Posts Tagged ‘FDI’

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China continues to penetrate the otherwise impenetrable – Ukraine

November 22, 2016

In April 2016 the blog noted a(nother) significant investment by China in Odessa – and by extension Ukraine – “It has now become public knowledge that the Chinese company CNBM International (part of CNGC) has acquired eight solar panel plants (previously owned by Activ Solar behind which were the Kluyev brothers, both now wanted in Ukraine having done rather too well within the Yanukovych regime for all their business dealings to be entirely above board).

The two “Franko” solar farms in Starokozache , both “Danube” solar farms in Artsyz, the pair of “Lakeside” solar farms in Kilivy, and twin “Limanskaya” farms in Renne have certainly been acquired by CNBM.

It is quite likely that the remaining Activ Solar farms in Bolgrad have the same CNBM owners too, although as yet that cannot be confirmed.  Also unconfirmed, but of reasonable likelihood given the source, is a further solar farm being built by CNBM.  CNBM is after all, a renewable energy superpower across Asia and a global heavyweight in wind farm blades – not withstanding thin film solar cells.

(It will surely not be long, if it hasn’t quietly happened already, that parent company CNGC expands its own interests into Ukraine – cement and drywall production and raw material trading on truly global scales.)

Regardless, China via CNBM has just acquired in Odessa one of the top 50 solar power plants in the world, and seemingly intends to expand its solar energy production in Odessa even further.

(With regard to these solar power plants/farms in Odessa, more than 70% of the parts are actually manufactured in China by part of the CNGC industrial empire – thus no surprise that its subsidiary CNBM have now acquired the Activ Solar assets.  Indeed the Kluyev brothers Activ Solar loans were underwritten by these Chinese produced assets.)”

The entry concluding thus – “A reader may perhaps wonder, with Ukraine no longer the most receptive of markets for the Russian Federation – and therefore opportunities aplenty exist where they once did not – why it is China that is prepared to walk the business investment walk, whilst it is the Europeans with the DCFTA and reform financing leverage over Ukraine, that are still engaged in business talk.”

To be blunt the size of the aforementioned Chinese investments whilst certainly not small, are only part of more than $10 billion invested in Ukrainian clearly identifiable infrastructure sectors in recent years.  There will be no reader that is not aware that China invests where China feels it will benefit – whether or not that is also beneficial to the location/nation/business market it decides to invest in.

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The reason this Chinese investment was worthy of note (far in excess of the notice actually taken) was that it penetrated the otherwise impenetrable – the Ukrainian energy sector with energy generating assets located in Ukraine.

It appears that China has not been put off by the experience either – in fact it is going to expand its presence in the Ukrainian energy market further – yet again in solar energy.

Another $1 billion investment will begin to physically manifest by way of solar power plants in the 10 kilometer exclusion zone around Chernobyl.  Those solar power plants expected to generate 1 GWh per annum.

The investors this time being,  GCL System Integration Technology (part of the GCL Group) and the China National Complete Engineering Corp.

Well so be it.  With the Russian Federation far from welcome in the Ukrainian energy market and no noticeable committed long-term western entry thus far, China may as well capture the solar generation market – move over Rinat Akhmetov’s DTEK.

It would appear that the early bird once again catches the worm.  (There is certainly not much concern over it usually being the second mouse that gets the cheese – for China is selfish, it is far too big, and far too influential than any Ukrainian mouse trap that would kill the first mouse.)

It would be somewhat ironic that as Ukraine legislatively progresses toward meeting its EU 3rd Energy Package obligations if only China manages to penetrate the Ukrainian energy production market.

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Privatisation and domestic competition – Odessa Port Side and Odessa Port

November 17, 2016

With the second attempt at the privatisation of Odessa Port Side soon arriving upon the horizon, it is necessary to make clear that this time it undoubtedly will sell.

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Another failure there will not be – the opening bid price is now about right and likely to encourage a final offer above that opening bid price.

According to the ministry responsible for conducting the privatisation there are both domestic and foreign bidders this time, and although they cannot be named by the ministry, the bidders can of course make themselves known.

It remains unknown whether Group DF will actively pursue this asset long coveted by Dmitry Firtash – or not.  As the link explains there are issues that would politically preclude his success, none more so that the many $ billions of debt owed to Russia’s Gazprombank.

Thus far two domestic bidders have let their interest be known.

One bidder is Glenshee Holdings (Cyprus) owned by Alexander Yaroslavsky.  The second known bidder is Ukrefteburenie, which is in turn owned by Deripon Commercial (Cyprus), owned by Ihor Kolomoisky, who has also long coveted this asset, and Vitaly Homutyunnik (a particularly affluent parliamentarian and Kolomoisky lobbyist therein).

As stated in previous entries regarding this particular privatisation “Though perhaps it is irrelevant whether Odessa Port Side is sold to foreign or Ukrainian owners as long as the privatisation occurs to the highest of international standards, a reader may perhaps have more faith in a foreign investor actually honouring the clauses within the contract of sale than a potential Ukrainian owner.”

That comment still holds true – what matters for Ukraine is that the privatisation meets the highest standards of international practice and that winners and losers all leave the process with complete faith in the integrity of that process and its outcome.  Whether the winner be a domestic or foreign bidder is a secondary consideration (albeit a foreign winner sends a far more desirable signal).

Whatever – It can already be said that there is at least domestic competition for the asset – or can it?

Of the two known domestic bidders any sensible money would be placed upon the Kolomoisky/Homutyunnik Ukrefteburenie (Deripon Commercial) bid being the winner vis a vis Glenshee Holdings and Mr Yaroslavsky.

The reasoning behind that statement is that Messrs Kolomoisky and Yaroslavsky are both active, amicable shareholders in Ukratatnafta.  It is beyond naivety to believe that the winner of this “competition” has not already been agreed privately.  Their relationship has nothing to gain from animosity in a genuine bidding competition.

Quite simply Mr Kolomoisky wants it more – and has always wanted it – as Mr Yaroslavsky (and everybody else) knows.   Indeed it can be pondered whether Mr Yaroslavsky’s interest is there simply to give the appearance of domestic competition for Messrs Kolomoisky and Homutyunnik, or whether it exists as Contingency Plan B should the Kolomoisky-Homutyunnik bid be deemed unpalatable and Mr Yaroslavsky would then hold ownership for a period of time before selling it on per prior agreement.

As matters stand however, realistically it can be understood that the winner of the Odessa Port Side privatisation is going to be between the Kolomoisky/Homutyunnik Ukrefteburenie (Deripon Commercial) bid and any foreign bidders.

In a few weeks the winner will be known – but sold Odessa Port Side most certainly will be now there is a far more sensible opening bid price.

The blog having decried the original bid price as far too high for the first failed attempt at privatising Odessa Port Side, it is now time to decry a sale price that is far below what it should be – in Odessa Port.

It appears that the Ministry of Infrastructure is attempting to quietly sell off the 12 tugs of Odessa Commercial Sea Port to a company called P&O Maritime FZE.  The tug service at the port is a source of significant income for OCSP – on average a tug costs about $750 per hour.  Annually “tug revenue” generates about $15 million.

It therefore appears that a monopoly at OCSP that generates about $15 million for the port should not be quietly sold off for a mere $50 million – particularly when the rumoured sale will be constructed of an immediate $25 million payment followed by the remainder spread over several years.

Clearly there are few monopolies being sold off that repay outlay within 4 years – thus the nature of this attempt to quietly facilitate this sale at a prima facie undervaluation seems to have more than a whiff of nefariousness about it.

Perhaps Prime Minister Groisman, who stated he would personally look after Odessa during the absence of a Governor would take it upon himself to ask questions of the Ministry of Infrastructure regarding this sale and lowly asking price?  Perhaps he would too – if he knew about it, but a reader probably suspects he is rather too busy to take note of what is happening in Odessa despite his well-meaning rhetoric.

Maybe among the diplomatic corps that drop by the blog, one will privately raise the issue?

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Banking of interest (not with interest) Odessa

November 16, 2016

Much is written regarding the banking system in Ukraine.  Normally relating to the on-going clean-up of the nefarious Ukrainian banking sector by the NBU, or relating to the alleged nefarious actions of the NBU itself.

It therefore catches the eye when a small provincial bank in Odessa is to be bought by an Austrian investment banker with a curriculum vitae that clearly infers connections within the elite strata of Vienna.

The bank in question is called Investbank which certainly does not have much high street recognition in Odessa despite being a bank of Odessa.  Indeed, it is not a “high street bank”.

The Austrian purchaser, or at least soon to be majority shareholder, is Uwe Christian Eshner.  The current owners being Alexander and Tamara Nezvinsky, Nick and Igor Teplitz, and Sergei Yablonsky.

Unsurprisingly, for a provincial bank with no high street recognition, in the national ranking by size of assets, the bank falls within the smallest 25%.

That it was available for purchase is not exactly a secret.  Some years ago it could have been bought for $100 million or so.  No doubt the purchase price will be substantially less considering the dramatic change of circumstances Ukraine has found itself subject to.

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Clearly Mr Eshner is purchasing the majority share to own a fully licensed banking vehicle in Ukraine – though why Investbank when there are perhaps better deals to be struck with the NBU over insolvent licensed entities is perhaps a question some readers will ponder.

Austrian banks and bankers certainly have a “reputation” within Ukraine and among the Ukrainian elite and organised criminal class for being “helpful” when it comes to moving money out of Ukraine (and laundering it).  Who among of the very elite of Yanukovych/”Family” did not have Austrian bank accounts and expensive property in Vienna?

Mr Eshner of course will not be unaware of such things.  His Bloomberg profile boasts a history that began to “build up and develop extensive contacts to Central Eastern European countries” in the early 1990s.  Thus even if not partaking in, nor facilitating any nefarious activities, it is beyond belief that during the mad 1990’s when Mr Eshner began his banking expedition into the eastern-European nations he will have been unaware of what what brazenly going on in both Austrian and CEE banking.

(Indeed, a reader may ponder whether the infamous Udo Proksch was in any way related to one of the favoured Yanukovych Austrian bankers Reinhard Proksch.)

As a healthy level of cynicism is a requirement for living in Odessa, there are some questions that arise that may be without foundation – or not.

 

Considering the amount of elite “Ukrainian interest” past and present in Austria, who if anybody is behind Mr Eshner?

By extension, whose money is buying this banking vehicle?

What is this banking vehicle to be used for by Mr Eshner?

Is it to become a front for “interests” behind a respectable face?

Is it a bank where transactions will now be, or should be placed on a “watch list” if not by the NBU, then by the international policemen and spooks?

Did this banking purchase raise the same raised (interested) eyebrow with international policemen and spooks as it did the blog?

Why are the blog flags raised over this when there is nothing prima facie untoward?

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Populist political guns aim at Gontareva (and the NBU)

October 17, 2016

With Ukraine no longer being dependent upon the IMF, and with international debts to be serviced more than manageable in 2017, it is perhaps no surprise that the current head of the National Bank of Ukraine (NBU) is now a legitimate political target when it comes to taking a scalp from the President.

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Thus, during the week 6 – 10 October at a meeting of the IMF and World Bank in Washington DC, a brochure was circulated with the clear intention of undermining Ms Gontareva as head of the National Bank of Ukraine.

Behind the brochure sits Sergei Taruta – Verkhovna Rada parliamentarian, businessman and oligarch.

To be entirely blunt, having only recently met with senior people within these institutions in Ukraine, if the intention was to undermine Ms Gontareva (and/or the NBU policies) then it was sure to find little if any traction at the meeting of these international institutional lenders.

Whilst neither institution support specific politicians or institutional appointees (like Ms Gontareva), instead supporting State institutions and internal processes, quite clearly both fully recognise what they consider to be very positive change within the NBU under her leadership.  It seems unlikely that there would be any private conversation that would encourage her removal from office until the changes she has brought are far more consolidated and (perhaps) irreversible.

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It is therefore difficult to believe that Sergei Taruta could seriously expect that a brochure clearly designed to undermine the head of the NBU would find traction among the IMF and WB elite in Washington DC.

If he did then he has a truly woeful understanding of the relationship between the current NBU management and that of the IMF and WB in Ukraine.

Needless to say, the brochure brought with it no result at the IMF and WB gathering in DC that was in any way helpful for Mr Taruta – perhaps the opposite.

Nevertheless on 14th October Mr Taruta decided to pursue to resignation of Ms Gontareva through the machinery of the Verkhovna Rada, declaring on his intentions on his Facebook page together with accusations of incompetence and corruption.

That same day the NBU website questioned the allegations, the framing of his claims, and the motivations of Mr Taruta.  Indeed the NBU requested that such machinations be scrutinised by the Ukrainian law enforcement entities.

A reader will now rightly note the true audience – that of the Ukrainian constituency.

Not to be left on the periphery, on 17th October, the ever populist Yulia Tymoshenko pushed Batkivshchyna to the fore as a rallying point for Verkhovna Rada Deputies to coalesce around to force the removal of Ms Gontareva.  Ms Tymoshenko’s main charge being that Ms Gontareva is in charge of the destruction of the State at the behest of President Poroshenko.

Her secondary charge, and clearly she has noted the real reason for Sergei Taruta’s attack on the NBU, was that the free-floating (more or less) of the Ukrainian currency has caused all those with foreign currency loans to struggle and/or default as the currency weakened significantly when finding its true market value.

Thus Mr Taruta’s attempt to attract struggling SME’s and entrepreneurs to the Taruta political sphere is now duly challenged by Ms Tymoshenko’s act – whilst both simultaneously attempt to remove a presidential appointed (Verkhovna Rada approved) scalp who is now fair play having completed many of the most unpopular IMF reforms.

Perhaps Ms Gontaerva is incompetent and/or corrupt as Mr Taruta claims.  Perhaps she is President Poroshenko’s tool for the destruction of the State as Ms Tymoshenko orates.  If so however, neither Ms Tymoshenko nor Mr Taruta have the moral high ground nor are particularly concerned about it considering the company they keep and the activities of those within their orbit – both business and political.

It is far more likely that they both simply see the IMF as now expendable and thus Ms Gontareva as no longer essential/untouchable – and therefore she is nothing more than a possible scalp for a populist “win”.

If they managed to remove her, would State policy change?  Probably not.

 

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The neverending Mriya/Dream (or nightmare) – Ukraine

October 10, 2016

This entry has bumped its way up the “should write a few lines about that” list due to further deterioration of the situation as of yesterday when yet more assets were illegally stripped from the Mriya Agro Holding entity that has become something of an international nightmare for the Ukrainian authorities – despite Mriya meaning “Dream” in Ukrainian.

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Where to start this nefarious tale, and which names on the periphery to include or exclude is somewhat subjective.  What happens next is far from clear either.  Whatever the case, there will be many readers left with the perception that the authorities grip upon the rule of law, even with this high profile case involving numerous foreign investors, is more than a little questionable despite innumerable historical and very recent assurances by the authorities to pay special attention to the rights and circumstances surrounding those committing to FDI into Ukraine.

Perhaps most aggravating (aside from an absence of rule of law enforcement) is the fact that this incident is in agriculture – a sector that the Ukrainian authorities view as a leading economic sector to drive and sustain economic growth.

First however, a little historical glossary is required to bring a reader to the present day.

Sometime around 1992/1993 from within the leaderless and lawless rubble of post-Soviet Ukraine Mriya Agro Holdings was created by Ivan and Klaudia Guta.  It went on to become a major agricultural holding in Ukraine – among the top 5 in terms of land under management.

The Guta family, Ivan, Klaudia, Andrei and Mykola remained 80% majority share holders even after a successful IPO on the Frankfurt Stock Exchange in 2008.

Investors such as BNP Paribas SA, Credit Agricole SA and UniCredit SpA, while bondholders include Argentem Creek Partners, CarVal Investors, DuPont Capital Management, Pioneer Investment Management and T. Rowe Price Group Inc piled in, the World Bank and EBRD provided loans for expansion.  Why not?  Mriya Agro was reporting wonderful annual results ($660 million per annum) and reportedly had a truly enormous 320,000 hectares of land under management.

Quite where the due diligence was in all of this is unclear, for Mriya Agro Holdings had within its set up a number of obvious shell companies.  There is nothing wrong with shell companies per se as far as doing business in Ukraine is concerned.  Whilst they may be synonymous with tax evasion and dodgy dealings they also provide Ukrainians with multiple jurisdictions beyond the ruinously corrupted court system that can insure property rights are far from inviolable.

What reader would have left multi-million/billion dollar businesses at the mercy of a thoroughly corrupted Ukrainian judicial system where rights for such entities historically have been temporary in the hands of a suitably selected judge?  Off-shoring is akin to insurance therefore.

Suffice to say that the entirety of the Guta family were shareholders in (at least) 5 off-shore companies, including HF Asset Management Limited which owned the 80% of Mriya and which was subsequently wound up in December 2014 when the company CFO was the infamous Alexander Cherniavsky (see below).

The summer of 2014 found Ukraine with empty cupboards following the Yanukovych regime grand theft, a war with Russia, and the inevitable crash of the Ukrainian currency.  Mriya Agro Holding could no longer service its $ denominated bonds.  (The total debt portfolio across more than 20 lenders exceeded $1.2 billion.)

By December 2014 it was clear to shareholders of the 20% of Mriya not owned by the Guta family, and also Mriya’s lenders that the Agro Holding was being systematically asset stripped with assets being illegitimately re-registered (often back dated) to other companies, whilst other assets were being stolen, hidden and/or sold off with the proceeds disappearing.  A process requiring dodgy lawyers and “black notaries”.

The Guta family and the senior management left Ukraine swiftly when awkward questions began to be asked.

The remaining international shareholders were then faced with acting swiftly not only to deal with the international creditors, but also to prevent the continuing illicit stripping of Mriya Agro Holding.

It swiftly became clear that the accounts of Mriya audited by Ernst & Young (Kyiv office) were hardly a true reflection of Mriya Agro Holdings.  Aside from the ubiquitous VAT scams associated with agriculture in Ukraine, the asset stripping, fraud, accounts manipulation and cash skimming swiftly became apparent.

Indeed the 320,000 hectares of land reportedly under management turned out to be 220,000 – prior to further nefarious reductions.  In short $ hundreds of millions have been misappropriated

The minority shareholders won control over Mryia Agro Holding in the courts, struck deals the creditors, installed new management and began proceedings in Ukraine (and other jurisdictions), leading to former senior employees being declared wanted.  (Indeed Mykola Guta the former CEO had an Interpol Red Notice raised against him, currently sitting under house arrest in Switzerland.)  Legal process is underway to reclaim about 60,000 hectares of land bought with stolen cash from Mriya under the names of other companies.

Mryia Agro Holding today operates with about 180,000 hectares of agricultural land under management with a storage capacity of about 600kt.  It is now profitable, remains one of Ukraine’s largest agro-holdings, is servicing its restructured debts, has an operating capital of over $40 million, and should head to another IPO sometime around 2018 – 2020.

Bravo the much criticised legal system and law enforcement institutions of Ukraine?

Not exactly.

There have been recent “raider” attacks involving companies in one way or another related to the old Mriya management – FID Global Ltd, Global Health FID, FID Global LLC, Dream Leasing, OOO Bud M Haulage, OOO Bud M ATP, Global Feed Ltd etc.

Over the past month the following has occurred – 21st September 2016, the Kyiv Appeal Court lifted a freezing order on 142 units of agricultural equipment worth around $3 million that was illegally removed from the company by the previous management of Mriya when they defaulted on their debt obligations in August 2014.

The Appeal Court’s decision overturned the freezing order imposed by the Pechersk District Court on  July 6th 2016 as part of the main criminal case against Mriya’s previous management and owners.  That freezing order had returned the equipment to Mriya under its current management.

On October 4th, the former management began removing the equipment from a Mriya storage site and did once again on 10th October 2016 (prompting this “should write about one day” entry).

In response to the Appeal Court’s decision, the Special Anti-Corruption Prosecutor’s Office (SAPO) has prepared a request for a fresh freezing order. However, bureaucratic inaction by NABU is preventing SAPO’s request from going to court since NABU has (so far) not registered the fact that it is leading an investigation of/within the main criminal case against the former owners and management of Mriya.

The fact that SAPO and NABU are now involved can only mean that those individuals that fall within their legislative remit are involved.  The Category A and B public figures – the political class, judiciary, senior civil servants and SOE executives.  (The $ value of criminality certainly demands an investigation by an organisation perceived as having integrity.)

Nevertheless few such within that elite class would have the influence over the Appeal Court regarding such a highly visible on-going case with international complainants acting within a very sensitive economic sector for Ukraine.

Somebody with very serious clout is behind the above mentioned rulings less than one week ago – but who?  Undoubtedly the door to the Presidential Administration will be getting kicked down (once again) by numerous diplomats connected to the nations of shareholders and creditors – and rightly so.  Thus somebody who considers themselves “untouchable” by the Presidential Administration seems most likely to be behind the ordering of the Appeal Court decision.

Is there anybody in the Mriya Agro Holdings history capable of wielding such influence on such a sensitive case?  Do any such figures stand out from the others as having previously displayed the “right experience”?

From its inception in 1992/3, along the way the Mriya Holding certainly came into contact with numerous infamous names renowned for their less than stringent adherence to matters relating to the law.

For example, during 2003/4 it was associated with Yuri Karmazin who was something of a celebrity lawyer/parliamentarian at the time associated with questionable activities – among which land regularly featured.

Mriya’s association with Mr Karmazin seemingly came via Elena Berezhnaya, an “enabler of privatisation” granted numerous permanent and surprising legal abilities having done the “legal” for Party of Regions head office in Luhansk during post-Kuchma/pre-Orange 2004/5 elections.

Ms Berezhnaya’s daughter, Irina, miraculously found a role within the Verkhovna Rada in 2002 as an “assistant adviser to Yuri Karmazin and headed the Verkhovna Rada Sub-Committee for Synchronisation of Legislation in Ukraine.

While Elena Berezhnaya stayed in Luhansk and built a dubious but exceptionally profitable legal practice, her daughter Irena became something of a star within the Verkhovna Rada.  That stardom was not founded upon her legal qualifications or wily understanding of legislature, but rather that she was the first to bring cleavage to the VR coliseum, the first to bring tits to the theatre of the absurd, the first to bring admirably presented bare bosom to the most elite and feckless business club of Ukraine.

Irina Berezhnaya

Irina Berezhnaya

In short, womanliness was first displayed through fashionable “working apparel” within the corridors and halls of the Verkhovna Rada by Irina Berezhnaya, where conservative female dress code had otherwise prevailed.

To be honest, even as a “leg man”, the 2002 (onward) daily fun-pillow displays Irena presented to parliamentarians certainly caught the eye.  However, neither association with the then power of Mr Karmazin, nor Irena’s rather splendid boobs were her only attractions.  She was also associated with a very dubious notary service (black notary service) called Astra-Service.

By 2004 the illicit practices of this dubious (black) notary service had acquired clients such as VAB Bank, Ukrsotsbank and Mriya Agro Holdings.  To be blunt, such a notary service is rather useful when it comes to acquiring agricultural land rights by hook or by crook.

In 2006 Mr Karmazin lost his parliamentary position and was duly traded in by Irena Berezhnaya for one of Ukraine’s most infamous characters, Boris Fouksman.

Mr Fouksman is long (and strongly) rumoured to have made a fortune smuggling antiques and icons out of the USSR prior to its collapse, for having been involved in gun-running and having close Russian mafia connections – notwithstanding significant influence within Party of Regions at the time.

It therefore follows that the buxom Ms Berezhnaya became a Party of Regions Deputy within the Verkhovna Rada in 2007 under such patronage (collecting numerous honours and awards along the way both within Ukraine and an Honorary Professorship from the International University of Economics Vienna), until 2014 and the aftermath of the Yanukovych regime flight whereby she lost her parliamentary mandate.

It is rumoured that the daughter of Irena Berezhnaya is fathered by Boris Fouksman – though this has not been confirmed or denied.  The godfather of the child is known – the almost universally despised Nester Shufrych.

During her parliamentary period Ms Berezhnaya became “known” for supporting “raids” on corporate entities – for example Tochmash and Sinbias Pharma among several that had dealings with VAB Bank (behind which sat Boris Fouksman).  VAB Bank being one of the first VIP clients of Ms Berezhnaya’s (black) notary service Astra-Service along with Mriya Agro Holding.

Since losing her Deputy’s immunity, she has, perhaps unsurprisingly, having facilitated so much nefarious activity within the elites, not been subjected to any repercussions as far as the rule of law is concerned.  No doubt “insurance policies” of historical transactions exist should she fall under the eye of the law.

She is however, hardly powerful enough to have caused the latest Appeal Court judgement.

What seems most prominent in the history of Mriya Agro Holdings prior to its unsavory revelations of 2014 is the very short term appointment of the infamous Alexander Cherniavsky as CFO between September to December 2014 – the time when Mriya Agro Holdings then defaulted on $1.2 billion of bonds and land and assets where illegally re-registered in alternative company names.

Mr Chernaivsky is associated with Rinat Akhmetov, Sergei Liovochkin and Artem Ershov and in particular to the dodgy dealings surrounding the purchasing of Ukrtelecom many years ago.

A reader may possibly perceive that Mr Chernaivsky was deliberately installed for a specific (and nefarious) purpose considering such a short tenure as CFO and what occurred during that time.  Questions perhaps regarding Mriya’s interaction with Rinat Akhmetov’s FUIB bank may be asked?  (Rumours also circulate regarding Alpha Bank involvement.)

Is Mr Akhmetov the “untouchable”?  If a reader believes that the occupied Donbas will return to Ukrainian control, then it will surely be stewarded by Rinat Akhmentov as the biggest employer in that region.

That said, the vast majority of illicit money channels from scams and schemes did not flee with the Yanukovych regime.  The names of the end recipients simply changed.  Some of those surrounding President Poroshenko have hardly displayed morality or integrity since he came to power.  It is well within the realms of possibility (maybe even probability) that for a large enough fee, the desired Appeal Court decision would be reached upon their nod despite serious and numerous negative implications for the Ukrainian State.

Whether a Ukrainian journalist will attempt to find out the puppeteer behind the Appeal Court ruling, or ascertain exactly who among the ruling elite is playing “roof” for the Guta family and their on-going schemes remains to be seen.  Perhaps in the next few days a name will become apparent.

In the meantime international shareholders and investors continue to get shafted in Ukraine despite favourable court rulings and the instigation of criminal proceedings, whilst criminal proceedings and court rulings thus far have put nobody in jail almost 2 years after they were instigated.

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The gathering reform storm of 2017 – Ukraine

October 6, 2016

Many Ukrainian eyes are focused on 2017 and what external events will mean for the nation.

How will US policy change when a new president sits in the Oval Office?  What of the elections in France and Germany?  How much of a distraction will BREXIT be when it is eventually triggered?

All good questions – and as stated a few days ago “….. unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.”

That statement fails to include Ukraine meeting its obligations to international institutions.  There are agreements with the IMF, World Bank, EIB and EBRD that will either be met – or broken.  This in turn will have a major impact upon FDI if (or possibly when) these agreements go unfulfilled.

To keep a watchful eye upon the external, currently” friendly” influences that will effect Ukraine in 2017 is understandable, but there are some extremely prickly and difficult issues internally that have the ability to magnify or reduce the thus far (surprisingly robust) goodwill of the international community (minus Russia) which seem destined to once again radically and negatively effect Ukrainian standing among its “friends”.

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In short there is a reform (or distinct lack of) storm brewing that is going to hit Ukraine in early 2017 and which when it does, the feckless domestic politicians will be once again at its core.  The issues are vividly clear, yet as normal, preparation, professionalism and policy are entirely absent.

Before looking at 2017 however, 2016 has yet to run its reform course.  The next tranche of IMF money, about $1.3 billion, is due in November.  For this tranche to be forthcoming there are but a few obligations to meet.

Clearly insuring reform progression thus far does not reverse is necessary.  The irreversibility of what has been done thus far is highly questionable.  What reforms, if any, can be claimed as being irreversible and consolidated?  Some may be close, but which are truly over the line?  The NBU has done a very good job, but a change of leadership and/or policy could undo almost all that has been done.  NABU is under direct assault by the PGO and Attorney General.  The new national police for the most part is refusing to buckle to corruption despite the police service remaining only half reformed and far from ethical as an institution.  The military are now a capable fighting force, yet its leadership remains poor and con tinuing corruption is as corrosive as the war of exhaustion with Russia in the occupied east.

Nevertheless, aside from holding the reform line that has be advanced thus far,  to meet the requirements for the next IMF tranche NABU should be given the right to wire tapping.  The list of SOEs for privatisation in 2017 completed (notwithstanding the November 2016 second attempt to sell Odessa Port Side – and the equally robust attempts to prevent its sale by vested interests.)  The e-declarations of politicians and relevant public office holders are to be filed in their entirety.  A “fair” budget for 2017 is to have been submitted.

All this to be accomplished by the end of this month so the IMF can give a timely nod of approval for November’s $1.3 billion.

Thus far, “fair” or otherwise, the budget has been submitted for consultation within the Verkhovna Rada.  The outcome of those consultations and the guaranteed subsequent amendments remain to be assessed by the IMF.  The budget however, is possibly the least problematic of the IMF requirements.

An independent NABU logically should not require the SBU to carry out wiretaps on its behalf.  The more people that know that “Mr X” is subject to a wiretap, the more chance there is that “Mr X” will find out.  Having to use a third party brings with it an unnecessary potential for leaks and/or tip-offs.  It should therefore not require stating that a nefarious elite and feckless parliament do not want a self-sufficient NABU that is far more difficult to infiltrate, influence or preempt.

The e-declaration fiasco remains just that.  The  declaration system still fails to meet the legislative framework requirements.  The e-declaration legislation itself also requires some amendment – just not the amendments to remove criminal liability that so many politicians want to see.

The sheer scale of opposition to the e-declaration reform is naked to the observing eye when considering it took EU conditionality to get the e-declaration law passed initially, and then months later it requires IMF  conditionality to actually get e-declarations completed by those who are required to do so (by the end of October).

At the time of writing about 1600 e-declarations have been submitted.  Of those only one of that number is of a parliamentarian (Mikhail Gavriluk).  None of the other 400+ MPs have yet filed.  Not a single member of the Cabinet has either.  About a dozen of the 300 NABU detectives have filed, and only two of the four NAPC members charged with policing e-declarations have done so.  Even if all e-declarations are submitted by the end of October, as stated long ago, court challenges are inevitable when the system still fails to meet the legislative framework it operates within.

In March the blog forecast that by the autumn Ukraine would not need external financing (although it would continue to accept it gratefully), but that it should nevertheless earnestly complete its obligations for reasons of external confidence in the nation’s governance.  Naturally the usual issues of fecklessness loom large, for when it is clear to the political class that there is no impending and immediate fiscal doom, the will to complete prickly reform legislation evaporates – which is where Ukraine finds itself today.

Reform orientated legislation has more or less stopped and requires resuscitation.  In fact it requires steroids if Ukraine is to meets its reform obligations to the IMF (let alone others) for 2017.

There are issues with compiling a list of SOEs ready for privatisation, liquidisation or remaining State owned.  There are at least 20 outstanding audits from those commissioned.

If the next few weeks in meeting the November 2016 and the $1.3 billion IMF tranche requirements appears optimistic, then meeting the obligations for the scheduled February 2017 tranche of $2 billion is perhaps as remote as riding a unicorn naked through the centre of Kyiv without once being snapped by a smartphone.

Despite the reform orientated legislative work completed in the energy sphere, the Ukrainian energy market remains entirely impenetrable, thus looking to 2017 the privatisation of Centrenergo is perhaps the only realistic chance of breaking into this market if it be sold to a foreign investor.  As such, the sale of Odessa Port Side in November has to be seen as a fair and transparent process by all onlookers.

Whatever the case, there is no way the list of SOEs for privatising, liquidisation or remaining State owned will be completed (and made publicly accessible upon the Ministry of Economic Development) by the year end.  Even if the only list of those SOEs identified for liquidisation is completed by then, there is simply little interest within the Verkhovna Rada to kill off such entities.  Gathering 226 votes for an exercise where none have any interests close to the New Year break is somewhat unlikely.  Auditors will not be rushed either.

Likewise “supervisory boards” such as that Naftogaz currently has (and which seems to be working well) for another 10 major SOEs is very unlikely to be achieved prior to 2017 as planned.  There is really no political will to do it – and a good deal of vested interests that will obstruct it.

Thus this reform requirement will roll over into 2017.

Fecklessness, lobbying/nefarious acts, and legislative short-comings aside – now to ever-present populism.

There two obligatory reforms by year end 2016 that seem simply beyond reach, will thus roll over into 2017, and yet are still unlikely to get through the Verkhovna Rada to facilitate the $2 billion February IMF tranche – thus finally breaking the IMF agreement and dealing a critical blow to “friendly” transatlantic assistance beyond issues of Ukrainian sovereignty and territorial integrity.

The first is the long-standing issue of pension reform that almost every government has stated it will tackle – but hasn’t.  Pensions from the age of 50 are simply unsustainable, and to be blunt most people continue to work way past being 50 because the pensions do not sustain them.

It is a policy that has to be addressed, but one that when push comes to shove, and despite a decade of rhetoric regarding the necessity of raising the pension age, every Ukrainian leadership succumbs to populism.

Nevertheless it simply has to be raised.

It is foolish to believe that any attempt to raise it significantly in one go will ever get through the Verkhovna Rada.  A system, for example, of raising the retirement age by 1 year every 2 years over 20 years (or a variation therefore) may stand a chance – however slim.  A system of greater contributions equating to greater pensions may also find some traction – but enough?  The populists however (Ms Tymoshenko, Mr Lyashko etc) will always seize upon pension reform for short term politicking and pre-election electioneering rather than looking at long-term policy necessities.

There are also existing process issues relating to checking the authenticity of claimants – something aggravated by the large number of internally displaced people.

Most difficult of all however, is the issue of land reform.  Ukraine has obligated itself to creating legislation regarding agricultural land reform by the end of October 2016.  That simply is not going to happen.  As of the time of writing the blog cannot even find a draft law registered regarding the issue.

It may be that the IMF will allow this sensitive/populist issue to roll over into 2017 and allocate the November 2016 tranche if all other conditions are met.  It will not issue the $2 billion tranche in February 2017 without this issue being tackled however.

Ms Tymoshenko is already noisily calling for the current moratorium upon the sale of agricultural land to be extended to 2022.  The Radicals being equally as populist will enthusiastically support her.

The sly oligarchy or slightly less mega-rich will look to provide/create agri-loan businesses with formidable foreclosure clauses to assume agricultural land of those farmers they lend to should the sale of agricultural land be permitted.  Huge ranges of State land will be swiftly leased through cronyism prior to any right to buy.  The farmers must be given more time to save the capital to buy the land they current lease and farm.  All such reasons will be presented not to create an agricultural land market.  Those farmers that do own their land will be tricked out of it by the unscrupulous, or simply coerced into selling it for a pittance – by continuing to stop them being able to sell the land they currently own, we are saving them from themselves (rather than infringing upon their rights to sell their own property).

There will be some societal “buy in” for some of that rhetoric, but that rhetoric can perhaps be employed to create safeguards within any laws creating a land market – if anybody actually drafts a law to create a land market that will be fair, regulated, and if necessary contain legislative restraints.  (Perhaps Ms Tymoshenko would like to draft a law that explains how a land market will be created after her 2022 moratorium expires?)

If it proves simply impossible (as is likely) to find the political will not only to lift the current moratorium but also prevent its extension, then perhaps legislation creating a fair land leasing market  is an alternative?

If the land cannot be bought and sold in a (regulated) free market environment, then create a transparent free market where leases for the land can be.  Some imagination might be required, but there is surely some way to create a land market that brings about transparent and fair benefits to all and around which Ukraine and its “friends” can agree as constituting positive market driven reform.

Although it is possible to continue with examples that are going to lead to a reform storm in 2017, it is perhaps unnecessary insofar as highlighting how swiftly matters are going to come to a head and when a probable breach of IMF conditionality occurs – with undoubted repercussions with a newly installed US Administration and immediately prior to both French and German electioneering.

Indeed it may also become the catalyst for the long anticipated early Verhovna Rada elections in Ukraine (which are unlikely to bring about a reformist critical mass as current election laws stand).

* * * * *

A note to regular readers – For the next few days your author will be in Poland locked behind closed doors with a dozen sages and otherwise insightful boffins from across the region.  Although undoubtedly returning far wiser, the normal rambling and low-brow blog entries will continue upon return.

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Gov UA – What cost obligation and reputation?

October 4, 2016

Much has appeared in the blog regarding Government Ukraine’s obligations and reputation with regard to investment and the international arena.  Too little prose has been written regarding the obligations and reputation of Government Ukraine with regard to what occurs domestically.

It is perhaps overdue to raise such an issue once again.

Having written on numerous occasions about the privatisation of Odessa Port Side, to continue on a familiar theme for regular readers, there were, and remain, both domestic and international parties interested in its purchase – and by international that means genuinely international companies rather than Ukrainian owned internationally registered companies such as Dmitry Firtash’s Group DF.

With Ihor Kolomoisky’s claims toward Odessa Port Side now dealt with, the most prominent hurdle for privatisation to a foreign investor/company is most certainly the legitimate $251 million gas debt to Dmitry Firtash’s chain of companies.  (That is on the presumption that debt is truly to Dmitry Firtash and not ultimately to Gazprombank to which he is indebted to the tune of several $ billions.)

If (a significant if) Mr Firtash can write of the debt to himself, then Odessa Port Side will be a very cheap acquisition for Group DF – but perhaps he cannot.  Despite Ihor Kolomoisky’s long interest in owning Odessa Port Side, the bankrupt (in all but legal proclamation) position of PrivatBank, and equally questionable health of his MAU (Ukrainian Airlines) probably rules him out of any acquisition.

It is the question of legitimate debt to Mr Firtash that may very well force international investors to think and rethink any bids for Odessa Port Side.

Which (mostly European) international companies want to buy Odessa Port Side and be forced to write a cheque to “Mr Dmitry Firtash, marooned oligarch in exile, Vienna” for $251 million, when Mr Firtash is wanted by the USA and extradition attempts to get him will never end?    There are issues of corporate reputation at stake.

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The Ukrainian government has acknowledged the debt as legitimate and the opening bid price for Odessa Port Side has been radically reduced to acknowledge this.  Having done so, and recognising that some domestic bidders will have no consideration for reputation, the Ukrainian government are surely aware that some otherwise solid international bidders have such reservations.  If Gov UA is not aware of such reservations, then this blog certainly is.

For the sake of coalition survival within the Verkhovna Rada, the sale of Odessa Port Side to Dmitry Firtash is a non-starter.

Why then has the Ukrainian government not arranged the purchase of Odessa Port Side in a way that will save any external purchaser the reputation issues associated with giving a man wanted for corruption by the USA, $251 million?

It is not beyond competency or legal structuring of a purchase for Gov UA to assume the Firtash debt, receive and accept a good bid in full and then use part of the sale dividend to settle the Group DF debt without any reputational damage to an international buyer.

The US, as does everybody else, knows full well that Odessa Port Side has to be privatised.  It will also be well aware of the reputation issues many potential international buyers have with being forced to settle directly with Mr Firtash.  Whilst US patience with the current Ukrainian leadership is clearly thinning rapidly, there will be no issue with Gov UA settling with Mr Firtash if it would facilitate a successful international privatisation.

The US is also keenly aware that the Ukrainian government simply does not have the unallocated funds to settle the Firtash debt prior to privatisation.

To be absolutely clear, the Ukrainian government has little option but to sell Odessa Port Side – whether a reader considers Europe’s biggest fertilizer manufacturer a strategic asset for Ukraine when considering the scale of its agriculture, or not.

Gov UA simply cannot afford to continue to subsidise Odessa Port Side as it does to the tune of UAH billions.  The only reason it has to subsidise what would be a clearly profitable entity otherwise is due to the nefarious hands that make it unprofitable knowing the plant will be subsidised.

As is usually the case, regardless of the desire and recognition within the Cabinet of Ministers of the financial need to get Odessa Port Side off of the State books before next year’s budget, there are many influential hands within the Verkhovna Rada that require the privatisation to fail in order to maintain the dodgy deals and nefarious revenue streams from which they benefit lavishly.

It is no coincidence that former Prime Minister Yateseniuk appointed two people very close to Mykola Martynenko to sit on the board and manage the plant.  It is also no coincidence that another board appointee was a former assistant of Alexander Granovsky, who is close to Ihor Kononenko (President Poroshenko’s leg-breaker within the Verkhovna Rada).  Unsurprisingly the exceptionally odious Sergiy Pashinsky and dubious Sergiy Tishchenko also have vested interests in Odessa Port Side.

To be blunt Messrs Martynenko, Granovsky, Kononeko, Pashinsky and Tishchenko have no reason to welcome the privatisation of Odessa Port Side.  This is a particularly powerful group of individuals, all of whom do very well from existing schemes to the point where the plant records losses rather than the profits it would otherwise make.  Privatisation to a foreign corporation would end those lucrative schemes.

Nevertheless, it seems somewhat incredulous that Gov UA has not insulated the reputation of any foreign buyer from having to directly pay an oligarch in exile $251 million that is (and will remain) wanted by the USA for corruption.

To pluck another example from Odessa that shines a dim light upon Gov UA and its internal reputation and obligations, during the Yanukovych regime a major water treatment works project was commissioned and delivered in full by an engineering company from Odessa.

(Full disclosure, the blog is acquainted with the owner.)

It was a major project that included closing the cooperation of Turkey in closing the Bosporus Strait whilst pipe was brought through as the below YouTube clip displays.

It doesn’t take a civil engineer or quantity surveyor to realise that such a project costs many, many $ millions, nor that the project brought with it a tangible benefit to Odessa and the Black Sea environment.

This is a company that can deliver major projects and manage international supply chains.  It operates in Africa and the Gulf States too.  Such private Ukrainian contractors are few and far between.

It will not be working for or with the Ukrainian Government again any time soon however.

When the Yanukovych regime and government fled, it fled with unpaid contractors all over Ukraine – the above engineering company being one such contractor.  This Odessa company was and remains owed in excess of $20 million.

Unlike many such contractors, this company from Odessa is owned by a man with sufficient influence to sit in the Prime Minister’s office and raise the issue of The State’s unpaid debt.  When a contract is with the State, it is with The State and not whomever is currently in power.  If Gov UA can recognise as legitimate the $251 million owed to Dmitry Firtash (which it is), then there are a lot of other contractors with claims against the Ukrainian State which are equally as legitimate.

The answer given to the owner of this engineering company by Prime Minister Groisman was apparently “Ask the Americans”.

There is no way that the USA is going to undertake to repay Ukrainian State debts to contractors it has failed to pay.  It is simply a non-starter.  Indeed unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.

It is for the Government of Ukraine to honour its obligations as “The State” to its unpaid contractors.  It may very well decide to use US backed guarantees to begin to fund such an effort – for as long as the US is prepared to issue such guarantees, and that will not be for much longer if the current leadership continue as is.  It may have to find other ways to pay them.  Whatever the case, the reputation of Gov UA will continue to suffer domestically so long as it fails to even recognise its obligations, let alone arrive at a strategy to honour them.

Quite what the State debt to unpaid contractors amounts to is probably a very scary number – and as it is unlikely that there is even $20 million unallocated cash available to settle even this single case.  Undoubtedly the Government of Ukraine will continue to ignore such issues rather than reach some form of accommodation with the domestic businesses, including those rarities capable of delivering large infrastructure of international standard.

As long as that situation continues, such contractors are not going to be enthusiastic about other opportunities with Government of Ukraine.  Instead the “bodge it and scarper” companies will be used.

Perhaps yet worse with a long term view, the contractor in this example has numerous clearly beneficial projects to both Odessa and the environment already drawn up – but it will not approach City Hall, the Oblast Administration, nor Gov UA with them unless it can be sure of a third party (EBRD or a sovereign investment fund) that provides some faith in contracts being fully honoured.

As such The State reaps as it has sown – and will continue to do so.

President Poroshenko is unquestionably the most PR aware president in Ukrainian history, thus a reader may well ponder quite why there is such disregard for reputation and obligation toward those with which the State engages (or hopes to engage).

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