Shares of five strategic enterprises were passed to the state. Who will the plants of Kolomoisky, Boguslayev, Zhevago and Grygoryshyn work for now?
Why the alienation of shares does not mean their nationalisation and whether they will be returned to their former owners after the war
On 6 November, the National Commission on Securities and Stock Market (NCSSM) resolved to forcibly alienate the shares of five strategic enterprises in favour of the state. These were Ukrnafta, Ukrtatnafta oil refinery, Motor Sich, AvtoKrAZ and Zaporizhtransformator. The alienation of shares was confirmed by President Volodymyr Zelensky, Secretary of the National Security and Defense Council (NSDC) Oleksiy Danilov, Defense Minister Oleksiy Reznikov and Prime Minister Denys Shmygal. The official proof of its decision was published by the NCSSM on 7 November in the evening.
What was the reason for this? According to Volodymyr Zelensky, the compulsory alienation of these enterprises into state ownership was necessary to secure the country's defence needs. "At the Supreme Commander-in-Chief's Staff meeting, we decided to transfer the assets of strategically important enterprises to state ownership. Such steps, necessary for our state in times of war, are taken in accordance with current legislation and will help meet the urgent needs of our defence sector," Zelensky wrote in his Telegram channel.
From a legal point of view, the alienation of shares was done strictly within the framework of the current legislation, Denys Shmygal assured.
Oleksiy Danilov said the seized assets acquired a military property status, their management was assigned to the Ministry of Defence.
Oleksiy Reznikov, in his turn, explained that the enterprises will meet the needs of the security and defence sectors. This includes the supply of fuel and lubricants, restoration and repair of weapons, military equipment, etc.
What is the compulsory alienation of shares? Both Shmygal and Reznikov emphasised that the procedure of alienation of enterprises into state ownership is not nationalisation.
The alienation procedure complies with the requirements of the Law of Ukraine No. 4765-VI "On the Transfer, Compulsory Alienation or Seizure of Property under the Legal Regime of Martial Law or State of Emergency."
According to the definition in Art. 1 of the law, the expropriation of property provides for:
- deprivation of the owner of such property being in private or municipal ownership of the right for it;
- transfer of property to state ownership for use in martial law or a state of emergency, with prior or subsequent full reimbursement of its value.
The Article 12 of the law also allows for the return of the alienated property after the martial law or state of emergency is cancelled.
Nationalisation is the procedure of returning objects belonging to private owners, including previously privatised property, to the state ownership. Nationalisation can mean both compulsory and compromise confiscation of estate from their owners. Nationalisation may be implemented through the mechanisms of redemption, bankruptcy, voluntary transfer, acquisition of a controlling stake or ownership rights by court decision.
Thus, it can be concluded that:
- compulsory alienation of property in favour of the state is applied in wartime, and former owners have the opportunity to return their assets back;
- nationalisation is the return to state ownership of those objects that were transferred to private hands, while the possibility of re-privatisation of such enterprises is minimal.
Whose shares became the state ownership? Almost all enterprises subject to the alienation procedure belong to Ukrainian entrepreneurs, say, with a "problematic" background.
Before being transferred to state ownership, about 42% shares of Ukrnafta belonged to the Privat Group, whose key beneficiaries are Igor Kolomoisky and Gennadiy Bogoliubov. Naftogaz of Ukraine owned 50% of it plus one share. Other shares were owned by minority shareholders. Kolomoisky and Bogoliubov also owned 60% of Ukrtatnafta. The rest 40% of the company belonged to Naftogaz.
"Ukrnafta is the largest petroleum producer in Ukraine. The volume of oil and gas condensate produced by the company in 2021 amounted to 1.499 million tonnes. Ukrtatnafta owns the Kremenchuk Oil Refinery, which has been physically out of operation since spring due to missile attacks.
A group of Chinese investors owned a stake of about 75% in Motor Sich, which had been in conflict with the Ukrainian authorities for several years over attempts to nationalise the company. Furthermore, the former owner of Motor Sich, Vyacheslav Boguslayev, who remained the company's Honorary President, was arrested in late October on suspicion of collaboration and complicity with the aggressor state. Among other things, Boguslayev was revealed to have Russian citizenship.
"Motor Sich is one of the world's largest enterprises that develops, manufactures and repairs aircraft gas turbine engines. The company used to export the bulk of its products. In 2021, Motor Sich received UAH 5.5 billion in profit from foreign supplies.
AvtoKrAZ is a part of the Finance&Credit financial-industrial group owned by businessman Kostiantyn Zhevago. The company produces heavy-duty trucks. Its monthly production of vehicles in the pre-war period was about 20 items. AvtoKrAZ planned to produce 1000 cars in 2022.
Zhevago himself has long lived outside Ukraine and is in the wanted list. The businessman is wanted by Interpol on charges of embezzling $113 million from the Finance&Credit Bank which belonged to Zhevago before the bankruptcy.
However, the company continued to operate. For example, in the summer of 2021, Zaporizhtransformator signed a contract for the manufacture of two transformers for the distribution company Atyrau Zharyk from Kazakhstan. In late 2021, the power supply transmission operator Ukrenergo ordered the manufacturing of transformers worth UAH 149 million from the company.
How will the work of the enterprises be organised after the takeover by the state? In a conversation with Mind, one of the NCSSM representatives said that all issues related to the organisation of further activities of the enterprises fall outside the NCSSM's area of responsibility. The Commission only executed the decision made at the meeting of the Supreme Commander-in-Chief's Staff, and "...technically recorded the transfer of shares to state ownership."
However, Denys Shmygal assured that all those companies that have already been working will not sit idle and will receive even more contracts from the government. "The operation of the enterprises that have not been functioning today will be restored, 100% of their technical potential will be employed, and the personnel will be back in the production," the Prime Minister promised, adding that all enterprises would work 24/7.
Oleksiy Reznikov, for his part, said that supervisory boards have already been approved at all five enterprises. They will subsequently appoint new management that will handle the production processes.
Is it possible to return the enterprises to their owners? As for the return of share holdings back to their former owners in the future, such a procedure is foreseen by the law No. 4765-VI. But in what form it will be implemented is currently unknown, says our speaker from the NCSSM.
Oleksiy Danilov, in particular, stated that after the end of martial law, the alienated assets can indeed be returned to their owners or their value will be reimbursed.
If we turn to this law, it says the following. If the former owner of the expropriated property insists on its return, this is possible only in court and provided that the property has survived.
An alternative option may be to provide the former owners of the alienated enterprises with other property, if possible. At the same time, all disputes related to reimbursement of the value of expropriated assets are also resolved in court.
Given the mentioned above, we may conclude that even if Kolomoisky, Bogoliubov or Grygoryshyn dare to demand their stakes back after the martial law is lifted, it would result in years-long lawsuits. And it is far from certain that the trials will end in favour of the businessmen.
If you have read this article to the end, we hope that means it was useful for you.
We work to ensure that our journalistic and analytical work is of high quality, and we strive to perform it as competently as possible. This also requires financial independence. Support us for only UAH 196 per month.
Become a Mind subscriber for just USD 5 per month and support the development of independent business journalism!
You can unsubscribe at any time in your LIQPAY account or by sending us an email: [email protected]
