Ivan Horodyskyy
Dexis Partners, Lviv
ivan@dexis.partners

The Ukrainian mechanism

It should be recognised that the government of Ukraine is not just demanding from its allies the confiscation of assets related to Russia, but is also taking the lead in the process and has introduced an effective confiscation mechanism. Created in the first months of the full-scale Russian aggression, it gives powers to the Ministry of Justice (MoJ) to file a lawsuit regarding the confiscation of assets related to the Russian Federation sanctioned by the President of Ukraine, in accordance with the decision of the National Security and Defence Council.

The High Anti-Corruption Court (HACC), established in 2019 – which has a reputation as the most professional and independent court in Ukraine – was designated as the judicial body authorised to make decisions on confiscation. Subsequently, the decision on confiscation may be appealed to the HACC Chamber of Appeals by the MoJ or other parties to the dispute.

However, there are a number of other problems related to the protection of property rights, the failure of which risks jeopardising future compensation for affected parties.

Asset freezing as a criminal legal tool

The confiscation mechanism currently lacks the option to freeze assets or implement blocking tools before the MoJ files a lawsuit in the HACC. To prevent the alienation of property, an arrest is imposed by the general courts within the framework of criminal proceedings, following an appeal from law enforcement agencies. For example, the court recently seized a number of assets belonging to the Alfa Group (owned by Russian oligarchs Mikhail Fridman and Petr Aven), at the request of the Security Service of Ukraine (SSU), following their conviction for financing Russian aggression.

However, this is often done for tenuous reasons. For example, in the case of Oleg Deripaska’s quartzite mining enterprise, corporate rights were blocked due to alleged abuse of authority by officials of the State Geology and Subsoil Service of Ukraine. The real reason, however, was the connection of the company's assets with Russia.

Proving the connection between the asset and the owner

The second problem lies in proving the connection between the asset and the sanctioned Russians. An example can be the situation with two companies – ‘Khust quarrier JSC’ and ‘Zhezhel quarrier JSC’. Until November 2021, these quarries were owned by the Austrian construction company Strabag. Oleg Deripaska was a co-owner, holding 27.8 per cent of the shares through the Cypriot company Rasperia Trading.

A few months before the war, Strabag sold 100 per cent of the shares of both companies for about UAH 13m to the Cypriot company Samsta. The nominal owner of Samsta is an investment banker acting in the interests of a group of Ukrainian businessmen.

The position taken by the MoJ was that the sales agreement was fake and had been concluded to evade sanctions in the interests of Oleg Deripaska, who allegedly has effective control over Strabag and had previous sanctions evasion record.

On June 16, the Appeals Chamber of the HACC overturned the first instance decision regarding Khust quarrier JSC and Zhezhel quarrier JSC, and cancelled their confiscation ‘due to the lack of sufficient evidence regarding the possibility of a sanctioned person (Deripaska) disposing of the corporate rights of Khust quarrier JSC and Zhezhel quarrier JSC.’

This decision serves as evidence of both the impartiality of the HACC and the need to refine approaches to proving the connection between assets and sanctioned individuals.

The next case where this issue is likely to arise will be the proceedings regarding the confiscation of assets of Alfa Group. For instance, this can be the case of Morshynska – the leading producer of mineral waters in Ukraine – which is owned by the Georgian group IDS Borjomi. Alfa Group owns 49.9 per cent of the Cypriot company IDS, which in turn owns 100 per cent of Morshynska. Furthermore, an additional 7.73 per cent was transferred by it to the Georgian government in June 2022, following protests by workers at the Borjomi plant in Georgia. Currently, the government of Ukraine does not recognise that Alfa Group has lost effective control over the company, and the HACC will be compelled to assess this situation.

Third party property rights protection

The third problem that exists is the protection of the rights of unsanctioned co-owners of assets during the confiscation process. The practice of HACC shows that confiscation limited only to the corporate rights of sanctioned persons is possible, only if the corporate rights are divided at the level of the corporate structure in Ukraine. If the corporate rights of a Ukrainian asset are 100 per cent owned by a foreign company, then the asset is confiscated in Ukraine as a whole.

This question also arose in the case of the assets of Alfa Group. In addition to the Morshynska case, there is also the question of a share in the corporate structure of the mobile operator Lifecell. The general court, at the request of the SSU, froze 100 per cent of Lifecell, in which Alfa owns 19.8 per cent. Subsequently, the court amended its decision, seizing only the share corresponding to Alfa Group at 19.8 per cent, although it is not separately allocated at the level of the Ukrainian corporate structure.

Although the decision is about freezing assets, not confiscation, it is possible that HACC will follow this approach, although it requires amendments to the sanction’s legislation by Parliament. However, even then, the question arises of the violation of the rights of third-party co-owners in the event of partial asset confiscation, as well as the matter of compensating them.

What can be done?

The main issue with Ukraine's asset confiscation mechanism is the limited authority of the HACC in cases related to recovering the assets of sanctioned individuals. While the court has the power to grant claims either in full, partially, or refuse them, such decisions are only applicable to assets which are corporately structured within Ukraine's territory. If the assets are owned by a foreign company, the interests of non-sanctioned individuals cannot be considered.

It is imperative that the property of Russian oligarchs in Ukraine be confiscated. As Ukraine demands this from its allies, it must uphold the same standard. However, it is crucial to ensure that this action does not infringe upon the rights of non-sanctioned third parties. If the owners are citizens of the EU or other countries, they may seek to defend their rights in foreign international courts.

One solution could be to implement a compensation mechanism for affected individuals. However, this option is economically less desirable, as the asset values at the time of confiscation and future privatisation could vary significantly. Consequently, the state could end up ‘punishing’ sanctioned individuals at the taxpayers’ expense.

The most effective solution appears to be the expansion of the powers of the MoJ and the HACC concerning the confiscation of sanctioned assets. The MoJ should have the authority to demand, and the court should have the power to allocate the confiscated assets to the non-sanctioned owners in proportion to the shares they lost due to the confiscation.

Consider the situation with Kyivstar, another national mobile operator. Alfa Group, through Dutch company Veon, owns 47.9 per cent of Kyivstar. The HACC could confiscate all assets of the mobile operator in Ukraine and simultaneously transfer 52.1 per cent of the shares to the non-sanctioned shareholders of Veon.

This approach would eliminate risks of infringing upon third-party rights and streamline the asset recovery process. The MoJ could specifically target assets owned by oligarchs, regardless of how they may have concealed their property.

Ultimately, Ukraine would prevent years of potential litigation and associated costs, thereby demonstrating its commitment to upholding property rights, a foundational principle of a rules-based society.