UKRAINE: Problems of property rights observance in the context of Ukraine’s future accession to the European Union
A Research Paper by Wiktoria Duleba (*)
Table of contents
Introduction
What do international rankings indicate?
What does the business community say about the investment climate in Ukraine
The application of wartime laws raises questions
Stories of businessmen who have experienced coercive pressure
Seizure of businesses from owners without proof of guilt
Short-term issues related to seized property in Ukraine
The Roots of Property Owners’ Insecurity in Ukraine
Limited Capabilities of Business Protection Institutions in Ukraine
The Tatarov and Shurma Factor
Risks of Expanding Confiscation Mechanisms
A Retrospective Review of Global Experience
Adoption of European Values by Ukraine
How the European Union Can Help Ukraine Protect Property Rights
Introduction
HRWF (23.08.2024) – From 2013 until 2022, following Croatia’s accession, the European Union kept its doors closed to new members. Russia’s aggression against Ukraine has shifted the approach to enlargement, and the EU now views it as a tool for European and geostrategic security. Therefore, the question of feasibility has been replaced by a calculation of the cost of the new enlargement, which is likely to occur between 2028 and 2034.
Currently, the countries waiting in line to join the EU are Albania (applied in 2009), Bosnia and Herzegovina (in 2016), Georgia (in 2022), Moldova (in 2022), North Macedonia (in 2004), Serbia (in 2009), Turkey (in 1987), Ukraine (in 2022), Montenegro (in 2008), and Kosovo (in 2022). Montenegro has the highest chances of becoming the next member of the European Union. Ukraine has been on its path for many years, not always moving with determination. In 1994, the European Council adopted a Common Position on Ukraine, thereby granting access to programs supporting democratic institutions and market reforms.
The legal basis for relations between Ukraine and the European Union was the Partnership and Cooperation Agreement, which came into effect in 1998 and remained in force until 2008. In May 2009, Ukraine, along with five other former Soviet republics, began participating in a new EU initiative, the Eastern Partnership.
The European integration processes gained momentum during the presidencies of Viktor Yushchenko, Petro Poroshenko, and Volodymyr Zelensky, while Leonid Kuchma and Viktor Yanukovych struggled to choose between Europe and Russia, on whose economic market the country was oriented due to the long period of joint membership in the USSR.
On December 10, 2012, the EU Foreign Affairs Council expressed readiness to sign the European Union Association Agreement with Ukraine at the Eastern Partnership summit in Vilnius on November 29, 2013. However, in the fall of 2013, President Yanukovych announced that Ukraine was postponing the signing until the next summit. The refusal to sign the Association Agreement led to mass protests, known as the Revolution of Dignity, and a complete change of power and Ukraine’s political course. The new pro-European government of Ukraine, led by Arseniy Yatsenyuk, signed the Association Agreement on March 21, 2014, after which Ukraine began fulfilling its obligations to the EU.
In February 2021, the European Parliament approved a report on Ukraine’s compliance with the conditions for membership, but the country received candidate status only on June 23, 2022—after four months of heroic resistance to Russia’s invasion, which began in February 2022.
On December 14, 2023, the EU Council decided to begin negotiations on Ukraine’s accession to the European Union. On June 25, 2024, the negotiations officially started at an intergovernmental conference in Luxembourg. Thus, Ukraine’s future accession to the European community is no longer a subject of debate and is essentially a settled matter. According to Berthold Busch from the German Economic Institute (IW), this will be “a historic step with great geostrategic significance, especially against the backdrop of Russian military aggression.”
Currently, only the timing of Ukraine’s accession and the cost of its membership to the European Union’s budget are being discussed. These two factors are interconnected and partly depend on the candidate itself. According to Nathalie Tocci, an advisor to the EU High Representative for Foreign Affairs and Security Policy, Ukraine is the most populous and poorest of all the countries that have applied for membership, with vast agricultural lands and currently in a state of war, the recovery from which will require 500 billion euros.
According to an internal study conducted by the European Council, the admission of all candidates would cost the EU 256 billion euros, while Ukraine alone is estimated to receive 186 billion euros over seven years, not including the expenses for post-war reconstruction. Therefore, the EU would need to increase its budget by 15% to accommodate Ukraine’s accession.
The primary portion of the estimated costs consists of agricultural (from 70 to 90 billion euros) and regional (from 50 to 90 billion euros) subsidies. However, according to Tu Nguyen, Deputy Director of the Jacques Delors Institute, large subsidies may not be necessary because Ukraine’s agricultural sector is competitive and self-sufficient and does not require as much support as the European sector.
The European Commission generally views Ukraine’s readiness positively and raises concerns primarily regarding criteria such as combating corruption, the influence of oligarchs, imperfections in the justice system, and issues related to legislation on national minorities. However, aside from corruption, a major problem for Ukraine is the dependence of the judicial and law enforcement systems on those in power, the lack of guarantees for property rights, the non-observance of investors’ rights, and, as a result, an unfavorable investment climate. This complicates investment in Ukraine and may require additional funding from the EU to stimulate economic growth.
According to the International Property Rights Alliance, in 2021, Ukraine ranked 106th in the world in terms of property rights protection. Since then, the situation has worsened due to the application of sanctions and wartime laws. This information sharply contrasts with assessments of Ukraine’s progress in meeting the conditions necessary for future EU membership. It indicates that European governing bodies, particularly the European Commission, do not pay sufficient attention to the violation of property rights in Ukraine by judicial and extrajudicial means, as well as the pressure on businesses by law enforcement agencies, which both Ukrainian and foreign investors complain about.
The problem of an unfavorable investment climate is not limited to its impact on the country’s economy; it also leads to a conceptual conflict because, to join the European Union, a candidate state must meet the political and economic conditions commonly known as the Copenhagen Criteria. These criteria require adherence to the Universal Declaration of Human Rights and the European Convention on Human Rights and Fundamental Freedoms. These include the right to life, the right to be held accountable only in accordance with laws in force at the time of the crime, the right to peacefully own property, and protection from arbitrary government action.
In this study, we examine both the historical and mental aspects of disrespect for private property in Ukraine, as well as specific cases of pressure and confiscation of businesses from owners not directly connected to Russia. The selection of examples was based on public sources, regardless of the identity of the owners. None of the owners of the companies under consideration are criminal figures, have been convicted, or are beyond the reach of justice according to the practice of extrajudicial confiscation.
The confiscated and nationalized assets were not acquired through criminal means and were not used for criminal purposes; they were also not part of the shadow economy. All the owners engaged in open business activities. The investigations against them do not question the fact of bona fide acquisition of property and its use within the framework of the law.
What do international rankings indicate?
According to the International Centre for Policy Studies, in the 2023 Rule of Law Index by the World Justice Project, Ukraine ranked 89th out of 149 countries, dropping 13 positions compared to the previous year. In the International Property Rights Index for 2021, Ukraine ranked 106th out of 129 with a score of 4.453 (and a downward trend of 0.013 points), neighboring Zambia with a score of 4.453 and Mozambique with a score of 4.324. For comparison, Switzerland, Singapore, and New Zealand, which received the top three scores, have respective ratings of 8.148, 8.087, and 8.079.
The International Property Rights Index is a composite indicator that measures the achievements of countries worldwide in terms of property rights protection. It has been published since 2007 by the Property Rights Alliance. The goal of the study is to globally examine the state and effectiveness of protecting private property rights, both physical and intellectual.
The Index evaluates countries in three main categories. The first is the legal and political environment: the independence of the judiciary and impartiality of courts, the rule of law, political stability, and the level of corruption. The second is physical property rights: protection of physical property rights, property registration, and access to loans. The third is intellectual property rights: protection of intellectual property rights, patent law protection, and the level of “piracy.”
For each of the three categories, a rating from 0 to 10 is assigned, which affects the country’s position in the overall ranking. The lower the rating, the worse the country’s performance in that category. The indicators used in the rating are based on statistical analysis of data from the Organisation for Economic Co-operation and Development, the World Bank, the World Trade Organization, the Office of the United States Trade Representative, and international and national research centers.
The editorial board of the Index includes representatives from several leading universities and international organizations. A detailed description of the methodology for forming the Index and the data sources used is provided in the annual release of the ranking based on the results of the latest comparative study.
At the time of the publication of the latest ranking (in 2021), Ukraine was widely using the mechanism of sanctions against businesses through decisions by the National Security and Defense Council of Ukraine (NSDC), but had not yet practiced the mass confiscation of property from owners under the pretext of war or at the pretrial investigation stage.
What does the business community say about the investment climate in Ukraine?
In 2023, 84% of directors of member companies of the European Business Association of Ukraine stated that they consider the investment climate unfavorable, with about half of the respondents (48%) indicating a deterioration in the investment climate. The integral indicator of Ukraine’s Investment Attractiveness Index at the end of 2023 decreased to 2.44 points, compared to 2.48 out of 5 possible points in the second half of 2022.
Foreign investors assess the investment climate in Ukraine with cautious negativity. Among the main factors influencing it, they cited the war, corruption, and a weak judicial system. The association clarifies that foreign businessmen visit Ukraine, study projects, but there is no significant investment in the Ukrainian market.
An analysis of the court decision registry conducted by journalists from “Economic Truth” showed that in 2023, the number of business complaints against law enforcement agencies increased several times. Surveys of entrepreneurs were conducted in April and June 2023 in the “Problems” section. The most significant increase was noted among responses such as “Unpredictable actions by the government that could worsen the business environment” and “Obstacles from regulatory and/or fiscal authorities.”
Representatives of the entrepreneurial movement “Manifest 42” stated that in the 11 months of 2023, 74% of criminal cases against businesses were initiated without further transfer to court with an indictment. This is the worst indicator since such statistics have been tracked: in 2018, 32% reached the court, in 2019 – 28%, in 2020 – 30%, in 2021 – 39%, in 2022 – 33%, and in January-November 2023 – 26%.
During the European iForum-2023 conference in August 2023 in Kyiv, two business leaders—CEO and founder of Ukraine’s largest online store and offline marketplace Rozetka, Vladyslav Chechotkin, and co-founder of the leading Ukrainian document, cargo, and parcel delivery company “Nova Poshta,” Volodymyr Poperechnyuk—stated that the relationship between the government and business is not much better than during the time of the president who fled to Russia, Yanukovych. Chechotkin and Poperechnyuk identified the main problem as pressure from law enforcement on business. They stated that after a respite following the start of Russia’s invasion of Ukraine in February 2022, the situation has again worsened.
In May 2023, Business Ombudsman Roman Waschuk stated that there is a presumption of guilt against businesses in Ukraine. He also noted that the repressive methods implemented by the executive branch produce the opposite of the desired effect, instilling fear in the economic system.
On June 30, 2023, the Ukrainian edition of Forbes published an op-ed by billionaire Kostyantyn Zhevago, who is under investigation in Ukraine and currently resides in France, which refused Ukraine’s request for his extradition due to distrust of the local justice system. In his column, titled “I Don’t Want Ukraine to Become Like Russia,” Zhevago sharply criticized the increased influence of the state on the economy. He wrote that once Ukraine wins the war against Russia, it will join the European Union and be forced to operate according to European and universally recognized rules.
However, for now, Ukrainian officials have dramatically increased their influence, budgets, and appetites. The state controls more than half of the banking market, which is inconsistent with EU principles, has increased its influence on the media market, and has nationalized, sanctioned, or seized hundreds of private companies during the wartime period.
“Sometimes this can be explained by objective reasons: war, resource mobilization, questionable or even hostile owners. But sometimes such decisions cause surprise and outrage,” stated Zhevago, referring to the seizure of his family’s shares in the AvtoKrAZ enterprise.
“Temporarily confiscated companies should be returned to their owners, and seized and nationalized assets should be put up for auction. There can be no democracy with an almost entirely state-controlled economy,” the well-known businessman believes.
The application of wartime laws raises questions
The situation described in the Forbes column by the embattled Ukrainian billionaire concerns the application of the Ukrainian law “On the Transfer, Forced Seizure, or Exclusion of Property Under the Legal Regime of Martial Law or a State of Emergency” to certain private enterprises, which came into effect on September 29, 2022.
The law allows for the confiscation of property from citizens and enterprises during the period of war until its conclusion. Afterwards, the owners should receive all seized assets back, or if that is not possible, compensation for their market value.
According to the provisions of this law, only property necessary for conducting military operations can be confiscated. However, in the first application of the law, by a decision of the Commander-in-Chief’s Headquarters on November 5, 2022, not defense-related assets but shares of corporate rights belonging to private owners were confiscated, which are now formally managed by the Ministry of Defense.
The assets nationalized under the wartime laws include PJSC “AvtoKrAZ” owned by Kostyantyn Zhevago; PJSC “Zaporizhtransformator” owned by businessman Kostyantyn Grygoryshyn; PJSC “Motor Sich,” whose founder, Vyacheslav Bohuslayev, is suspected of aiding Russian aggression; the shares of minority owners of PJSC “Ukrnafta,” where the state already owned more than 50% of the capital at that time; and PJSC “Ukrtatnafta,” where the state’s share was blocking (over 25%).
Unlike other privately owned companies, “Ukrnafta”—the main oil and gas company in Ukraine, which produced 86% of the oil, 28% of the gas condensate, and 16% of the gas (from coal hydrocarbons) at the time the decision on its temporary nationalization was made—essentially already belonged to the state: the controlling stake (51%) was owned by the state company Naftogaz of Ukraine.
As the majority shareholder, the state could have simply replaced the company’s management or decided to allocate all funds to support the Armed Forces of Ukraine. There was no objective necessity to conduct the so-called nationalization by seizing shares from minority shareholders. The correctness of using the term “nationalization” concerning “Ukrnafta” is a legally contentious issue.
At an extraordinary general meeting of shareholders of “Ukrnafta” on November 9, 2022, changes were made to the Charter, according to which the collective executive body (the management board) was replaced by a sole director. After this, the management board was dissolved, and both companies, “Ukrnafta” and “Ukrtatnafta,” were headed by Serhiy Koretskyi, the former CEO of the WOG gas station network.
Former Deputy Minister of Finance of Ukraine, Olena Makieieva, who was a member of the Supervisory Board of “Ukrnafta,” confirmed that the Supervisory Board effectively oversaw the management’s activities, and the audit committee had no complaints about the work of the company’s head and board members, who were dismissed in November 2022.
Ukraine’s Energy Minister’s explanation of the criteria for taking companies under state control contradicts reality
Ukraine’s Minister of Energy, Herman Halushchenko, commenting on the application of asset confiscation, stated that if private businesses do not support the armed forces during the war, the state may take over their owners’ assets. Halushchenko also noted that such subordination of private businesses to the state is not fully considered nationalization. The state takes control of such enterprises only for the duration of the war, subordinating their operations to the laws of wartime. This is necessary to maintain the national economy and enhance the country’s defense capabilities.
Halushchenko’s statement might surprise Kostyantyn Zhevago, whose main business—Ferrexpo (Poltava Mining and Processing Plant)—as of April 2022, had paid 5.7 million euros in current taxes, 27.1 million euros in advance taxes, and spent 11.3 million euros on humanitarian needs.
Ukraine’s Minister of Energy, Herman Halushchenko
Another philanthropist, Vadym Novynskyi, who is considered a pro-Russian businessman, stated in the spring of 2022 that he had allocated 4.5 million euros to humanitarian projects. Nevertheless, corporate rights to forty of his enterprises, totaling more than 3.5 billion UAH (77.3 million euros), were seized, and personal economic sanctions were applied.
The criteria by which businesses are selected for the application of repressive measures are not entirely clear and do not appear objective. An analysis of open sources shows that the number of well-known businessmen, owners of large Ukrainian and foreign companies, who have faced pressure over the past two and a half years, and who have lost their assets temporarily or permanently, has significantly increased. Many of them are perplexed by the hostile actions of government authorities against them.
Stories of businessmen who have experienced coercive pressure
At the beginning of 2023, businessmen began sharing their stories publicly, one after another, which allowed for the formulation of a typology of repressive actions by the authorities. The primary non-confiscatory methods of pressure on business include harsh searches, demonstrative arrests with excessive court-set bails, the reopening of old criminal cases, and the prolongation of investigation periods. We present only four examples from the many similar episodes reported by the Ukrainian press in 2023 and 2024.
Kyivguma
In January 2024, the Security Service of Ukraine (SSU) conducted a series of searches in the offices of the company “Kyivguma”— a manufacturer of rubber products and tactical first aid kits for the army, arrested the management, and publicly accused the company of supplying first aid kits to the enemy.
The CEO of “Kyivguma,” Andriy Ostrohrud, stated that competitors had previously offered him a share of the market with the aim of monopolizing it, and when he refused, they began to tarnish his company’s reputation with the help of law enforcement agencies.
MacPaw
In February 2023, the founder of the IT company MacPaw, whose software is installed on every fifth Mac computer, Oleksandr Kosovan, spoke about the harsh and intrusive searches conducted at his company. The reason for these searches was the purchase of land plots in 2016-2017 to create a recreational base for IT specialists.
The businessman noted that in his desire to create working conditions for highly qualified personnel that are competitive with those in Europe and the United States, he became a hostage to his own investments.
Concorde Capital
Another criminal case, revived in 2023 after 10 years of “suspension,” involved the privatization of land plots near Kyiv for the creation of a cottage community, leading to problems for one of the opinion leaders in Ukraine’s business community, the founder of the investment company Concorde Capital, Ihor Mazepa. A few months after the searches and investigative actions began, on January 19, 2024, Mazepa was arrested without a court decision on his way to the Davos forum.
The Pechersk Court of Kyiv chose to impose a pretrial detention measure for him, with the alternative of posting bail set at 349 million UAH (7.85 million euros). The prosecution had requested that the bail amount be set at 700 million UAH (15.6 million euros). The Kyiv Court of Appeal reduced the bail to 21 million UAH (464 thousand euros), which allowed Mazepa to be released from jail. This story sparked public outrage and attracted international attention to the pressure on business in Ukraine.
U.S. Ambassador to Ukraine Bridget Brink stated at a briefing in Kyiv on February 20, 2024, that she frequently communicates with the Ukrainian business community and is aware of the pressure exerted on business by law enforcement agencies. The ambassador said she does not know who is behind the pressure on businesses, but it is important to find out.
!FEST
On October 17, 2023, Yuri Nazaruk, the co-founder of the restaurant holding !FEST, complained about harsh searches. Nazaruk is the creator of conceptual restaurants such as “Mazoh-café” and “Kryivka,” the latter styled as a secret refuge of Ukrainian nationalist insurgents from World War II, as well as the chain of bars “Drunken Cherry” and the café “Lvivski Plyatsky,” which have become tourist attractions in Ukraine.
Nazaruk recounted that during the investigative actions, employees of the Bureau of Economic Security stayed at the holding’s hotel and dined in their restaurants, displaying an attitude toward the entrepreneur as if he were a criminal.
Seizure of businesses from owners without proof of guilt
The practice of seizing and transferring assets to the management of the state agency ARMA without judicial proof of the owners’ guilt has become widespread in Ukraine in recent years. We will examine four examples of asset seizures from large businesses: 26 gas distribution companies, Ukrnaftobureniye, Gulliver, and Arricano.
The Case of Regional Gas Distribution Companies (so-called Oblgazes)
In May 2022, the Pechersk District Court of Kyiv, at the request of the State Bureau of Investigations (SBI), seized and transferred to ARMA the corporate rights of 26 companies that deliver gas to consumers through gas networks owned by the state (in Ukraine, these are known as Oblgazes).
Among them were all the Oblgazes of the “Regional Gas Company” (RGC) group, associated with Dmytro Firtash, who has been residing in Austria since 2014 and whose extradition the United States has been seeking for many years. The reason for the seizure and confiscation of assets was a debt of 1.5 billion UAH (33.2 million euros) for the use of gas pipelines.
Firtash’s group unites 20 companies in 16 regions of Ukraine, which distribute about 70% of all gas in Ukraine. Among them are major operators such as “Kyivoblgaz,” “Kharkivgaz,” “Zaporizhgaz,” and “Dniprohaz.” After coming under the control of ARMA, these assets were then transferred to the management of the state-owned company Naftogaz of Ukraine. In addition to Firtash’s assets, similar enterprises belonging to Ukrainian businessmen Ihor Voronin, Yuriy Velychko, Viktor Popov, and Ihor Uchytil were also confiscated.
None of the businessmen publicly commented on the matter. Firtash challenged the confiscation in court. The High Anti-Corruption Court of Ukraine (HACC), which is considered the most impartial and was created to handle corruption cases, overturned the seizure of the company’s shares. However, the Pechersk Court reinstated the seizure and maintained state company Naftogaz of Ukraine’s control over them.
Firtash acquired his assets in 2012, and the judiciary had no claims against this transaction. On February 21, 2017, the Ukrainian government adopted a resolution providing for the signing of new contracts with gas distribution network operators, with an annual payment for the use of gas pipelines. Before this, the pipelines were used by operators free of charge. However, the Ukrainian state regulator—the National Commission for State Regulation of Energy and Utilities—violated the government’s decision by not including payment for the use of gas pipelines in the gas distribution tariff.
Dmytro Firtash
A situation has arisen that can be interpreted as the Ministry of Energy and Coal Industry of Ukraine having transferred the gas distribution systems to 37 private operators for free use in 2017. However, the punishment for the actions of government officials was borne by the businesses whose assets were confiscated.
The Case of Ukrnaftoburinnya
In early 2023, the State Bureau of Investigations (SBI) announced that, together with the Security Service of Ukraine (SSU), it had uncovered illegal activities by former officials of the State Service of Geology and Subsoil Use of Ukraine, who had issued special permits (licenses) for mineral extraction in violation of procedures.
Pre-trial investigation in this criminal case began back in May 2014 and had been in a dormant state for many years, similar to the case of Igor Mazepa described above.
The investigation materials involve a license for the development of the Sakhalin gas condensate field in the Kharkiv region, issued to the foreign-invested company “Ukrnaftoburinnya”—the second-largest private gas extraction company in Ukraine, operating at the Sakhalin field since 2004.
In early April 2023, an SBI investigator sought a court decision to recognize the corporate rights of non-resident legal entities ARES SYSTEMS LTD, DERIPON COMMERCIAL LTD, JKX Ukraine B.V., and ARIANA BUSINESS LIMITED, which own “Ukrnaftoburinnya,” as material evidence in the criminal case.
At the time of filing the petition for the arrest of shares as material evidence, there were no suspects and no notification of suspicion had been served, as required by Ukrainian law. This could have been grounds for rejecting the recognition of corporate rights as material evidence. However, the Pechersk District Court in Kyiv made several decisions in April-May 2023 that determined the fate of “Ukrnaftoburinnya” owners. On April 7, 2023, the investigative judge of the Pechersk District Court ordered the arrest of the shares. On April 11, 2023, the court transferred these shares to the Asset Recovery and Management Agency (ARMA), which then transferred them to the state company “Ukrnafta,” recently nationalized and under the Ministry of Defense.
On May 3, 2023, another investigative judge of the Pechersk District Court overturned the arrest as unfounded. The decision stated that criminal-legal measures could not be applied to the company’s shares because there were no allegations of crimes committed by the shareholders, and the ownership rights were not the subject of the criminal case against officials who had wrongfully issued licenses.
On May 4, 2023, the prosecutor again petitioned the investigative judge of the Pechersk District Court for the arrest of “Ukrnaftoburinnya” shares and their transfer to ARMA. A repeated petition on a matter already decided by the court, without new data or arguments, could be seen as an abuse of procedural rights. Nevertheless, the court re-arrested the shares and confirmed their transfer to ARMA, even though, according to Article 98 of the Criminal Code of Ukraine, material evidence must be tangible objects obtained unlawfully or used in the commission of a crime and bearing traces of the crime. Corporate rights of bona fide non-resident shareholders do not fall under this definition by their legal nature. However, foreign investors were temporarily deprived of access to their property and are rightfully concerned about the prospects of its return.
In August 2024, non-resident shareholders declared that, according to Ukrainian legislation and the National Depository of Ukraine’s records, they had not permanently lost their property. The shares were transferred to ARMA and then to “Ukrnafta” only for the duration of the criminal investigation. However, ARMA’s management publicly referred to them as “former owners,” signaling that the assets might not return to their lawful owners after the investigation ends.
The Case of Gulliver
On April 9, 2024, the Kyiv Court of Appeals granted the Prosecutor General’s Office’s petition and imposed a seizure on the assets of the company Trei O LLC, whose main asset is the Gulliver shopping and office center. In early June 2024, the Shevchenkivsky District Court of Kyiv allowed the transfer of the Gulliver complex to ARMA’s management. The property, with a total area of more than 150,000 square meters in a prestigious area of Kyiv, is listed as material evidence in a criminal case concerning unpaid taxes amounting to 145.8 million UAH (approximately 3.2 million EUR). Trei O LLC contested the tax claims, asserting that from 2019 it had paid over 620 million UAH in fiscal payments (13.7 million EUR) and had transferred 300 million UAH (6.6 million EUR) to state banks for debt repayment in 2023.
In March 2024, the tax and debt dispute gained political overtones. Press reports from 2015 about the familial connections of the company’s beneficiary Viktor Polischuk’s wife, Lilia Rezva, to the Kremlin were republished. Rezva was described as the niece of the wife of Dmitry Medvedev, Deputy Head of the Security Council of the Russian Federation. The owner’s representatives believe that the artificially created public resonance from the publication expedited the property seizure process during the investigation phase. Polischuk filed a lawsuit against ARMA for protection of honor, dignity, and business reputation, disputing statements by ARMA’s head about his and his wife’s “close ties with the Kremlin elite.” The head of ARMA explained that she had seen information about Polischuk’s connections with the “Kremlin elite” in the press.
The Case of Arricano
In October 2023, four shopping and entertainment centers owned by Estonian investor Arricano Real Estate PLC—Kyiv’s “RayON” and “Prospekt,” as well as City Mall in Zaporizhzhia and “Sunny Gallery” in Kryvyi Rih—were seized as part of a criminal case opened by the Security Service of Ukraine. The case was formulated as aiding a state-aggressor.
The criminal case against Arricano, registered in May 2023, over a year after the war began, involves the Southern Gallery shopping center in Crimea. The first phase of its construction was completed in 2009—five years before Russia annexed Ukrainian Crimea in 2014. The accusation of aiding the aggressor state is based on the fact that after Crimea’s annexation, the Estonian business’s branch was listed in the Russian legal entities registry and may still be controlled by the parent company in Cyprus.
The Estonian owners argue that there is no direct evidence of this and no visible financial transactions of Ukrainian legal entities in favor of Russia. They suggest that the underlying reason for the seizure of their assets during the preliminary investigation might be a conflict with a Ukrainian partner over the construction of the Sky Mall shopping center in Kyiv and a demand for Ukraine to compensate 750 million USD. The difficulties of returning assets after the owners’ exoneration are significant.
The Case of Karpatneftekhim
In August 2022, LLC Karpatneftekhim, one of Ukraine’s largest producers of organic chemicals, was accused of tax evasion amounting to over 3 billion UAH (66.8 million EUR) and suspected of transferring over 5 billion UAH (112 million EUR) to a non-resident legal entity controlled by a Russian oil company.
In connection with this, the corporate rights of the company, owned by the Dutch entity Karpaty Chemical B.V., as well as the factory’s buildings and land plots, were seized. All this property was transferred to the management of ARMA in late October 2022.
In the summer of 2023, it became known that the investigation into the case, during which ARMA received Karpatneftekhim’s assets, had been terminated. The Dutch company Karpaty Chemical BV exited as a founder, replaced by other legal entities.
ARMA announced several times a competition to select a manager for Karpatneftekhim, but there were no takers. Only thanks to this did the company’s property complex not get legally transferred in a dubious manner during the investigation.
The Case of Rollton
In June 2022, the Security Service of Ukraine (SSU) began an investigation against the company “Mareven Food Europe,” the producer of the instant noodles brand Rollton, under the Criminal Code article “Financing the overthrow of the constitutional order or changing the borders of Ukraine.”
The reason for the investigation was that the parent company, the Vietnamese-Japanese holding “Mareven Food Holdings Ltd,” which owns the Rollton and BIGBON brands, has a branch in Russia that pays taxes there. This branch had no connection to the activities of the Ukrainian plant. Moreover, during the investigation, the company “Mareven Food Europe” announced its exit from the Vietnamese-Japanese holding, and the owner became Vietnamese citizen Mai Van Minh.
However, as with Arricano, the assets of “Mareven Food Europe,” specifically the production facilities of the factory located near Kyiv, were seized, confiscated from the owners, and handed over to ARMA (the Asset Recovery and Management Agency).
On December 29, 2022, the Security Service of Ukraine terminated the criminal proceedings due to the lack of evidence of a crime. Despite the closure of the case, entrepreneurs had to go to court to release the seized assets, which were under ARMA’s control at that time, to return them. At the beginning of 2023, the owners, whose guilt had not been proven, expressed their intention to wind down their investment program and cease production in Ukraine.
Short-term issues related to seized property in Ukraine
Research into changes that have occurred in the economic activities of companies transferred to state management indicates a forecasted or actual deterioration in several parameters.
Temporary Halt in Production at Enterprises
According to information from sources such as businessman Konstantin Zhevago’s statements, former AutoKrAZ CEO Roman Chernyak’s interviews, and an open letter from AutoKrAZ shareholders to G7 ambassadors and finance ministers, the President of the European Commission, the IMF, and the EBRD regarding expropriation, it can be concluded that since the nationalization in November 2022, the only Ukrainian manufacturer of special and military vehicles has ceased operations due to the lack of orders from the state. Wages were not paid, and jobs were reduced to a minimum.
Normal systemic production did not resume even after receiving 1 billion UAH (22.7 million EUR) in advance payment from the state—no specialists in heavy vehicle manufacturing with experience in producing trucks for civilian and military use were appointed to the plant’s management. According to the former owners of AutoKrAZ, tax and fee payments to the budget since the nationalization have been at an inadequate level due to the lack of funds at the enterprise.
Konstantin Zhevago
From the statements of Ukrainian parliament member Oleksiy Kucherenko, press publications, and official responses, it can be inferred that following the confiscation of shares from legitimate owners, the company “Ukrnaftoburenie” ceased operations from the end of November 2023 until early August 2024, despite Ukraine’s acute need for its own energy resources and tax revenues.
The reason for halting production, as well as the criminal case that prompted the confiscation of shares, was a dispute over the license to develop the Sakhalin field. On November 28, 2023, the Sixth Administrative Appeals Court annulled the special permit for subsoil use No. 6349 dated July 10, 2019, along with order No. 204, on which special permit No. 6349 was issued. Consequently, licenses were stripped from 15 other companies that were unaware that their operations were being discussed in court. The State Service of Geology and Mineral Resources of Ukraine, against whose officials an investigation was being conducted, initiated this decision.
The transfer of the company’s shares into state management as physical evidence in the criminal case concerning the license was justified by the need to preserve “Ukrnaftoburenie” as the second-largest private gas producer in Ukraine.
However, after the court’s annulment on November 28, 2023, production activities became impossible. In May 2024, the state-owned company “Ukrainian Energy Machines,” which suffered from the cancellation of order No. 204, filed a lawsuit that, if successful, could have allowed the resumption of operations at the Sakhalin gas field. However, the lawsuit was dismissed.
Only in August 2024 was the license returned to “Ukrnaftoburenie” by a decision of the same Sixth Administrative Appeals Court. Following this, the Asset Recovery and Management Agency (ARMA) reported that it had already approached law enforcement agencies to hold those responsible for the state’s billion-dollar losses due to the halt in hydrocarbon production accountable.
At the same time, deputy Kucherenko publicized his questions to the management of ARMA and “Ukrnafta,” into whose control the company had been placed, as to why its operations had not resumed for eight months. He sought to find out if the state-appointed manager of “Ukrnaftoburenie,” Oleg Malchyk, was present at the court hearing on November 28, 2023. He also questioned why ARMA, together with “Ukrnafta,” from August to November 2023, prior to the court’s decision to halt the license, did not appeal to the government to withdraw the lawsuit filed on behalf of the state body.
Budget and state company losses
The confiscation of gas distribution companies from businessman Dmytro Firtash to the state led to losses from decreased gas payments by the Ukrainian population due to the war being absorbed not by the private supplier but by the state budget, covered by state funds. The confiscation of Gulliver, according to representatives of state banks and the parliamentary committee for investor rights protection, could harm the state budget if problems with further debt servicing arise.
The total debt of Gulliver’s owner, “Tri O” company, to the state-owned Oshchadbank and Ukreximbank exceeds 23 billion UAH (508 million euros). A significant portion of the loan is in foreign currency, so the debt is increasing due to the depreciation of the hryvnia. Galyna Yanchenko, head of the parliamentary committee on business protection, stated that the decision to transfer the arrested asset to ARMA, from which 40 million UAH is paid monthly towards debt repayment to the state banks, is utterly incomprehensible.
According to Forbes, sources in state banking institutions express concern that after the asset’s transfer to ARMA, due to defects in state management, the debtor will lose a significant portion of its income and will not be able to service its obligations, thus risking significant losses for the state as the owner of state banks.
Estimates of losses from the downtime of “Ukrnaftoburenie” vary. According to former top manager Mykhailo Bakumenko, the budget losses amounted to 1.8 billion UAH. Before the license loss, “Ukrnaftoburenie” paid a minimum of 380 million UAH in taxes monthly, which over seven months of license absence (at the time of Bakumenko’s comment) would total 2.66 billion UAH (about 60 million euros). Under state management, the company paid only 831.2 million UAH (about 19 million euros) in taxes during this period. The difference is a direct loss to the Ukrainian state budget due to the company’s downtime caused by unresolved disputes around the license.
ARMA representatives estimate the consequences of annulment of the special permit for gas extraction at 3 billion UAH (65.7 million euros). According to the management contract, at least another 1 billion UAH (22 million euros) could have been added to the state budget. Independent analysts, referencing company specialists, calculated that during six months of downtime, the state lost 2.46 billion UAH in taxes (54 million euros), 285 million cubic meters of gas, and 31 thousand tons of condensate. The state-appointed company management claimed a loss of 10 billion UAH (219 million euros) per year due to downtime. But in any case, we are talking about extremely significant amounts.
According to statements by deputy Kucherenko, the nationalized company “Ukrnafta,” under state management, caused its overseer, the Ministry of Defense, to overpay for petroleum products by 350 million UAH (7.8 million euros). The price increase occurred by including VAT rates of 7% and 20% in the contract cost, although according to government resolution №178 from March 2, 2022, operations for supplying petroleum products to the army, National Guard, and other military structures during the war are exempt from value-added tax. Meanwhile, “Ukrnafta” has sued the Ministry of Defense to force it to pay for contracts at inflated prices.
Currently, amendments to the 2024 state budget are being discussed in Ukraine, which anticipate an increase in expenditures on the security and defense sector by 500 billion UAH (11 billion euros). The harm to the state budget appears alarming and causes bewilderment in the EU, which is the primary external donor to the Ukrainian state budget – with financial assistance to Ukraine from the EU totaling 40.2 billion euros as of August 15, 2024.
Violation of Merger Procedures and Management Appointment
Analysis of public statements regarding the state management appointed to lead confiscated and nationalized assets yields a generalized result, highlighting doubts about the effectiveness and competence of the new leaders, as well as the legitimacy of their status.
The National Securities and Stock Market Commission (NSSMC) recorded a violation of relevant legislation during the organization of a remote extraordinary general meeting of shareholders of “Ukrnaftoburenie” held on March 11, 2024, after the company was transferred from legitimate owners to the state. “Ukrnaftoburenie” is managed by PJSC “Ukrnafta.”
Other publications point out that after nationalization, the role of “Ukrnafta’s” supervisory board, consisting solely of representatives from the shareholder Ministry of Defense, was diminished. It does not advocate for its interests but serves as “silent signatories.” According to Serhiy Boitsun, one of the ideologues of corporate governance reform in Ukraine according to European standards, the new supervisory board of “Ukrnafta” is formed in violation of the norms of the law on joint-stock companies and is illegitimate.
This also applies to the company director appointed by the Supervisory Board. This situation may lead to the challenge and invalidation of “Ukrnafta’s” management decisions, resulting in significant legal and compensatory expenses for the state.
The transfer of 26 gas distribution system operators to the management of “Naftogaz of Ukraine” contradicts Ukrainian and European legislation. In particular, it violates the requirements of the EU’s Third Energy Package. As stated by the former acting Minister of Energy, Olha Buslavets, the norms of the Third Energy Package do not allow one company to extract, sell, and distribute gas. The separation of networks from “Naftogaz” must become inevitable after the end of the war.
Similarly, the transfer of “Ukrnaftoburenie” from ARMA to the management of “Ukrnafta” creates a threat of monopoly concentration. The permission for concentration granted by the Antimonopoly Committee of Ukraine shows signs of legal and procedural violations, which in the future could lead to consequences such as the judicial cancellation of the permit and criminal proceedings against officials who made the decision in violation of legislative norms.
Inefficient Operation of ARMA
The owners of confiscated or nationalized assets, such as the shareholders of AutoKrAZ, have publicly expressed concerns that incompetent and unprofessional appointments made on behalf of the state could lead to the mismanagement of their assets or even their complete destruction. These concerns are well-founded, as discussions were held in 2023 about the possible dissolution of the state body responsible for managing confiscated assets – the National Agency for Finding, Tracing, and Management of Assets Derived from Corruption and Other Crimes (ARMA).
ARMA was established in 2016, modeled after European agencies, as part of Ukraine’s implementation of the Visa Liberalization Action Plan with the EU. A review of ARMA’s history and the circumstances of its creation suggests that the agency was initially intended to trace assets obtained from crimes and corruption, based on international experience in the ARO/AMO (Asset Research Office/Asset Management Office) system.
It was meant to be analogous to the U.S. Marshals Service, Canada’s Directorate of Seized Property Management, France’s Agency for the Recovery and Management of Seized and Confiscated Assets (AGRASC), and Italy’s National Agency for the Administration and Management of Seized and Confiscated Assets.
To enhance its operational capabilities, ARMA was granted the authority to conduct cross-border asset searches in foreign jurisdictions, utilizing international networks such as CARIN, StAR, Interpol, and Europol. Unlike investigative bodies that may wait months for responses to their requests for international legal assistance, ARMA can exchange information within a matter of hours.
The management of seized property was intended to serve as a means of preserving evidence, such as money, real estate, vehicles, and corporate rights, rather than being a primary business activity conducted by ARMA employees.
However, the law requires ARMA, in the event of the lifting of a seizure and the return of assets, to compensate the owner for income and interest earned during the entire period of management. Based on this provision, ARMA gradually transformed from an asset tracing agency into a property management body, employing non-transparent procedures with limited public oversight.
For example, ARMA independently and non-publicly determines the process for appointing managers (from among commercial entities) and bears no responsibility for the results of their business activities, even if they lead to asset devaluation or losses. Moreover, it is impossible to challenge the transfer of property to management separately from the lifting of the asset seizure.
ARMA-appointed managers often fail to perform their duties, leading to the deterioration or even suspension of enterprises, as occurred with the company “Ukrnaftoburenie,” described in this report.
According to ARMA’s 2023 activity presentation, the agency managed 68,500 assets under seizure in criminal proceedings at that time. Revenues to the Ukrainian state budget in 2023 amounted to 191 million UAH (4.2 million euros), of which 101.3 million UAH came from ARMA’s asset management activities, and 89.7 million UAH came from other income, including the sale of assets under ARMA’s management. Meanwhile, expenditures from the state budget to support ARMA’s activities in 2023 amounted to 171.7 million UAH (3.7 million euros). Thus, the economic effect of the agency’s activities exceeded the state’s spending on its maintenance by only 20 million UAH (442,000 euros).
The Roots of Property Owners’ Insecurity in Ukraine
Historically, Ukraine, which was part of the Soviet Union from 1917 to 1991, emerged from a totalitarian society where free enterprise was considered a criminal offense, economic activities were not profit-oriented, and the confiscation of private property was normalized.
Before the 1917 Revolution, Bolsheviks and other revolutionary parties practiced forced seizures of private and state property to finance their underground activities, a process called “expropriation,” though it was essentially robbery framed in ideological terms.
After the 1917 Revolution, the Bolshevik government declared the abolition of private ownership of the means of production and began nationalizing property in the territories they controlled. The Decree of the Council of People’s Commissars on December 14, 1917, abolished the rights to land, means of production, and estates, and prohibited transactions involving urban real estate. By 1918, private ownership of housing was entirely abolished. The Decree of April 27, 1918, annulled the inheritance of property, whether by law or by will.
This eradicated the notion of private property as inviolable, a sentiment further reinforced by agricultural collectivization (collective farms), which led to mass famines, including the Holodomor in Ukraine, recognized by many countries as genocide.
In the 1930s and 1940s, the expropriation of private property occurred across all territories occupied by the Red Army: in Moldova, Western Ukraine, Belarus, Estonia, Latvia, Lithuania, Poland, Hungary, Romania, Bulgaria, East Germany (GDR), and several other countries.
After gaining independence in 1991, Ukraine faced the challenge of shedding the ideological stereotypes ingrained in both the political establishment and the general population. This process has been lengthy and remains incomplete.
In 1996, Ukraine adopted its Constitution. Article 41 of the Constitution enshrines the inviolability of private property: “No one shall be unlawfully deprived of the right to property. The right to private property is inviolable. Compulsory alienation of private property may be applied only as an exception for reasons of public necessity, on the grounds and in the manner prescribed by law, and subject to prior and full compensation of its value. Compulsory alienation of such objects with subsequent full compensation of their value is allowed only under conditions of martial law or a state of emergency.”
However, this constitutional provision has never been fully implemented in practice. The ideology of respecting private property has traditionally been replaced by coercing businesses to be loyal to the ruling political power to protect their investments and assets. Businesses have been forced to adapt to each new political force that comes to power; otherwise, they risked becoming targets of repression and extortion.
The interactions between big business and the state apparatus, including law enforcement agencies, were rooted in the notion that these agencies served as political tools for retaining power. For small and medium-sized businesses, their dealings with regulatory bodies often occurred through private arrangements, which involved paying bribes to secure protection or favorable treatment.
The period of repression against businesses with a political undertone (1994-2004)
In 1994, Leonid Kuchma from Dnipro became the second president of Ukraine. At that time, Ukraine had almost no major foreign investors. One of the first such investors was U.S. citizen Joseph Lemire. He founded one of Ukraine’s most popular FM radio stations, “Gala Radio,” and attempted to legally develop a nationwide network of radio stations.
Facing administrative barriers (the National Council for Television and Radio Broadcasting, controlled by the authorities, did not fulfill the terms of the agreement and did not issue him licenses for broadcasting in 12 cities across Ukraine), the American businessman demanded compensation for losses amounting to $15 million. The dispute escalated to the U.S. Congress and the Ukraine-U.S. Commission “President of Ukraine Leonid Kuchma – U.S. Vice President Al Gore” (the “Kuchma-Gore” Commission). After many years of international litigation, Ukraine lost the case to the owner of “Gala Radio” and had to pay $9 million. Ukraine’s legal expenses significantly exceeded those of the American.
Violations of property rights of American investors from R&J Trading International Inc., who invested millions of dollars in the “Borshchahivsky Chemical and Pharmaceutical Plant,” also reached the U.S. Congress and the “Kuchma-Gore” Commission. In exchange for their investments, the Americans received a 50% ownership stake, which was devalued through an additional share issue. Control remained with the plant’s owners, who were Soviet-era managers. The Ukrainian authorities were not ready to recognize the inviolability of private property and failed to protect the investor. The conflict between the Soviet directors-owners of the plant and the American investors was further complicated by the Kyiv City Council’s intervention, after which a blocking stake in the pharmaceutical company was transferred to the Kyiv municipality. The Americans lost both their money and property in Ukraine.
Other high-profile cases of that time had political undertones. In 1995, Viktor Bozhenar, a former famous basketball player and economic advisor to the head of Ukraine’s parliament, socialist Oleksandr Moroz, who was a major political competitor and opponent of President Kuchma, was arrested on suspicion of misusing loans.
Another figure, initially a political ally and later an opponent of Kuchma, was the former governor of Dnipropetrovsk region, Pavlo Lazarenko, who later served as Ukraine’s Prime Minister. Lazarenko became a symbol of corruption and extortion and received a lengthy prison sentence in the United States.
Lazarenko’s business partner, Yulia Tymoshenko, who managed the gas wing of Lazarenko’s empire through the corporation “United Energy Systems of Ukraine,” became an opposition parliamentarian and Deputy Prime Minister for Energy in the government of Viktor Yushchenko, a democratic rival to Kuchma. In 2001, Tymoshenko was arrested on charges of economic and corruption-related offenses. In 2002, her relatives and top managers of her company were also arrested. All were released in 2003-2004 due to a lack of evidence.
In 2000, banker Borys Feldman was arrested on charges of tax evasion. His guilt was not proven, and he was eventually released, but his bank, “Slaviansky,” was liquidated. The opposition press linked Feldman to Tymoshenko and portrayed the economic charges as politically motivated persecution.
In 2002, prominent businessman Kostiantyn Hryhoryshyn was arrested. During the arrest, police allegedly found drugs on him. Hryhoryshyn spent a week in jail before the charges were dropped. He considered his arrest an attack on his business. This provocation led to hearings in the House of Lords in the United Kingdom, as well as a speech in the Verkhovna Rada of Ukraine by then-leader of the Ukrainian opposition, Viktor Yushchenko.
At the end of 2002, Ukraine was rocked by a major political scandal linked to the murder of opposition journalist Georgiy Gongadze and the release of recordings of conversations made in the presidential office by one of President Kuchma’s security guards, Mykola Melnychenko (known as the “Melnychenko tapes” scandal).
Among the hours of recordings were fragments related to pressure on business owners during elections. The tapes revealed that law enforcement agencies and tax inspections were used by the government as key political tools to control voting and destroy businesses that financed protest movements and the opposition.
The result of such policies was growing public dissatisfaction with the Kuchma regime. The two-year protests related to Gongadze’s death and the release of the “Melnychenko tapes” culminated in a broad popular protest known as the Orange Revolution of 2004, which ultimately brought the democratic opposition, led by Yushchenko, to power.
The period of mass raiding (2005-2010)
The election of Yushchenko was met with optimism by European and American partners. A significant increase in foreign investments was anticipated, and this expectation was partially fulfilled. Businesses welcomed the proclaimed course towards liberalism and mutual understanding with the government and were ready to contribute significant funds to Yushchenko’s humanitarian projects, such as the creation of a Holodomor memorial, the revival of the “Hetman capital” in Baturyn, and the establishment of the “Hospital of the Future,” in exchange for the government’s declared friendliness.
However, expectations for an improvement in property rights were not met. In 2005, the government led by Tymoshenko announced a re-privatization policy, which aimed to nationalize 3,000 properties. The government justified this initiative as a fair redistribution of assets that might have been acquired at undervalued prices by businessmen loyal to the authorities during Kuchma’s presidency. Opponents argued that Yushchenko and Tymoshenko were providing their political supporters, who had missed out on earlier privatizations, the opportunity to acquire assets that would have to be nationalized for this purpose.
Ultimately, the re-privatization campaign stalled at the outset. Its main success was the nationalization of the Kryvorizhstal steel plant, which was later resold to Lakshmi Mittal’s Mittal Steel Company N.V., the world’s largest steel company.
Re-privatization eventually gave way to raiding, with the state’s official role becoming increasingly shadowy. During Yushchenko’s presidency, an estimated 1,000 enterprises were seized (excluding small businesses). Raiding involved schemes where ownership or corporate rights were transferred from the legal owner to another party by altering ownership documents. Raiding included changes in ownership registries, the creation of artificial debts, misuse of shareholder meetings, and the involvement of unscrupulous notaries, state registrars, and corrupt judges who issued unjust rulings in property rights cases.
The chaos in the state’s system of property rights enforcement led to the seizure or defense of assets. In 2006-2008, the Ukrainian press almost daily reported that yet another factory had been “seized.” Private security firms would bring in assault teams, allegedly to enforce court decisions on ownership changes, often resulting in violent clashes with factory security or the police.
Attempts by the authorities to address the situation by creating a Collegium for the Consideration of Complaints in the Field of State Registration, a permanent advisory body under the Ministry of Justice of Ukraine, did not achieve noticeable success. In response to the mass manifestations of raiding and the state’s weak position, the Anti-Raider Union of Entrepreneurs of Ukraine was established in 2006.
In 2009, Yushchenko acknowledged that raiding had become a threat to the country’s economic security, confirming that 70% of all corporate takeovers were illegal. “Society is losing its sense of the inviolability of private property. The level of legal protection of property rights in the country is very low,” he said.
Raiding, which had become an economic disaster, contributed to the discrediting of economic and political liberalism in the eyes of the public. This led to the victory of the pro-Russian Party of Regions, led by Viktor Yanukovych, in the 2010 elections, under slogans of restoring order and addressing the needs of citizens and businesses.
The period of property seizure in favor of the “Family” (2010-2014)
After his election as president, Viktor Yanukovych announced a sweeping reform program that included deregulation, tax reduction, and control over property registries. However, instead of protecting property rights, his administration became synonymous with a system of monopolistic business takeovers favoring individuals close to the ruling group, known as “the Family,” which replaced the anarchy of competing raider groups that existed during Yushchenko’s era.
The “Family” was comprised of the president’s relatives and friends, including his eldest son Oleksandr Yanukovych, businessmen with criminal backgrounds like Yuriy Ivanyushchenko and Ivan Avramov, and high-ranking government officials such as Serhiy Arbuzov (head of the National Bank, later Deputy Prime Minister), Oleksandr Klymenko (head of the tax service), Prosecutor General Viktor Pshonka, and his son Artem.
According to estimates by the Anti-Raider Union, during Yanukovych’s presidency, at least 7,000 Ukrainian companies were targeted by the “Family.” Business owners were given the option to pay regular “tribute” amounting to 30-50% of their company’s profits or to relinquish ownership (partially or fully). Refusal often resulted in threats of legal, governmental, and judicial challenges.
Yuriy Kravets, a representative of the public organization “Anti-Raider Movement,” explained that before Yanukovych’s election, 99% of large and medium-sized property seizures were carried out through court decisions. After the 2010 presidential election, they were increasingly handled through mafia-style negotiations or illegal actions by law enforcement agencies.
Often, negotiations took place at the level of criminal organizations that held de facto control over profitable assets without official documentation. An example of this was the takeover of one of Ukraine’s largest commodity markets, the “Seventh Kilometer” in Odesa. Within 10 minutes, the enterprise was seized from its previous owners through coercion, with the promise that they would be spared physical harm if they did not resist.
The “Family’s” interests extended beyond markets to include large public companies. Among those mentioned by Andriy Semydidko, the executive director of the Anti-Raider Union of Entrepreneurs of Ukraine (ASPU), were Nibulon, one of Ukraine’s leading agricultural companies; Europroduct, owner of the children’s goods store chain “Antoshka”; the vodka company Nemiroff; and the Kyiv department store “Univermag Ukraina.”
The seizure of “Univermag Ukraina” became public knowledge thanks to articles by British journalist Graham Stack in Business New Europe. The department store’s owner, Sean Quinn, claimed that due to dubious decisions by Ukrainian courts, he lost control of his property to Ukrainian partners connected to Yanukovych’s circle.
The raider takeover of Nemiroff with the support of Yanukovych’s regime was confirmed by Marianna Konina, the company’s communications director. Nemiroff suffered massive reputational and financial losses. The Ukrainian asset was returned to its rightful owner only after Yanukovych fled to Russia.
The owners of Nibulon, Ukraine’s largest grain trading company, Oleksiy Vadatursky (who died during Russia’s war against Ukraine in 2022) and his son Andriy, also confirmed attempts to take over their business but only spoke out after Yanukovych’s regime was overthrown.
In 2017, Vadatursky, by then a member of the Ukrainian parliament, revealed that in 2012, businessman Ivanyushchenko, a Yanukovych protégé, approached him with an offer to hand over a large share of his company’s stock to the “Family.” After refusing, the company faced various forms of pressure from state and law enforcement agencies, including criminal cases and document falsifications, which prevented it from operating for six months. However, they ultimately won their legal battles.
Yanukovych’s rule and the dominance of his “Family” ended in early 2014 as a result of the democratic uprising in Ukraine known as the Revolution of Dignity. The revolution was triggered by the government’s refusal, led by Yanukovych, to sign the Association Agreement with the European Union. However, one of the critical reasons for public dissatisfaction was the government’s uncivilized approach to society, business, and human rights, including property rights.
The period of controversial bank closures (2014-2019)
The victory of the Revolution of Dignity in February 2014 opened Ukraine’s doors to Europe. On March 21, 2014, Ukraine’s Prime Minister Arseniy Yatsenyuk and EU representatives signed the political bloc of the Association Agreement with the EU. The economic part of the Agreement was signed three months later, on June 27, 2014, by EU representatives and Ukraine’s newly elected President, Petro Poroshenko, who took office on June 7, 2014.
From the moment the Association Agreement was signed in 2014, Ukraine embarked on a reform program. The EU and its financial institutions mobilized over €17 billion in grants and loans to support these reforms. The European Union quickly became a significant economic partner for Ukraine, accounting for 34% of all Ukrainian exports and 41% of Ukrainian imports by 2015.
Almost immediately after the Revolution of Dignity, efforts began to combat raiding and reclaim property that had been illegally seized by the “Family.” On March 19, 2014, acting President of Ukraine Oleksandr Turchynov signed an anti-raiding decree and established a working group.
On May 12, 2014, Ukraine signed a Memorandum of Understanding that provided for the creation of a business ombudsman institution, with the European Bank for Reconstruction and Development agreeing to allocate €1.5 million monthly for its operation.
In 2016, the Ukrainian parliament passed a law “On Amendments to Certain Legislative Acts of Ukraine Concerning the Improvement of State Registration of Property Rights to Real Estate and Protection of Property Rights,” aimed at reducing the number of raider attacks on Ukrainian enterprises. However, this did not significantly improve the situation.
The business community had high hopes for stronger protection of property rights with the election of Petro Poroshenko, a billionaire (with a net worth of €1.17 billion according to Forbes in June 2014) who had also been pressured by tax authorities during Yanukovych’s rule.
In 2017, the head of the European Business Association, Czech investor in Ukraine Tomáš Fiala, noted that Poroshenko, as an opposition businessman, had complained about the same issues “that we continue to complain about now.” “He talked about pressure from law enforcement agencies and the inability to protect his business interests in courts. His business suffered significant losses back then. Therefore, there were expectations that he would be sympathetic to business since he understood the need to radically reform law enforcement agencies. But when one comes to power, these levers of control become convenient, and it is difficult to give them up. Unfortunately, Poroshenko, like his predecessors, could not resist the temptation to use them,” Fiala observed.
Using state mechanisms, Poroshenko stripped his former business and political partners, with whom his relationships had deteriorated, of their property. In 2016, a conflict arose between President Poroshenko and parliamentarian and gas trader Oleksandr Onyshchenko, who had previously been close to him. Onyshchenko was accused of abuse in gas sales. Facing arrest, he fled Ukraine on July 2, 2016, and attempted to fight Poroshenko with recordings secretly made in Poroshenko’s office using a dictaphone embedded in his wristwatch.
After fleeing Ukraine, Onyshchenko made several scandalous statements, accusing Poroshenko of demanding money from large businessmen, allegedly to bribe members of the Verkhovna Rada. In the end, Onyshchenko found himself under U.S. sanctions and lost his property in Ukraine.
In 2015, as part of an investigation into companies in Dmytro Firtash’s OSTCHEM group, 46 properties and 500,000 cubic meters of natural gas stored by Ukrtransgaz, belonging to the group’s enterprises, were seized. Within a short period, Firtash, who had supported Poroshenko’s presidential bid, lost titanium mines and other assets.
The most significant economic event during Poroshenko’s presidency was the so-called “banking market cleanup” carried out by the National Bank of Ukraine (NBU) under the leadership of Valeria Gontareva, who now resides in the United Kingdom.
During Gontareva’s tenure as head of the NBU from June 19, 2014, to May 10, 2017 (she officially stepped down on March 15, 2018, but was on unpaid leave for the preceding 10 months), more than 100 banks were removed from the market. According to court rulings, at least one in ten of these banks was, in fact, solvent.
Financial analyst Andriy Blinov, former coordinator of the NBU Expert Platform, stated that “some banks, even after liquidation, easily settled with all their creditors, including depositors. They were closed for political reasons, and the NBU did not even try to hide that they were removed because they belonged to the previous regime.”
In the closed banks, depositors lost 163 billion UAH (€6.7 billion) in deposits, including 52 billion UAH (€1.1 billion) belonging to businesses. The funds of companies, not protected by state guarantees, were completely lost, while individual depositors lost amounts exceeding 200,000 UAH (€8,500). Additionally, 35,000 bank employees lost their jobs.
During this period, the assets of Avangard Bank, associated with Gontareva, grew by nearly 70% in just a year and a half, an unprecedented figure for Ukraine’s crisis-ridden banking system. This provoked a negative reaction from the public, who had hoped for change following the Revolution of Dignity.
The period of sanctions and confiscations (2019-2024)
In March 2019, Volodymyr Zelensky won a decisive victory over Petro Poroshenko in the presidential election, garnering 73.23% of the vote. On July 21, 2019, in early parliamentary elections, Zelensky’s political party, “Servant of the People,” won the state electoral district with 43.16% of the vote and secured the most seats (130) in single-member constituencies. In total, the president’s party obtained 237 out of 450 mandates in the IX convocation of the Ukrainian parliament, allowing the formation of a so-called parliamentary mono-majority.
Poroshenko’s defeat and the overwhelming victory of actor Zelensky, who became famous for his bold parodies of government officials, reflected the public’s dissatisfaction with the outcomes of the Revolution of Dignity and its desire for more tangible changes.
In June 2019, Zelensky held his first official meeting with the business community, where he announced the cancellation of 166 decrees that interfered with the economy and promised that within 3-4 years, Ukraine would enter the World Bank’s top 10 rankings for ease of doing business. Zelensky emphasized that he viewed the entrepreneurs in the room as clients of the state and customers of government services, which his team was working on improving.
On October 21, 2019, the law “On Amendments to Certain Legislative Acts of Ukraine on the Protection of Property Rights” was signed. Businesses were promised that with the law’s adoption, the number of raider attacks on real estate and corporate rights would decrease.
However, the euphoria surrounding the new president’s declarations and actions began to fade by mid-2020 and had almost disappeared by 2021. At the beginning of 2021, the National Security and Defense Council (NSDC) of Ukraine started actively using sanctions against individuals and legal entities, leading to the blocking of trade and financial operations, as well as restrictions on managing assets and property.
Sanctions were applied to individuals involved in terrorist and criminal activities and to businessmen publicly accused without court rulings, such as those implicated in smuggling. The term “sanctioned Friday” emerged among Ukrainian entrepreneurs and journalists because NSDC meetings, where sanction decisions were made, typically occurred on Fridays.
Legal experts argue that the Law of Ukraine “On Sanctions,” adopted in August 2014, was initially a response to Russia’s hostile actions and the involvement of hybrid Russian forces in the Donbas conflict (in regions captured by pro-Russian separatists). This law was not intended to be a tool for restricting the property rights of Ukrainian businesses unrelated to Russia.
Partners from the AVER LEX law firm, Vitaliy Serdyuk and Volodymyr Yenich, pointed out that the legal framework consists of only six articles and lacks detailed descriptions of evidence that could justify sanctions, allowing for arbitrary interpretation of the law’s provisions and granting the NSDC unlimited powers in its application. In contrast, the EU’s sanctions regulations span more than 50 pages of comprehensive provisions on sanctions in EU policy, including the possibility of appealing restrictive measures in the European Court of Justice.
The situation regarding property rights worsened further with the outbreak of war with Russia in February 2022, reaching a critical point by mid-2023. In November 2022, several large enterprises were forcibly seized from their owners, including minority shareholders. Among them were AutoKRAZ, Ukrnafta, and Ukrtatnafta.
With the onset of the war, law enforcement began using charges unrelated to economic crimes, such as treason, financing terrorism, or encroaching on territorial integrity, to conduct searches of businessmen. Additionally, the easiest charge to initiate an investigation, “fraud,” was frequently used to pressure businesses. Between January and August 2023, nearly 60,000 cases were registered under this charge, twice as many as during the same period in 2021. It remains unclear how many of these cases involve actual economic fraud and how many reflect the subjective claims of law enforcement against medium and large businesses.
In June 2023, the “Manifest 42” movement of Ukrainian businessmen emerged to protect against the arbitrariness of officials, judges, and special services. The name refers to Article 42 of the Ukrainian Constitution, which guarantees the right to entrepreneurial activity.
After the formation of this consolidated protest by entrepreneurs, Zelensky, for the first time since the war began, met with business representatives and associations to hear their grievances. On June 29, 2023, participants spent two hours explaining to the president the pressure they faced from law enforcement, the threat of business confiscation, the blocking of VAT invoices, and the poor performance of ARMA (Asset Recovery and Management Agency).
Business leaders were initially encouraged by the president’s attention, despite him being exhausted and fully occupied with the task of saving Ukraine during the war. However, their hopes were dashed when it was revealed that the coordination platform for addressing problematic issues would be headed by Deputy Heads of the Presidential Office, Rostyslav Shurma and Oleh Tatarov, both of whom were seen as key figures behind the pressure on businesses and the confiscatory policies against private assets. They were also viewed as protectors of ARMA’s dubious activities.
In 2023, the situation did not improve, and at the beginning of 2024, it worsened again following the arrest of the “Manifest 42” movement leader Mazepa. The sharp reaction from both Ukrainian and international communities to the arrest of the popular entrepreneur forced the president to hold a second meeting with business leaders during the war. This meeting resulted in an NSDC session and the issuance of two decrees.
Decree No. 21/2024, “On Urgent Measures to Ensure Economic Security During Martial Law,” instructed law enforcement agencies to audit criminal proceedings against businesses and develop mechanisms for their protection.
Decree No. 30/2024, “On the Council for Business Support During Martial Law,” established a closed-door advisory body composed of seven entrepreneurs (IT entrepreneur Artem Borodatiuk, co-founder of Monobank Oleh Horokhovskyi, Biopharma pharmaceutical company head Kostiantyn Yefimenko, member of the Board of Representatives of the Ukrainian IT Association Taras Kitsmei, president of the Union of Ukrainian Entrepreneurs and co-founder of Nova Poshta Vyacheslav Klymov, Ajax Systems security system founder Oleksandr Konotopskyi, and head of the Federation of Employers of Ukraine Dmytro Oliinyk) to consult with the Presidential Office.
Limited Capabilities of Business Protection Institutions in Ukraine
The Ukrainian government has historically established various advisory councils comprising representatives of domestic and international companies. The first such body was the Council of Entrepreneurs of Ukraine under the Cabinet of Ministers, formed back in 1993. More recently created bodies include the Coordinating Council for Comprehensive Solutions to the Problems of Small and Microbusinesses (2020); the Council for Promoting Small Business Development (2020); the National Investment Council under the President of Ukraine (2020); and the “Economic Headquarters” under the Ministry of Economy of Ukraine (2022).
Investors’ self-organization in response to government overreach has led to the formation of public associations such as the European Business Association, the American Chamber of Commerce, the Ukrainian Union of Industrialists and Entrepreneurs, the Ukrainian Chamber of Commerce and Industry, the Federation of Employers of Ukraine, the Union of Ukrainian Entrepreneurs, the Diia.City Residents’ Association, UNIC, the Association of Taxpayers of Ukraine, the Ukrainian Bar Association, CEO Club Ukraine, and the “Manifest 42” movement.
On June 11, 2024, at a meeting of Ukraine’s Donor Coordination Platform at the ministerial level, the creation of the Business Advisory Council was announced. This council includes representatives from major international companies like McDonald’s, Siemens Energy, Kawasaki Heavy Industries, Lloyd’s of London, Genesis, Northrop Grumman International, Orange Polska, Inditex, the Canadian Imperial Bank of Commerce, Egis, Confindustria, VNO-NCW, the Confederation of Netherlands Industry and Employers, the Norwegian Confederation of Enterprises, and Business Sweden.
The Business Advisory Council is intended to advise the Ukrainian government on obstacles faced by investors and ways to overcome them. This mandate signals concern within the international business community about the state of the business climate in Ukraine. However, according to Ukrainian parliamentarian Yaroslav Zheleznyak, it is difficult to assess the council’s potential to improve property protection in Ukraine.
Business Ombudsman Council
The primary structure for business protection in Ukraine is the Business Ombudsman Council, which was initiated by the European Bank for Reconstruction and Development (EBRD) in 2012 but was only implemented after the Revolution of Dignity in 2014.
The first Business Ombudsman of Ukraine was Algirdas Šemeta, who had twice served as Lithuania’s Minister of Finance and held the position of EU Commissioner for Taxation, Customs Union, Audit, and Anti-Fraud. In a 2014 interview, Šemeta acknowledged that the Business Ombudsman Council has limited powers, with its recommendations to state and law enforcement agencies being non-binding. The ombudsman cannot demand the dismissal of judges or law enforcement officers involved in pressuring businesses. His primary tools are public criticism of the authorities and signaling concerns to the governments of donor countries.
The Business Ombudsman Council is funded by the Multi-Donor Account for Ukraine’s Stabilization and Sustainable Development (MDA), managed by the EBRD. The MDA’s donors include Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Poland, Sweden, Switzerland, the United Kingdom, the United States, and the European Union—the largest donor.
According to the current Business Ombudsman of Ukraine, Roman Waschuk, a former Canadian ambassador to Ukraine, the vast majority of appeals in 2023 concerned tax and customs disputes, actions by state regulators and local authorities, or the non-enforcement of court decisions.
In its 2023 report, the Business Ombudsman Council cited a case where it assisted a businessman whose company office and director’s home were searched by the State Bureau of Investigation in November 2021. During the search, equipment and money totaling €239,000 were seized. In December 2021, an investigative judge denied the request to seize the temporarily confiscated property, yet it was not returned to the owner. Only after repeated appeals by the Business Ombudsman Council did Ukrainian law enforcement comply with the court’s decision in 2023. This example highlights the council’s limited role as a mediator between businesses and government agencies, with its recommendations often facing slow or reluctant responses from the authorities.
Parliamentary Commission on Investor Rights Protection
The temporary parliamentary commission, established in June 2020 and comprising 13 deputies from various factions, is chaired by MP Halyna Yanchenko. The commission’s accomplishments include assisting Scania (a dispute involving the payment of UAH 123 million to the former dealer LLC “Zhuravlyna”); Auchan (a conflict with ARMA over land sold for a new shopping center in Odesa); Nova Poshta (challenging the results of inspections by the State Consumer Service in court); and Philip Morris (disputing the opening of an Antimonopoly Committee investigation regarding health risks from using the IQOS system).
The commission’s deputies have also helped resolve issues related to the “Amstar Europe” investment project, which, with their support, obtained urban planning permits for a logistics center, and the Ukrainian subsidiary of Wrigley, the world’s largest chewing gum and candy manufacturer, which contested overpayment of profit tax and other payments, seeking corrections in the records of the State Fiscal Service’s Large Taxpayers Office.
The commission has prepared legislative initiatives aimed at reducing pressure on businesses. For example, a draft law proposes amendments to the Criminal Procedure Code of Ukraine and other legislative acts concerning the protection of bona fide property owners, suggesting a legal prohibition on seizing third-party property. However, this draft law had not been submitted to parliament as of August 2024, when this study was conducted.
The commission’s powers include summoning state officials for reports, requesting and receiving relevant documents from state bodies, and participating in consultations on the appointment and dismissal of heads of state agencies. For example, in January 2024, Prosecutor General Andriy Kostin attended a commission meeting. According to Yanchenko, they discussed auditing criminal cases against businesses and imposing a three-month moratorium on procedural actions against entrepreneurs.
It can be assumed that the Parliamentary Commission on Investor Rights Protection could become an effective tool for parliamentary oversight and intervention in cases of nationalization or business confiscation. However, no public statements from commission members on the issue of property rights restrictions were found during this study, possibly due to political reasons or personal motives—avoiding confrontation with representatives of the president’s team, who wield significant influence over law enforcement, the judiciary, and appointments in state companies. This refers to the aforementioned Deputy Heads of the Presidential Office, Oleh Tatarov and Rostyslav Shurma.
The Tatarov and Shurma Factor
In May 2023, Ukrainian Forbes published an article titled “Taxes, the Ubiquitous Tatarov, and the Russian Connection: Businesses Complain of Increased Pressure from Security Forces.” Several sources from parliament and the Presidential Office expressed the view that widespread pressure on businesses was directly or indirectly linked to the influence of Oleh Tatarov, the Deputy Head of the Presidential Office, who had come to dominate nearly all security agencies.
Oleh Tatarov, a former member of Yanukovych’s Party of Regions, served as the Deputy Head of the Investigative Department at the Ministry of Internal Affairs of Ukraine from 2011 to 2014. During the violent crackdown on protesters during the Revolution of Dignity in Kyiv’s central square in January-February 2014, Tatarov publicly justified the actions of the authorities and the police. Later, as a lawyer, he defended police officers suspected of involvement in the shootings of demonstrators.
In 2020, much to the surprise of anti-corruption activists and the democratic press, Tatarov was appointed as Deputy Head of the Presidential Office. Soon after, he became the subject of an investigation by the National Anti-Corruption Bureau of Ukraine (NABU) for his alleged involvement in the embezzlement of UAH 18 million (€398,000) during the construction of apartments for National Guard servicemen in 2017. The investigation claimed that Tatarov facilitated a bribe to Deputy Director of the State Scientific Research Expert Forensic Center of the Ministry of Internal Affairs, Kostiantyn Dubonos, who had previously been a student of Tatarov.
During the investigation, Tatarov called for the dismissal of NABU Director Artem Sytnyk and leveraged his connections to hinder the investigation. This “rescue operation” to protect Tatarov from criminal liability involved judges and prosecutors, including his friend Oleksiy Symonenko, who was then Deputy Prosecutor General and later briefly Acting Prosecutor General. Symonenko transferred Tatarov’s case from NABU to the Security Service of Ukraine (SSU), effectively halting the investigation. Subsequently, Judge Serhiy Vovk of the Pechersk Court, with procedural support from Kyiv Court of Appeal judges Olha Zhuk and Liudmyla Kepkal, ordered the transfer of Tatarov’s case from NABU (an anti-corruption body created after the Revolution of Dignity and aligned with U.S. interests) to the State Bureau of Investigations (SBI), which by then was under Tatarov’s control. Prosecutor Andriy Hrytsan refused to request Tatarov’s detention and withdrew the petition of the Specialized Anti-Corruption Prosecutor’s Office (SAPO), which was working in tandem with NABU. Judges Olena Meleshak and Marina Antonyuk of the Shevchenkivskyi District Court of Kyiv declined to extend the investigation period for the case.
In 2021, Tatarov appointed Artem Shylo as an advisor to the Presidential Office. Shylo had headed the Main Directorate of Counterintelligence Protection of State Interests in the Economic Security Sector of the SSU, which investigated cases against businesses. Shylo was arrested by NABU in April 2024 on suspicion of orchestrating a scheme to embezzle nearly UAH 100 million (€2.2 million) in procurement contracts for the state-owned railway monopoly Ukrzaliznytsia but was released on bail.
Rostyslav Shurma, who has served as Deputy Head of the Presidential Office for Economic Affairs since November 2021, is, like Tatarov, a former member of the Party of Regions. During Yanukovych’s presidency, Shurma was a deputy in the Donetsk Regional Council, a stronghold of Yanukovych and his political clique. He later managed a large metallurgical plant, was a member of another pro-Russian party, the Opposition Bloc, and engaged in business. His brother owns assets in the renewable energy sector. On August 17, 2023, an investigation by Bihus.Info revealed that the state had made compensation payments under the “green tariff” to Shurma’s brother’s solar power plants located in territories under Russian occupation. NABU opened a criminal case on this matter.
Oleh Tatarov (left), Rostyslav Shurma (right)
Shurma oversees the appointments of ministers in the economic bloc and manages state-controlled nationalized and confiscated assets. Public sources have linked him to several key figures:
– Minister of Energy Herman Halushchenko, who justified nationalization;
– President of Energoatom Petro Kotin (the company generates more than half of the country’s electricity);
– Serhiy Koretsky, appointed head of the holding company formed from nationalized companies Ukrnafta and Ukrtatnafta, which took over the seized shares of Ukrnaftoburenie;
– Oleksiy Nykiforov, appointed head of the nationalized aircraft engine manufacturer Motor Sich.
Shurma also controls Ihor Cherkaskyi, the head of the State Financial Monitoring Service of Ukraine, who has business ties with pro-Russian politicians from Ukraine now residing in Russia, such as Viktor Medvedchuk (who was exchanged for Ukrainian prisoners after being arrested for treason), Oleksandr Klymenko (head of the tax service under Yanukovych, mentioned in the context of property seizures from 2010-2014), and Ihor Bakai (former head of Naftogaz Ukraine, now conducting business in Moscow). Additionally, Cherkaskyi is connected to MP Serhiy Lyovochkin, a former member of Medvedchuk’s party and head of the Presidential Administration under Leonid Kuchma.
Experts and the press generally agree that the current head of ARMA (Asset Recovery and Management Agency), Olena Duma, is controlled by Shurma (previously controlled by Shylo until his dismissal), but at a higher level, the agency follows Tatarov’s unofficial directives. As reported by “Novoye Vremya,” in 2022, Duma applied for the position of NABU Director but failed to rank among the top 50 out of 74 candidates, which could indicate her professional qualifications. It is logical to assume that her appointment as head of ARMA could not have occurred without the involvement of high-ranking officials in the Presidential Office.
The study of the biographies and activities of Deputy Heads of the Presidential Office, Tatarov and Shurma, is crucial for understanding their role in confiscatory decisions. It is easy to observe the involvement of judges from Kyiv’s Pechersk Court, employees of the State Bureau of Investigations, the Bureau of Economic Security, the National Police, or the Security Service of Ukraine in these cases. However, the National Anti-Corruption Bureau (NABU) is conspicuously absent from such cases. According to independent democratic sources in Ukraine, all the listed agencies, except for NABU, are under Tatarov’s influence.
In July 2023, NABU, following a ruling by Ukraine’s High Anti-Corruption Court, opened a criminal case regarding possible serious corruption offenses committed by officials against the company Ukrnaftoburenie, with the aim of establishing control over its operations and subsequently seizing the rights to the Sakhalin oil and gas condensate field, which the company legally had the right to develop.
What is Tatarov’s network?
The Forbes article noted that since the Revolution of Dignity, Ukraine had not experienced a situation where all law enforcement agencies were under the control of a single individual (referring to Tatarov). This led to the breakdown of the system of checks and balances. Previously, there was competition among security forces, and they reasonably feared each other. A businessman could complain about the Security Service to the police, and vice versa. Now, there is no one to complain to—everyone is in the same team (a quote from the Forbes article).
Tatarov’s influence over the judicial and law enforcement systems grew significantly after the resignation of Arsen Avakov as head of the Ministry of Internal Affairs (MIA) on July 15, 2021. Avakov, who was not close to Zelensky, had retained his position mainly due to his stance during the 2019 presidential elections, when he promised that the police would take strong measures to prevent electoral fraud in favor of then-incumbent President Poroshenko.
Tatarov’s position was further strengthened after Russia’s invasion of Ukraine in February 2022. Two months after the war began, in April 2022, the criminal case initiated against him by the National Anti-Corruption Bureau of Ukraine (NABU) was closed.
The Ukrainian press refers to Tatarov as the leader of an informal network comprising judges, police officers, and prosecutors loyal to the authorities. Notably, Deputy Prosecutor General of Ukraine Viktoria Lytvynova, chief specialist of the Prosecutor General’s Office Tetyana Novak, and prosecutor Pavlo Matviychuk, who were actively involved in the seizure of shares in Ukrnaftoburenie from their legitimate owners, are considered part of this network.
Many of Tatarov’s contacts were established during his work at the Academy of Internal Affairs (before 2010) and at the Main Investigative Department of the Ministry of Internal Affairs under General Vasyl Farinnik and Yanukovych’s Minister Anatoliy Mohyliov. He also worked with some individuals, such as Oleg Synegubov, the governor of Kharkiv Oblast, while at the Kharkiv National University of Internal Affairs. Andriy Putilov, the governor of Kherson Oblast, appointed in 2023 after returning from Russian captivity, had previously offered Tatarov the position of his deputy during his earlier tenure in 2014, but the democratic public blocked the appointment. Tatarov and Putilov have maintained business relations for over a decade.
Tatarov’s Network, click to open in a new window
After the Revolution of Dignity, Tatarov, together with his former boss Farinnik, established the law firm “Tatarov, Farinnik, Golovko” (also known as “Credence”), providing legal services to a wide range of controversial or ambiguous figures, such as businessman Rinat Akhmetov in the corruption case known as “Rotterdam +,” which was investigated by NABU.
Journalists found information on 59 individuals who defended their dissertations under Tatarov’s supervision or with his involvement between 2014 and 2020, before he joined Zelensky’s team. Most of them have since built successful careers in law enforcement and the judiciary. These include Deputy Director of the State Bureau of Investigations (SBI) Oleksandr Buryak, head of the Inquiry Department of the Main Investigative Department of the National Police Oleksandr Kovtun, the controversial former head of police and governor of the Lviv region under Yanukovych, Oleh Salo, MP from Medvedchuk’s party Hryhoriy Mamka, Kyiv prosecutor Oleh Bilous, Dnipro prosecutor Serhiy Lupashku, and Deputy Head of Police Investigations in the same region Andriy Melnichenko, as well as NABU detectives Artur Cherenkov and Roman Voytyuk.
According to various public assessments, Tatarov is also connected to the appointment of Ivan Vyhovsky as head of the National Police, Anatoliy Shchadylo (who defended his dissertation under Tatarov) as head of the National Police in Kyiv Oblast, the promotion of Vasyl Maliuk as head of the SSU, and Andriy Shvets as head of the Main Investigative Department of the SSU. His friends include Maxim Tsutsukiridze, deputy head of the Main Investigative Department of the Ministry of Internal Affairs, and Vasyl Nevolya, head of Interpol in Ukraine.
Tatarov directly oversees the leadership of the Bureau of Economic Security (as of the time of writing, this post was held by Serhiy Perkhun) and the State Bureau of Investigations (SBI), headed by Oleksiy Sukhachev, who co-authored scientific papers with Tatarov and four members of the commission that supported his candidacy as head of the SBI.
Among the judges who were either mentored by Tatarov or are otherwise under his control are Oleksandr Oksyuta, Mykhailo Yushkov, Svitlana Smyk (who served as judge, deputy chair, and chair of the controversial Pechersk Court of Kyiv, which issued many legally dubious rulings in political and economic cases), Vita Yermichova, Svitlana Shaputko, Anna Hrydasova, Oleksandr Burlaka, and many others.
Some of these judges have made politically and economically significant decisions. For example, Pechersk Court Judge Vita Bortnytska, who defended her dissertation under Tatarov in 2020, ordered the seizure of former President Poroshenko’s property and confirmed the seizure of shares in Ukrnaftoburenie from their owners as evidence in a criminal case investigated by the SBI, which is under Tatarov’s control, and their transfer to ARMA, which is also under Tatarov’s influence.
New scandalous details about Judge Bortnytska emerged during the preparation of this study. She allegedly advised the head of the Antimonopoly Committee of Ukraine, Pavlo Kyrylenko, on how to destroy materials that were evidence in a criminal case. It was also revealed that Bortnytska provided similar consulting services to developer Serhiy Kopystra (the prestigious “Crystal Springs” residential complex in Kyiv) in a case where he was suspected of bribing then-Minister of Infrastructure Oleksandr Kubrakov.
Pechersk Court Judge Svitlana Shaputko, who defended her dissertation under Tatarov’s supervision in 2018, placed activist Roman Ratushny, who later heroically died in the war against Russia, under house arrest. She also closed the case against Deputy Head of the Presidential Office Shurma for violating conflict-of-interest regulations, which the National Agency on Corruption Prevention had accused him of. Shaputko also approved the seizure of Ukrnaftoburenie shares and their transfer to ARMA.
Shurma’s Position on Asset Seizure
Analysis of Shurma’s statements characterizes the Deputy Head of the Presidential Office for Economic Affairs as a potential architect behind the government’s confiscatory decisions toward businesses and its disregard for the rights of property owners and shareholders, including foreign investors. He is also seen as the author of populist justifications for these policies.
Justifying Nationalization
During the Davos Forum in January 2023, Shurma stated that “private property in Ukraine is inviolable. There should be no room for speculation. The only reason the martial law was applied to certain companies was due to the enormous risk to national security.” He justified the nationalization of AutoKRAZ by claiming that the owners had shut down the plant and had not produced military trucks for the past ten years, or only produced a few dozen, while the Ukrainian army needed 40,000 trucks.
The owners of AutoKRAZ, who lost access to the company’s assets, responded that between 2014 and 2018, the plant supplied more than 2,770 different vehicles to the Ukrainian military and National Guard. They linked the company’s difficulties and bankruptcy to the government’s shift towards purchasing imported alternatives. In the early days of the war, several Spartan and Shrek combat vehicles were quickly and freely handed over for military needs.
Shurma explained the partial nationalization of the state-owned “Ukrnafta” by claiming that the company’s management refused to supply oil products to the Ukrainian army. However, Ukrnafta’s management denied these claims. Former Chairman of the Board Oleh Hez emphasized that Ukrnafta is an oil extraction company and does not produce oil products but only sells the oil it extracts. Therefore, it never had obligations to supply fuel for the needs of the Armed Forces of Ukraine.
Despite not having such obligations, the then-management of Ukrnafta voluntarily provided regular support to military units and territorial defense forces, offering free refueling at Ukrnafta’s gas stations (which sell oil products produced by other companies).
Former Chairman of Ukrnafta’s Supervisory Board Mykola Havrylenko confirmed this information, stating that he was unaware of any unfulfilled obligations by Ukrnafta to supply oil products to the Ukrainian army. He noted that if such issues had arisen, they would have been discussed at meetings he attended, which never happened.
The Kyivstar Controversy
In July 2023, Shurma suggested the possibility of fully confiscating the shares of Kyivstar, Ukraine’s largest mobile operator, based on a law on the confiscation of assets from Russia and Belarus (“On Amendments to Certain Laws of Ukraine to Improve the Effectiveness of Sanctions Related to Certain Persons,” passed by Ukraine’s parliament on May 12, 2022, and effective from September of the same year).
Representatives of Kyivstar’s sole shareholder, the international group Veon (Netherlands), insisted that the share of Russian shareholders Mikhail Fridman and Andrei Kosogov in the company’s overall capital was less than 20%. Shurma, however, claimed in mid-2023 that the share exceeded 40%, making 100% of the company’s shares, including those held by foreign (American) shareholders, subject to confiscation.
On November 15, 2023, Mike Pompeo, U.S. Secretary of State under President Donald Trump and former CIA Director, joined Kyivstar’s supervisory board as a representative of a group of American shareholders united under Impact Investments, an investment company Pompeo led after leaving office. In February 2024, Pompeo visited Kyiv to meet with the U.S. Ambassador to Ukraine, the Dutch Ambassador to Ukraine, and senior Ukrainian officials.
By the summer of 2024, the political landscape in the U.S. had shifted, and with it, Shurma’s rhetoric about the total confiscation or nationalization of Kyivstar shares due to the presence of sanctioned individuals among the shareholders. It became apparent that only the Russian shareholders’ stake was at issue, especially since Fridman is under U.S. sanctions (SDN).
A notable situation involves the assets of the Belarusian state-owned company Service Oil (engaged in drilling and oil extraction). In June 2022, the company’s assets and charter capital, totaling UAH 1.5 billion (€33.1 million), were seized as assets of a country supporting Russia’s military aggression. However, in May 2024, the Podilskyi Court of Kyiv lifted the seizure on the company’s assets and charter capital. The prosecutor’s office disagreed and filed an appeal, which was dismissed by the court.
In 2023, the seized assets were transparently transferred through an open competition to DTEK-Naftogaz, one of Ukraine’s largest private oil extraction companies, owned by Ukrainian businessman Rinat Akhmetov (who had contributed UAH 9.1 billion (€200 million) to Ukraine’s needs as of August 15, 2024). DTEK-Naftogaz planned to significantly increase oil production to improve Ukraine’s fuel situation. However, the lifting of the seizure on Service Oil’s assets made the implementation of these plans impossible. The procedure for lifting the seizure appears opaque, and the court’s reasons for rejecting the prosecutor’s appeal remain unclear.
Risks of Expanding Confiscation Mechanisms
In April 2024, Ukraine submitted a request to the Council of Europe to partially suspend certain provisions of the European Convention on Human Rights and Fundamental Freedoms due to the state of martial law. On April 29, the Ministry of Justice of Ukraine clarified that this was an exemption from specific human rights provisions, not a complete cessation of rights protection.
According to the document, Ukraine temporarily ceased to adhere to the following provisions of the Convention during the war:
- Inviolability of the home;
- Privacy of correspondence, telephone conversations, and other communications;
- Non-interference in personal and family life;
- Freedom of movement and choice of residence;
- Freedom of thought and expression;
- Freedom to hold opinions, and to receive and impart information and ideas;
- Right to peaceful assembly, demonstrations, and strikes;
- Right to own, use, and dispose of property.
All of these points, except the last, can be seen as consequences of the war with Russia. However, the suspension of the obligation to adhere to the Convention’s provisions on the right to own and dispose of property raises concerns as it may hinder the appeal of confiscations and nationalizations of property in European courts.
In January 2024, Siobhra O’Leary, President of the European Court of Human Rights, stated that nearly two-thirds of the cases under consideration involved three countries, including Ukraine. She emphasized that Russia’s full-scale invasion did not significantly alter the overall picture of cases against Ukraine. “In recent years, there have also been many complaints about bias in the Ukrainian judicial system,” she noted.
On April 22, 2024, the Ukrainian parliament registered a draft law titled “On Amendments to Certain Laws of Ukraine Regarding the Mechanism for Protecting the Property Rights of Third Parties” (No. 11195). If passed into law, almost all large Ukrainian businesses would be at risk of having their property rights reviewed. The draft law proposes a special mechanism for the state to seize 100% of a company’s shares if a sanctioned individual holds at least 25% of the company’s shares.
This means that if even one investor among several is sanctioned, a special procedure for asset blocking and property confiscation could be applied to all other shareholders through the state agencies ARMA and the State Property Fund. If a sanctioned individual owns less than 25% of the company’s shares, the decision on confiscating the shares of bona fide investors would be made according to procedures established by the Cabinet of Ministers of Ukraine. The role of the courts in this process is notably absent from the draft law.
A letter from the Ukrainian National Committee of the International Chamber of Commerce, published by Forbes, warned that plans to expand expropriation and nationalization of property could provide a justified basis for foreign investors to seek protection of their property rights in relevant international courts. This could negatively impact Ukraine’s business reputation and investment inflows.
Despite the argument that desperate times call for desperate measures, as a democratic state, Ukraine needs to adhere to one of the fundamental rights—the right to property—enshrined in Article 1 of Protocol No. 1 of the European Convention on Human Rights and Fundamental Freedoms. This assertion by the authors of the letter from the Ukrainian Committee of the International Chamber of Commerce is supported by European and American studies, including those published by The Economist, which conclude that the downsides of nationalization far outweigh the benefits. State-owned companies, when subordinated to the government, often make management decisions based on political considerations rather than sound economic and business logic.
Bloomberg reporter Alex Morales believes that nationalized companies quickly become inefficient and turn into burdens for taxpayers because they require massive state support and usually provide poor services. A significant state presence in the economy hinders innovation, as it reduces incentives for its implementation.
It is even worse when nationalization is accompanied by protection from competition, which can further reduce a company’s efficiency. In Ukraine, this process is occurring in the oil and gas sector following the nationalization of Ukrnafta and Ukrtatnafta, as well as the confiscation of Ukrnaftoburenie, all of which have come under the control of the state-owned Naftogaz Ukraine.
An analysis of known global precedents suggests that nationalization and asset confiscation are generally unprofitable for the state, and in Ukraine’s case, create risks of direct and indirect losses in several areas.
1.Devaluation of Assets Due to Incompetent Management and Low Motivation of State Managers (AutoKRAZ, Ukrnaftoburenie, Ukrnafta). This includes losses from underpayment of taxes and other budget payments. The artificial expansion of the state sector of the economy through the integration of companies seized from private owners into state-owned companies creates a monopolistic environment in strategic sectors of the economy.
- Legal and Compensation Costs for the Budget. It is clear that the owners of confiscated and nationalized property, who are currently challenging government actions—almost all are legitimate owners of seized companies (we mentioned lawsuits by JKX Ukraine regarding Ukrnaftoburenie, Gulliver, Arricano, and others)—will continue to file lawsuits even after the war ends. Ukrainian press reports indicate that AutoKRAZ owner Kostyantyn Zhevago has announced his intention to file a lawsuit with the Supreme Court of Ukraine.
Minority shareholders of Ukrnafta and Ukrtatnafta have actively contested the seizure of shares by the state in various courts. For example, in late 2022, foreign investor Littop Enterprises filed a lawsuit with the Kyiv Commercial Court to reclaim its 13.6% stake in Ukrnafta from state ownership and to invalidate all decisions made at the extraordinary shareholders’ meeting in November 2022.
The company requested that the Logistics Command of the Armed Forces of Ukraine consider the temporary seizure of property or part of the property of PJSC Ukrnafta for defense purposes and, if necessary, temporarily seize such property (or part of it) during martial law for the purposes of resisting armed aggression and ensuring national security, while demanding confirmation of its ownership rights to the shares of Ukrnafta. As an alternative, it proposed the possibility of assigning mobilization tasks to Ukrnafta.
A similar lawsuit was filed by another Cypriot company, Ralix Services Ltd, regarding its 7.67% stake in Ukrtatnafta. It also sought to reclaim its shares from state ownership and to invalidate the decisions of the extraordinary shareholders’ meeting. These legal processes could potentially extend beyond national courts. A revision of the compensation amount in favor of the owners, especially if they are legally exonerated, is also possible.
- Significant Negative Impact of Confiscation Processes on Investment Volumes, Privatization, International Ratings, and the Assessment of Ukraine’s Investment Climate. Almost all the companies under review have made significant investments in the development of their enterprises. For example, Ukrnaftoburenie, as part of its extensive development program for the Sakhalin field from 2010 to 2022, invested over UAH 6 billion (€1.38 billion). More than 20 new wells were drilled, over 50 major well repairs were conducted, and gas production exceeded 6 billion cubic meters, resulting in one of the highest production-to-reserves ratios in Ukraine. However, this did not protect the company’s shareholders from having their property seized, which sends a negative long-term signal to other investors and buyers of state property.
- Creation of Conditions for Political and Economic Destabilization Due to Property Rights Disputes Following Political Changes. Sooner or later, martial law in Ukraine will end, and parliamentary and presidential elections will be held. According to established political traditions, new governments almost always review the actions and decisions of their predecessors, including in the area of property rights.
A Retrospective Review of Global Experience
Assessing the long-term spectrum of problems resulting from legally ambiguous nationalization and property confiscation for Ukraine’s economy can be done by looking at the experiences of countries that have taken similar steps over the past 20 years. Notably, the trendsetters in nationalizing private companies, often with a significant share of foreign capital but also domestic ones, were Latin American countries that experienced a political shift to the left in the early 2000s. This shift brought leaders like Hugo Chávez in Venezuela, Néstor Kirchner and his wife Cristina Fernández de Kirchner en Argentina, Rafael Correa in Ecuador, and Evo Morales in Bolivia to power.
Despite the vastly different ideological underpinnings of government actions in these countries compared to Ukraine, the fact that the active period of nationalization in the studied countries ended in 2012-2013 allows for an objective analysis of the long-term consequences of such decisions.
Argentina
Nationalization in Argentina was carried out during the presidency of Cristina Fernández de Kirchner, who held moderately leftist political views. In November 2008, Kirchner, with prior approval from the Senate, launched the process of confiscating private pension funds in favor of the state. These funds held citizens’ savings amounting to $24 billion. The opposition accused the Argentine president of trying to fix the budget deficit at the expense of pension savings. The heads of the private pension funds called the nationalization a “robbery of a system that had proven its viability and shown growth for 14 years.” The government justified its decision by claiming that the global financial crisis was causing citizens’ pension savings to devalue.
Setting aside the public rhetoric and propaganda elements, it can be stated that the expropriation of private pension funds aimed, first, to avoid a second default in Argentina in just a few years, and second, to bring $16 billion in pension savings invested in government bonds under state control, thus saving about $3.5 billion in interest payments in the crisis year of 2009. The international community’s reaction was decidedly negative—the yield on Argentine bonds rose from 12% to 29% within a month after the nationalization of the pension funds, reflecting the risks posed by the government’s actions.
Also, in 2008, Kirchner initiated the nationalization of the airline Aerolíneas Argentinas and its subsidiary Austral Líneas Aéreas, which were owned by the Spanish group Grupo Marsans. In March 2009, the process of nationalizing an aircraft factory owned by Lockheed Martin began; this factory was responsible for the technical maintenance and repair of aircraft for the nationalized airlines. The plan was to preserve 2,300 jobs for Argentine specialists. However, fewer than a thousand employees retained their jobs. The Argentine government paid Lockheed Martin $27 million in compensation.
In 2012, after lengthy preliminary discussions, Kirchner’s government seized 51% of the shares of the oil company YPF from the Spanish company Repsol, justifying the expropriation by citing a lack of investment in the oil and gas sector by the investor. After two years of discussions and negotiations, Repsol was paid $5 billion in compensation, although the company estimated its losses at between $8 billion and $10 billion.
The actions of the Argentine authorities regarding nationalization frightened foreign capital, immediately impacting the country’s investment climate. While overall investment in Latin American countries grew by 31% in 2011, investment in Argentina increased by only 3%, according to a report by the Economic Commission for Latin America and the Caribbean (CEPAL). Argentina also fell in the economic freedom ranking to 148th place, despite being in the top 30 in the late 1990s.
Argentina’s situation as the second-largest economy in Latin America led to a downturn in other emerging markets, causing a wave of doubt and fear among investors. At the height of the nationalization processes in Argentina, the MSCI Emerging Markets index for major emerging markets fell by several percentage points. Currencies of the largest emerging countries, such as the Brazilian real against the dollar, the South African rand, and the Turkish lira, weakened, while demand for the dollar increased in these countries.
However, these losses did not end there. In September 2023, the Southern District Court of New York ordered Argentina to pay compensation for the nationalization of YPF to the investment fund Burford Capital, which had bought bankrupt companies that owned 25% of YPF’s shares after the nationalization. According to calculations using the formula applied by the court, as reported by the newspaper La Nacion, the payout could reach $16 billion.
It is important to note that while this court ruling was issued, the current President of Argentina, Javier Milei, initiated the privatization of YPF and dozens of other government-controlled companies, many of which are unprofitable. However, according to him, it will take several years to privatize YPF again because, in his words during an interview with Bloomberg, “YPF has been destroyed after nationalization, and selling it at current market prices would mean giving it away for free.”
Ecuador
The main actions and threats related to the nationalization of private capital in Ecuador occurred during the presidency of Rafael Correa, a representative of the left-wing forces who held office from 2007 to 2017.
It should be noted, however, that the first nationalization was initiated during the tenure of the previous president, Luis Alfredo Palacio González, who also supported leftist ideas. During the presidencies of both leaders, between 2006 and 2007, a decision was made to terminate the contract with the American oil giant Occidental Petroleum Corporation for hydrocarbon extraction and to transfer the fields where the company was operating to the state-owned company Petroecuador.
Correa also nationalized the assets of the Brazilian oil and gas conglomerate Petroleo Brasileiro SA (Petrobras) due to disagreements with the government following the adoption of a law that replaced production-sharing contracts with service contracts, which did not allow for profit-sharing from production.
As a result of these actions, Ecuador became the first member of the Organization of the Petroleum Exporting Countries (OPEC) to extract oil at a loss. In 2015, the country was selling oil at $30 per barrel, while the production cost was $39 per barrel. President Correa confirmed to Bloomberg that the selling price of oil was lower than the production costs.
In 2015, the World Bank’s Arbitration Court ordered the Ecuadorian government to pay $1 billion to Occidental Petroleum Corporation for the nationalization of its assets in the country. The initial claim amount was $1.7 billion. The Brazilian company Petrobras was compensated $217 million for the nationalization of its assets. Thus, Ecuador’s losses from nationalization significantly exceeded the expected revenue from oil extraction.
In 2011, Correa considered the possibility of nationalizing the country’s banana exports in response to what he perceived as exporters’ failure to meet their obligations, specifically purchasing bananas at prices below the officially set rates. However, he did not proceed with this due to resistance from the business community.
On November 23, 2023, Daniel Noboa, a representative of the banana lobby, a supporter of economic liberalization, and a former ally of President Correa, who had since changed his views, was elected president of Ecuador. As for Correa, he is under investigation but continues to work as a host on Russia Today, where he expresses his support for Russian totalitarianism.
Bolivia
Nationalization in Bolivia took place during the presidency of Evo Morales, who was elected in December 2005 and left office amid protests in 2019. Morales, a leader of the coca leaf farmers’ movement, became known after chewing a coca leaf at a UN drug conference in Vienna.
On May 1, 2006 (International Workers’ Day, a symbolic date for socialists), Morales issued a decree announcing the nationalization of the country’s gas sector. Twenty foreign companies, including France’s Total, Spain’s Repsol, the UK’s BP, the US’s ExxonMobil, and Brazil’s Petrobras, were required to return their licenses for gas field development.
In 2008, Bolivia nationalized the German-Peruvian energy conglomerate Compañía Logística de Hidrocarburos. Later, French energy company GDF Suez, British Rurelec PLC, and Swiss metallurgical enterprise Glencore were also affected by similar actions. Within two years, 56 oil and gas industry assets (pipelines, refineries, fields) built by foreign companies were nationalized.
In 2012, Morales announced the nationalization of TDE, the local branch of the Spanish company Red Electrica, to gain full control over energy resources. Between 2006 and 2012, electricity suppliers and toll road operators were also nationalized.
Immediately after the decrees on nationalization were made public, Bolivian troops took control of all major fields, industrial facilities, and processing plants in the country. Reports from news agencies like MercoPress about Bolivia’s preliminary negotiations with countries and companies whose assets were to be nationalized suggested a theatrically populist nature in deploying military forces to the sites of nationalized enterprises. It is worth noting that Ukraine partially used such methods during the temporary nationalization of Ukrnafta: immediately after the relevant decision by the National Security and Defense Council (NSDC) and during the shareholders’ meeting, the central office was blocked by armed individuals. According to the company’s press service, its employees and management were not allowed to enter their workplaces without a court decision authorizing the use of force.
It should be noted that the Bolivian government guaranteed compensation to foreign companies that lost their property. However, these compensations were minimal. As of January 2017, Bolivia had paid $828.3 million in compensation to 12 companies, which amounted to only 24% of the initial $3.4 billion demanded by the plaintiffs.
The Spanish company Red Electrica, specializing in servicing power grids, received only $7.73 million for the confiscation of assets valued at $164 million. The Argentine company Pan American Energy agreed to receive less than 30% of the $1.49 billion it demanded from Bolivia as compensation. Toll road operator Abertis received only $23 million in compensation for the nationalization of its subsidiary in Bolivia, despite estimating its losses at $90 million.
However, the indirect losses from the policy of disregarding property rights were higher than the savings on compensation payments. As a result of Morales’ government’s actions, Bolivia received less than 1% of total investments in Latin America by the end of 2011. In comparison, countries that could provide legal guarantees for property rights protection received significantly more. Brazil, which ranked first in attracting investments during that period, received 43% of total investments. Mexico received 13%, and Chile 11%.
Bolivia holds the second-largest natural gas reserves in Latin America, with 1.4 trillion cubic meters. However, due to a lack of investment, only 10% of Bolivia’s mineral resources have been developed to date.
Venezuela
Venezuela is the leader in nationalizing private company assets in Latin America. Here, nationalization and violations of business rights reached an extreme level, leading to irreversible consequences for the country’s economy, political status, and the standard of living of its population.
Mass nationalization in Venezuela began during the presidency of Hugo Chávez, from 1999 to 2013, and continued under Nicolás Maduro, who formally won the election on July 28, 2024, but was not recognized by the United States and most leading countries.
During the most active period of nationalization in the mid-2000s, more than 2,000 enterprises were seized from private owners, both domestic and foreign, over six years. These included the telephone company CANTV and the energy companies EDC and Seneca, owned by American corporations Verizon, AES, and CMS Energy, respectively. Additionally, the Venezuelan branch of the Spanish bank Santander was nationalized. Many companies operating in Venezuela and affected by expropriation were forced to seek international arbitration to recover their losses. American oil companies ExxonMobil (awarded $1.6 billion) and ConocoPhillips (awarded $8 billion in compensation by the World Bank tribunal), cement manufacturers such as Switzerland’s Holcim, Mexico’s Cemex, and France’s Lafarge, and the Canadian gold mining company Rusoro took this route.
Venezuela’s government made isolated attempts to compensate companies that lost assets, including paying Santander €755 million and Rusoro $1.2 billion. However, these efforts faced obstacles due to international sanctions imposed on the country’s financial system. For example, the first compensation payment to Rusoro, following a ruling by the International Centre for Settlement of Investment Disputes (ICSID), was frozen by a Canadian bank due to U.S. sanctions. The government’s refusal or inability to pay for the nationalization of companies due to sanctions led to a deep crisis in Venezuela’s oil industry. While the country produced over 3 million barrels per day in the late 1990s and early 2000s, current production figures are almost four times lower—around 800,000 barrels per day. This decline is due to the concentration of the entire oil industry in the state-owned company PDVSA (Petroleos de Venezuela), the illegal nationalization of oil companies, the technological deficit caused by the expulsion of foreign oil companies, and the country’s poor investment attractiveness.
Venezuela, which holds 18% of the world’s oil reserves (comparable only to Saudi Arabia’s 17%), has been facing a severe fuel shortage on the domestic market, leading to long, sometimes multi-day, queues at gas stations.
The country also suffers from a severe shortage of consumer goods and medicines. This has led to mass migration—since 2014, over 7 million people have fled the country, a situation comparable to the exodus of civilians during wartime.
Despite the massive outflow of population, Venezuela’s GDP per capita fell by three times from 2012 to 2022, from $15,000 to $5,000.
After nationalizing the country’s strategic industries, Chávez issued a decree in 2007 that gave the government the right to nationalize all food warehouses, supermarkets, and retail chains whose owners refused to sell at fixed (government-set) prices, even at a loss. This became known globally as “nationalization down to the last refrigerator.” A striking example of the violation of private property rights was the complete confiscation of Christmas decorations from private entrepreneurs in 2016, leading to a complete halt in Christmas decoration imports over the next two years.
Six months before the 2024 elections, the United States initiated a dialogue with Venezuela, driven by political reasons such as allowing the opposition to participate in the elections and countering Rosneft’s dominance in the region amidst sanctions against Russia. This dialogue resulted in Chevron’s first investment project in years, involving oil extraction and production in Venezuela, which can be considered a test project with maximum insurance coverage. Given the undemocratic outcome of the July 28 elections, the long-term prospects for Chevron’s operations in Venezuela are uncertain.
Analysts unanimously agree that the recovery of Venezuela’s industry and its return to at least previous levels, as well as the replenishment of the consumer market, is not merely a matter of lifting U.S. sanctions but rather a question of the severe lack of investment, which the country is objectively unprepared for due to its extremely careless attitude toward property rights. Foreign companies, except for Russian and partially Chinese ones, are in no hurry to follow Chevron’s example, placing Venezuela among the countries with the most unfavorable business climates, alongside the Republic of Chad.
Chad
The only country in the world currently conducting nationalization not related to armed conflicts is the African state of Chad. In 2023, Chad’s interim president Mahamat Déby issued a decree nationalizing all assets of ESSO Exploration and Production Chad Inc., a subsidiary of the American firm Exxon Mobil, located in the country.
Chad is one of the world’s poorest countries. Its economy suffers from political instability, drought, and a lack of infrastructure. About 85% of the population depends on agriculture. Chad’s economy relies on the production of oil, gold, and uranium, which account for more than 95% of exports and form a significant portion of the state budget’s revenue.
The nationalization of American property resulted from a dispute over the sale of Exxon Mobil’s divisions in neighboring Cameroon to the British company Savannah Energy. Experts see a political dimension in the events, including Chad’s struggle for control over an oil pipeline owned by Cameroon, increased Russian influence in the region following sanctions against Russia in 2022, and China’s interest in African assets.
The leadership of Chad may hope that the nationalized property will be put up for sale again, with China becoming the new owner. However, such a development seems unlikely since all countries that are not global pariahs and are not isolated are subject to the jurisdiction of international courts. Any resale of confiscated private assets without an agreement with the investor on compensation for losses turns the buyer of such assets into a receiver of stolen goods or transfers the entire volume of legal claims and payments to the new owner.
Adoption of European Values by Ukraine
Ukraine’s preparation for joining the European Union entails a commitment to uphold human rights in accordance with the norms of European democracy, primarily the European Convention on Human Rights and Fundamental Freedoms.
Property rights are one of the fundamental human rights, protected by Article 1 of Protocol No. 1 to the Convention. According to this article, “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.”
The specific content of Article 1 of Protocol No. 1 to the Convention is revealed in the decisions of the European Court of Human Rights (ECHR), which has the authority to apply and interpret the Convention. The concept of property protected by the Convention is interpreted by the ECHR in a broad sense: property as a physical object and as property rights. For example, the landlord’s right to rent, rights related to owning shares, patents, licenses, court and arbitration decisions, the right to a pension, and other economic rights that form an asset for the owner.
In the case of “Iatridis v. Greece,” the applicant was a tenant of a cinema, which he had been operating for several years under a lease agreement. However, due to a dispute between the state and the cinema’s owners, the tenant was evicted. The Court found that by acting for many years as a tenant, the applicant had created a clientele that constituted an asset, which could be treated as property rights constituting property within the meaning of the Convention.
Furthermore, the practice of the European Court and European legal norms contain a direct requirement that the law must be accessible. A citizen should be able to receive an appropriate explanation of the legal norms that apply in a given case. In cases of nationalizations and confiscations of private property in Ukraine, the answers to these questions are often unclear, contradictory, and vague.
In 2021, as part of a project funded by the European Union and the Council of Europe, a study titled “Use of Seizure and Confiscation Without a Conviction” was published. It reviewed all documents and directives that define the confiscation regime in EU member states.
The study concluded that the application of confiscation without a conviction is compatible with the norms of the European Convention on Human Rights only in certain cases.
A court, when asked to issue a confiscation order, must ensure that the relevant assets are connected to criminal activity; asset recovery without a conviction is not a mechanism for arbitrary state confiscation of property. Prosecutors are required to prove the illegal origin of the assets combined with the owner’s inability to prove otherwise.
In cases of confiscation of property from an unconvicted person, prosecutors must prove that the disputed property was connected to illegal activity. Therefore, a possible title for an in rem claim could be “The State v. Ford Van worth 100,000 euros” or “The State v. Apartment No. 4 on Main Road.” The owner or beneficiary of the targeted property must subsequently prove that the property was not connected to criminal activity or be able to ensure the protection of his bona fide ownership.
However, as seen in the case of “Ukrnaftoburennia,” attempts by the owners to prove that, in the seizure of their lawfully acquired property rights, which were not instruments of unlawful actions, Article 1 of the First Protocol to the Convention on Human Rights and Fundamental Freedoms was violated, that there was no fair balance between the state’s interests and the individual’s right to own and dispose of his property, and that there was no evidence that could justify the seizure of the property, were not upheld in several judicial instances.
The ECHR has repeatedly emphasized that states are granted a wide margin of appreciation in identifying issues affecting public interests that require control measures and in the proper application of such measures. This is especially true when it comes to policies aimed at combating crime and corruption. However, under Article 6 of the European Convention on Human Rights, which protects the right to a fair trial, asset confiscation must be open to judicial review, and any asset seizure regime without a conviction must be both reasonable and proportionate.
The court is obliged to consider evidence based on the “balance of probabilities” or to require a high degree of likelihood of illegal origin combined with the owner’s inability to prove otherwise. The defendant must be given the opportunity to participate in the proceedings and any appeal. Such proceedings must be public.
The rights of other affected parties, including bona fide third parties, must be protected. The Convention also provides that “everyone charged with a criminal offense shall be presumed innocent until proven guilty according to law.” This means, among other things, that “the burden of proof lies with the state, and any doubt shall benefit the accused.”
How the European Union Can Help Ukraine Protect Property Rights
Consolidated financial support for Ukraine from democratic countries and international financial institutions is a logical factor in the context of Russian aggression. According to European Commission President Ursula von der Leyen on August 7, 2024, financial, military, and humanitarian assistance from EU member states to Ukraine amounted to €108 billion.
The Ministry of Reintegration of Ukraine, citing data from the Kiel Institute for the World Economy, estimated the total international assistance from February 24, 2022, to the beginning of 2024 at €170 billion. This total includes military support (40% of the total), as well as financial aid, which makes up more than half of the funding. The remaining 10% is humanitarian aid.
On April 9, 2022, during the global Stand Up for Ukraine campaign in Warsaw, organized by the European Commission and Canada, €9.1 billion was raised for people fleeing the Russian invasion, both within Ukraine and abroad. Of this amount, €1 billion was contributed by the European Commission. Additionally, the European Bank for Reconstruction and Development announced an additional €1 billion to support refugees.
At the Third Ukraine Recovery Conference on June 11-12, 2024, in Berlin (similar conferences were held in 2022 in Lugano and in 2023 in London), €1.4 billion was agreed upon to promote private sector investment.
However, according to the World Bank’s assessment as of March 1, 2024, the total cost of Ukraine’s recovery is estimated at $499 billion (€466 billion) over the next decade. In 2024 alone, the country needs about €14 billion for urgent priority measures. From January to July 2024, foreign aid covered 44% of Ukraine’s state budget expenditures.
In 2024, the World Bank Group, the European Commission, and the United Nations published the results of the updated Rapid Damage and Needs Assessment (RDNA3). EU Commissioner for Neighborhood and Enlargement, Olivér Várhelyi, stated that the RDNA3 findings complement the reform and investment priorities outlined in the “Plan for Ukraine,” which lays the foundation for funding under the Ukraine Facility program, through which Ukraine must implement over 100 reforms across 15 sectors in exchange for €50 billion from the European Union over four years. On August 6, the EU Council approved the allocation of €4.2 billion in macro-financial assistance to Ukraine in the form of grants and loans under the Ukraine Facility, and these funds were transferred to Ukraine on August 13.
The Ukraine Facility creates an important incentive for Ukraine, which needs financing for post-war reconstruction while also preparing for EU membership—the reforms required for funding support the “build back better” principle, meaning that the institutional capacity of national and regional authorities is not only about renovating war-damaged assets but also about changing approaches to the value of human capital and respect for property rights.
In the section dedicated to business environment reform, the Ukraine Facility states that entrepreneurs are the key beneficiaries of the reforms. The government’s task is to build a new transparent model of cooperation with businesses that is oriented toward their needs. The success of the private sector directly affects the pace of Ukraine’s economic development and the population’s standard of living.
The proposed changes include deregulating the economy and reducing administrative pressure on businesses, particularly through reforming the Bureau of Economic Security (BEB); increasing the share of small and medium-sized enterprises in the economy; simplifying the process of connecting to networks; and harmonizing norms and rules with the European Union. However, there is no mention of the critical issue of the inadmissibility of depriving businesses of assets and property.
One possible solution to the problem of guaranteeing the inviolability of assets could be the adoption and adaptation by Ukraine of the principles of the EU Model BIT for domestic application. In this way, after Ukraine joins the European Union, small and medium-sized European businesses may be protected from facing the same problems currently experienced by domestic businesses and their foreign investors.
The EU Model BIT program represents model agreements between the EU and other countries that provide four main standards of protection for investors:
- Most-favored-nation treatment;
- Fair and equitable treatment;
- Full protection and security;
- Prohibition of unlawful expropriation and nationalization.
The last point states that a state should not directly or indirectly nationalize investments covered by the EU Model BIT protection, except in special cases and subject to the immediate payment of adequate and effective compensation.
It is also necessary to consider the lessons of already completed reforms that the European Union has formally deemed finished. For example, the reform of the Security Service of Ukraine (SSU), which was supposed to strip the service of its inappropriate function of investigating economic crimes, did not reduce the pressure on businesses as expected.
During the war, the SSU has been used as a repressive tool against businesses, with articles of the Criminal Code on economic offenses being supplemented with articles under the SSU’s jurisdiction, including severe accusations such as treason or financing terrorism. It must be acknowledged that the fight against corruption, which has received positive evaluations from the EU, can only help protect investors’ rights if it is conducted non-selectively and not merely for public display, but according to the principle of no untouchables in power. The closure of NABU’s criminal case against Tatarov and the judicial termination of the conflict-of-interest investigation against Shurma may indicate the existence of an unofficial status of untouchables within the close circle of the president.
In this regard, it would be beneficial to study the experience of Romania, which joined the European Union during the 2007 expansion wave. In Romania, the National Anticorruption Directorate (DNA), an equivalent body to Ukraine’s National Anti-Corruption Bureau, managed to bring thousands of officials, including representatives of the ruling party, to justice for corruption within four years after former prosecutor general Laura Kövesi took charge of the DNA in 2013. In 2016, Mircea Băsescu, the brother of former Romanian President Traian Băsescu, was sentenced to four years in prison for corruption. This is particularly noteworthy given that it was President Băsescu who appointed Kövesi as the director of the DNA. In January 2014, former Romanian Prime Minister Adrian Năstase, who had created the anti-corruption directorate, received an additional four-year sentence for taking a €630,000 bribe.
Additionally, private investments should be protected not only through insurance mechanisms and bank guarantees, as discussed at the Ukraine Recovery Conference in Berlin, but also through special support within Ukraine to shield them from confiscations and pressure.
To achieve this, it is necessary for consultative councils under government bodies to be transparent, and for public business advocacy structures to be effective rather than merely decorative. The business ombudsman should be empowered to demand that the actions of the authorities and law enforcement agencies concerning the property rights of bona fide owners comply with European standards.
Conclusions
- The democratic potential of a state is determined by its attitude towards individuals and private property. The situation regarding property rights cannot be perpetually worsened, even if justified by the war. Improving the investment climate will attract significantly larger amounts of capital investment for Ukraine’s reconstruction. This is the only way to shift Ukraine from a dependency on international aid to self-sufficiency in the future.
- Issues with property rights increase the cost of Ukraine’s accession to the European Union and, consequently, delay this process. Ukraine, burdened with its current issues, will cost the EU budget more than a Ukraine with clearly regulated property rights and guarantees against state confiscation of capital.
- The European and American approach to property confiscation is based on a single principle: the property must have either been acquired illegally or used as a tool or instrument in criminal activities.
- Property acquired through legal procedures and used within the law should not be confiscated without a court conviction, even in wartime. War is not a mitigating circumstance for the government to seize property. Ukraine must recognize that its sanctions law is imperfect.
- The situations involving the companies “Ukrnafta” and “Ukrnaftobureniya,” highlighted in this study, are the most significant examples of the Ukrainian government’s violations of private property rights, investor rights, and the Convention on Human Rights and Fundamental Freedoms since Russia’s full-scale invasion. These issues not only worsen Ukraine’s investment climate but also pose obstacles to its accession to the European Union if they are not promptly, legally, and irreversibly resolved.
- Disregard for property rights is a legacy of the socialist past, which prevents Ukraine from being fully prepared to adopt European values as a state and society.
- Business is an ally of the Ukrainian government in the fight against Russia. Over two years of war, large Ukrainian companies have contributed UAH 58.5 billion (€1.3 billion) to support the army and humanitarian missions. The government must respond to public statements by businesses about excessive pressure and unjustified repression.
- It is alarming to European officials and experts that the organizer of pressure on legitimate businesses and unjustified repression against them is a high-ranking official, the deputy head of the Office of the President of Ukraine, Oleg Tatarov. EU officials and experts view this as a clear obstacle to Ukraine’s EU membership, a priority for President Zelensky.
- The situation can be improved by practically implementing the principles of the EU Model BIT and Protocol No. 1 to the European Convention on Human Rights and Fundamental Freedoms in relations with businesses.
- The European Commission, international partners, and institutions responsible for Ukraine’s future have the opportunity to consolidate the principles of RDNA3 and the EU Model BIT with the Ukraine Facility programs to improve the situation in the sphere of property rights protection and respect for asset owners in Ukraine. This is advisable to pursue.
(*) Wiktoria Duleba graduated from Riga Stradins University in 2002. Until 2014, she worked at ABLV Bank and until 2018 at Meridian Trade Bank, as analyst in both cases. She is now a freelance investigator. Expert in structural analysis, mergers and acquisitions. Coordinator of an international independent group of analysts.