Rule of law starting to appear with regard to foreign investment?

April 10, 2010

Errrrm, yes dear readers, I did qualify the “rule of law” with “foreign investment”……it was not a carte blanche statement.

It is way to early to say the rule of law is changing for the average person since the new administration took charge, if it ever will change.  The jury…….if there was one……..is still out.

However, for the foreign investor, there is positive signs appearing that Ukraine is not the wild east as is continually infered in the foreign press.


The Ukrainian Prosecutor General’s Office (PGO), after conducting checks on the observation of Ukrainian law with regard to the execution of court rulings in the sphere of privatization, has found evidence of criminal actions by officials of the Ukrainian State Treasury, PGO officials say.

“[The actions include] abuse of office and blocking the execution of court rulings. The said persons did not return UAH 800 million to bidder companies within six months of the holding of the tender to sell a stake in OJSC Odesa Port-Side Plant, so the courts imposed a fine of over UAH 3 million on the State Property Fund, which caused losses to the state,” the press service of the Ukrainian PGO reported on Thursday.

Yes, you read it correctly, the PGO and the courts are kicking some high level backsides past and present over the non return of “comfort, confidence, commitment”……. call it what you like……. payments made up front from foreign bidders for Ukrainian assests.

Before those of you who do not normally get involved in large asset deals start saying only in Ukraine would people have to put money up to even bid on an asset, I will tell you that this is quite normal further afield than Ukraine.

Basically the system is simple, having acted as a consultant in several such deals here and in Russia.

The would be buyer submits a Letter of Interest (LOI) in the asset.  The problem here is people with no serious interest are capable of writing such a letter, as are people who may be seriously interested but either do not have the cash behind them or have the banking relationships to get the cash behind them.

It is therefore quite normal for a LOI to be submitted followed by a financial sum to prove the seriousness of the potential buyer, which will be returned if they lose the bid.  Depending upon the asset size and cost, depends upon the size of the comfort payment for the seller.  Everything is relative in this regard.

After this comes the Non Disclosure Agreement relating to documents that are viewed in order to do due dilligence on the asset in question and occasionally a Non Circumvent Agreement if going through a intermediary such as myself.  Thus a NDA or NCND is signed prior to due dilligence beginning.

Depending upon the sturcture of the deal and the involvement of someone like myself, an IMFPA is also lodged at the bank of one or other party paying my fees, should the sale be structured over a period of time and my fee also be structured to match the payment schedule for the asset. 

An IMFPA is an Irrevocable Master Fee Protection Agreement and guarantees my simultaneous payment when asset payments occur.

Simple eh?

Anyway, it seems persons past or present at the State Property Fund have not returned “comfort payments” which accompnaied LOI’s for the Odessa Port Side asset when it’s privatisation was cancelled by the State, contrary to the agreements signed.  Even after court rulings to do so, they have failed to return monies, incurring further penalties by way of fines impossed by the courts to the State.

No doubt such money, if it has not yet been returned to the interested parties already, will now be promptly returned, which should be an encouraging sign to foreign investors interested in Ukrainian assets either being sold publically or privately.

Nobody I have acted for has ever been screwed in Ukraine or Russia despite the bad press it gets, whether the assets has been sold for $200 million or $500,000.

For the record, Odessa Port Side will once again be put up for privatisation soon, along with a 75% stake in UkrTelecom (25% retained by the State) and several other very plausable assets.

Before you all say that all the good assets will be sold to Russian and Ukrainian oligarchy, I will say that in the case of Odessa Port Side (as an example), the serious consideration was being given to foreign bidders…….although I can’t say who………because as I explained above, there are NDA/NCND arrangements.

Still, this is definitely good news for foreign investors who are not quite sure if they want to dip their toe into Ukrainian water, as it clearly displays that they actually do have some recourse here if things do not go according to plan…….or contract!

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