Test case

Arcelor/Ukraine: The biggest ever foreign investment in Ukraine is under threat. Ukraine's state prosecutor is accusing international steelmaker ArcelorMittal of failing to meet commitments made when it bought the country's Kriviy Rih steel plant in 2005. The outcome of the case will show whether Ukraine can shake off its terrible business reputation.

ArcelorMittal has warned that if a Ukrainian court finds against it, it could be forced to surrender control of the plant, where it has invested $5.3 billion, including the $4.8 billion paid for it in its 2005 privatisation. That would send an appaling signal to foreign investors.

Mittal's acquisition in 2005 was dubbed a huge step forward, and was equal to all Ukraine's previous foreign direct investments combined. At the time, newly-elected President Yushchenko was determined to reverse the scandal-tainted privatisation of the plant in 2004, when it had been sold for a paltry $800 million to two well-connected Ukrainian oligarchs.

Renationalising the plant a second time - and then possibly re-privatising it for a third time - would be farcical. It would signal that property rights in Ukraine last just as long as whoever happens to be in power. It hardly seems coincidental that the pressure on ArcelorMittal follows a change of political regime. The suspicion is that the previous oligarch owners, who have close ties with the new government, want it back.

True, the different branches of Ukraine's government don't seem to see eye to eye on the matter. Prosecutors say they just want to force the plant to fulfil social obligations, not renationalise it. But the case reeks of politics. Ukraine's steel barons have reasons to create difficulties for an unwelcome foreign-owned competitor. The lawsuit also coincides with key regional elections, and helps politicians deflect the blame for social problems onto the foreign steel company.

Whatever the motives, Ukraine can ill afford this battle around its largest foreign investment. The country is only beginning to emerge from a deep economic slump, and badly needs foreign cash. It is also trying to negotiate a free-trade agreement with the European Union. It will all be difficult if existing investors are given reasons to complain about unfair treatment.