Insurance

Co-founder and investment risk advisor at S&P Investment Risk Management Agency, Nataliia Osadcha, shared her opinion on the actions of the State Environmental Inspection using the case of the port of “Pivdennyi” and previous scandals involving cargo delays in Ukrainian ports in her column for Hubs:

Recently, representatives of the business community have increasingly discussed cases of illegal actions and abuse of authority by the State Environmental Inspection of Ukraine. Despite the fact that such cases are often supported by facts, official statements about these precedents rarely appear in the press.

Last year, our company encountered a case of unlawful actions by the State Environmental Inspection of the North-Western Black Sea region against one of our clients, who was the owner of a cargo shipment. In this case, the mentioned government agency was behind the creation of a “creative” scheme to detain a vessel with cargo. S&P Investment Risk Management Agency dedicated an article to this conflict, in which we detailed how these environmental officials manipulate concepts and “find” various reasons to delay vessels.

Recently, another case involving illegal actions by inspection officers surfaced in the media. To our surprise, after reviewing the case documentation, we discovered traces of the same “creativity” from the State Environmental Inspection of the North-Western Black Sea region. According to Mykola Shchurykov, Deputy Director of PJSC “Odesa Port Plant,” the essence of the recent conflict lies in the deliberate violation of current legislation by environmental officials.

After examining the facts and documents provided by Mykola Shchurykov, it becomes evident that the Environmental Inspection was once again involved in the downtime of vessels—this time in the port of “Pivdennyi.” This incident affected five vessels loaded with ammonia, whose owners suffered enormous losses totaling approximately $424,000.

The question arises: how do environmental officials manage to create conditions for vessel delays? The answer is simple: they use a fairly basic scheme, which, in their opinion, “covers up” all illegal actions. This scheme was used both in our case and in the subsequent one (albeit with some nuances, as the vessels carried different types of cargo). This government agency manipulates two completely different concepts and, under various pretexts, “discovers” violations of environmental legislation.

In our case, the alleged violation was the imaginary discharge of polluted ballast water. In the second case, it was the failure to coordinate the cargo loading plan with the environmental inspection. According to current legislation, when a violation of environmental laws is detected, inspectors are required to issue a protocol for an administrative offense, impose an administrative fine, and that should be the end of it. However, the Environmental Inspection freely “interprets” its powers.

Referring to an administrative violation (in our case), inspectors marked in the documents that the vessel had not passed environmental control. In the second case (with “Odesa Port Plant”), they outright refused to accept the documents. Do you think a vessel can pass customs control if it has a stamp stating “Radiological control of import/export prohibited” (as in our case) or has not passed environmental control (as in the case of the ammonia vessels in the port of “Pivdennyi”)? The answer is obvious—of course not.

In our case, inspectors stamped the documents, effectively detaining the vessel on Thursday evening (right before the weekend). It took us three days to release the vessel, but by then, the total delay exceeded five days. The shipowner suffered losses of $100,000 (not counting the losses of the cargo owners). In the case of the port of “Pivdennyi,” the financial losses were significantly higher.

The most striking part is that even as they release vessels with substantial financial losses, the inspection officials and their leadership continue to deny any wrongdoing, citing the “uncertainty” of current legislation. The inspectors, whose actions cost businesses hundreds of thousands of dollars, continue to work without consequences.

There are hundreds of similar cases involving the State Environmental Inspection of Ukraine, but only a few ever receive public attention. Until environmental officials prioritize lawful business practices over bureaucratic manipulation, such situations will persist.

The cases described above demonstrate that businesses in Ukraine are still not fully prepared to defend their rights within the legal framework. The market still lacks enough consultants who can help companies navigate crises using proper, legal, and ethical tools.

However, the latest case offers a glimmer of hope that a new wave of businesses is emerging—companies willing to openly assert their rights and act through legal means. This includes holding officials accountable for their “creative” abuses of power and defending their positions in accordance with the law. This shift benefits both society and the state as a whole. These companies are shaping the right “rules of the game.” Only by changing the existing business environment can Ukraine attract major foreign investors.

Investments of new large foreign players contribute to strengthening the country’s economy and help to reach a stable level of development. While in the eyes of potential investors, Ukraine does not belong to the category of investment-attractive countries. What is the problem and why such large foreign giants like Starbucks and IKEA have not yet entered the domestic market? Mykola Siutkin, managing partner of S&P Investment Risk Management Agency explains.

Now large foreign companies, which for a certain period were represented in our market, stop their business and leave Ukraine. According to open sources, over 27 foreign companies from various industries have left this field over the last three years: Honda, Peacocks, Mexx, River Island, Praktiker, Logitech, and others.

It may take years for potential investor to make a decision about entering Ukrainian market. For example, the European “giant” IKEA has considered this step since 2005, despite economically attractive indicators and clear advantages from doing business in the domestic market.

“Dark” rules for business

The main problem of Ukraine lies in the entangled rules of doing business, namely corruption at all levels. If a foreign investor leads a transparent business, it does not mean that sooner or later the company faces problems, sometimes even criminal ones. So it turns out that business “in white” in Ukraine can be compared with military actions, and not every investor is ready to keep such defense.

Fear Factor

The decision to gain a foothold in the Ukrainian market is not based solely on financial indicators or state guarantees. Investors carefully study the market, analyze the behavior of large players and look at real cases. If, for example, they encounter cases of initiation of criminal proceedings or raider seizure of another large company, it becomes a decisive factor. The company must feel safe, have guarantees of keeping property rights and immunity from unreasonable criminal prosecution.

High Level Risks

Acquisition of real estate in Ukraine and / or entering into partnership with the Ukrainian side – high level risks. Even experienced specialists are not always able to minimize them. If you put an attractive price on one bowl of scales and possible loss of an object in a couple of years on another one , which factor prevails? Often, large companies are not willing to risk their assets and a positive reputation because of an unsuccessful attempt to conduct business in Ukraine. Therefore, they opt for franchising. This type of risk refers to the category of risks with a business partner. Level of significance is lower than the previous one, but they can jeopardize the rights of the investor to transfer rights to use the objects of intellectual property, commercial experience and business reputation to the Ukrainian side.

In order for a foreign company would be able to conduct a successful business partnership in Ukraine, it is also necessary at the zero stage carefully consider the formation of correct rules of the game and to calculate all possible risks in advance.

«S&P Investment Risk Management Agency» owns the exclusive copyright of the information in this article. The author has the sole right to control the use of this material. It means the prohibition of using this information without our consent. The term “information” means texts, comments, photos, images, and other materials. Any use of the information or any part of this article without the written permission of the author is prohibited. The term “use” means copying, adaptation, re-writing, modifications, etc. In the case the irregularities are detected, the author has the right to copyright protection in accordance with the procedure established in Article 50-53 of the Law of Ukraine «On Copyright and Related Rights».

The problem of illegal seizure of an enterprise – raiding – has become relevant again. The heyday of raiding in Ukraine was in the early year two thousand and some years after, but the beginning of 2010s was relatively calm. During this period, the only raiders in the country were the “family” of the former Ukrainian president Viktor Yanukovich and his closest collaborators. They were not going to observe any formalities, so the prosecutor’s office, courts, the Security Service and the Ministry of Internal Affairs, which were completely under control of the Donetsk clan, nullified the possibility of owners to defend their business. After the Revolution of Virtue, the situation has somewhat improved, but the problem of forcible seizure of control and illegal transfer of property rights remains relevant. The good news is that now at least we have an opportunity try to defend business interests.

Nataliia Osadcha, co-founder of S&P Investment Risk Management Agency, told RAU how to hedge business and avoid attempts of raider capture and what to do if the attack has already begun

— How often and why do raider seizures take place in Ukraine? What is the reason for this?

— Today, raiding in Ukraine, alas, has become the norm and almost an integral part of doing business. Especially this problem affects the sphere of retail and real estate. Only in last few years dozens seizures of commercial real estate have been committed, you can remember the situation with the Lviv SEC Victoria Gardens and the Kyiv SEC SkyMall – ed. Some of them were so serious that they have become some markers of Ukraine as an investment-risky state. Analyzing the current situation in the country, I do not see the preconditions for reducing raider seizures in the near future.

The reasons that contributed to emergence and development of this phenomenon, we can distinguish

• Unstable political situation in Ukraine, the frequent change of high-ranking officials, leaders of law enforcement agencies and so on;
• Corruption at all levels, including law enforcement agencies and courts;
• Raider attacks execution involving state and law enforcement agencies;
• Absence of a real mechanism and practice of bringing raiders to criminal liability for raiding actions;
• Lack of a culture to lead honest business. An important factor in this aspect is the unwillingness of businessmen conducting business in Ukraine to play fair.

— What mistakes do Ukrainian companies make more often in such situations?

— Each raider capture is unique. Two equally organized and realized seizures are extremely rare. It’s like a battle, the scenario of which changes depending on the tactics of the enemy. Nevertheless, proceeding from our practice, it is possible to single out general trends and characteristics that can cause a raider capture.

The first thing that is important to remember is that not all enterprises become the object of raider seizure. It can be caused by the following circumstances:

The ownership of a large real estate object and / or objects of intellectual property, as well as business in any form that brings a stable income;

The company’s mistakes / circumstances, which may serve as the reason for the seizure. This is what are the prompts for raiders to attack, identifying the company with an easy prey.

Any raider capture is designed for speed. The attack is interesting to customers only under the condition of the fastest execution, first of all, from the financial point of view. The primary goal of the raiders is to gain complete physical control over the object, the secondary goal is to obtain financial control. In this situation, the raider does not care any more how long the conflict lasts, because he does not use his personal resources, but the means of captured object.

“Victim” of the attack will be “exsanguinated” and it will have to invest in this “war” both personal and borrowed funds. So, the confrontation can last for years, during which the raider will continue to receive income from the captured object. In general, protection from a serious raider attack is a long and financially expensive process. One of our defense case against the seizure of a large property in Kyiv lasted five years. The object was returned under our client control, but his financial losses proved to be enormous. Not every company can financially sustain such a battle. However, our case was an exception.

As practice shows, if a raider intrudes into an object and receives control over financial flows, it performs manipulations, because of which it is almost impossible to eliminate it from this object. Do not forget that large raider seizures are carried out with the active participation of law enforcement and / or government agencies, which significantly complicates attempts to return the illegally seized facility.

A vivid example is the sensational case of Arricano. Leading developer of shopping centers; for more than five years he has been trying to regain control of the shopping mall Sky Mall. Despite the fact that Arricano has at its disposal numerous decisions of the London Commercial Arbitration Court, it is practically impossible to execute them at the moment in Ukraine. Particularly difficult for the process is that officials are involved in the conflict at a sufficiently high level.

— How a retailer can protect his business?

— If the business project is executed in partnership, even at the “zero stage” it is worthwhile carefully consider the formation of the correct rules of the game. It is necessary to calculate immediately and c build correctly a system of checks and balances that makes it impossible or unprofitable to betray and / or capture business by one of the partners. According to statistics, one of the most common types of raiding is that one which begins with a corporate conflict.

Therefore, our main advice is this: even at the stage of discussing a business project, approach the issue of investing fundamentally. This will help the investor significantly minimize reputational and financial losses in the future.

— Prevention: what is better to be avoided?

— First: ignoring / not appealing the results of inspections of regulatory bodies that established the fact of illegal actions of the enterprise where the object was registered.

The second. Ignoring the institution of a criminal case against a counterparty who sold the real estate object and / or the official / body that made the decision to sell the property. Issuance of originals of legal documents to the investigation.

Third. Issuance of debt securities with a maturity date “upon presentation” by the enterprise where the property is registered.

Fourth. Primary privatization of the real estate object and / or redemption of the object from state authorities / local authorities without implementing a subsequent scheme to minimize legal risks.

Fifth. Non-renewal of title documents and / or statutory documents: the name of the enterprise has not been changed, a new certificate of ownership has not been received, technical characteristics of the object have not been changed after the reconstruction, etc.

Sixth. Transfer of a part of the corporate rights of the enterprise where the object is registered to third parties: directors, chairman of the board, etc.

Seventh. Distribution of shares between business partners on the basis of “60/40” or “51/49” in the event that the head of the enterprise has moved to the side of the participant owning the 51st% of the statutory fund.

Eighth. Purchase and sale of corporate rights of the enterprise where the real estate object (bought out from the state) was registered, without proper assessment of legal risks. Lack of procedures for minimizing risks.

Ninth. Exclusively legal mistakes / inaccuracies in the conduct of business, especially when concluding a transaction and / or after its conclusion.

«S&P Investment Risk Management Agency» owns the exclusive copyright of the information in this article. The author has the sole right to control the use of this material. It means the prohibition of using this information without our consent. The term “information” means texts, comments, photos, images, and other materials. Any use of the information or any part of this article without the written permission of the author is prohibited. The term “use” means copying, adaptation, re-writing, modifications, etc. In the case the irregularities are detected, the author has the right to copyright protection in accordance with the procedure established in Article 50-53 of the Law of Ukraine «On Copyright and Related Rights».