Monthly Archives: July 2008

Ukraine suggests talks with Vanco even as government prepares its case

Ukraine’s government has expressed willingness to hold talks with Vanco, so long as the oil exploration company drops its international arbitration suit. At the same time, an analysis by Kommersant of the government’s case against Vanco suggests that Ukraine’s argument, which includes accusations of corruption, may hold up in court.

According to Deputy Justice Minister Yevgeniy Korniychuk speaking on July 30th:

“Our position is that we will immediately hold consultations with Vanco Prykerchenska Ltd., as soon as they suspend their suit.  We have turned to Vanco with a request – if they want to continue talks, at first it is necessary to suspend the suit for 60 days, and than we will talk.”

This suggestion is similar to one delivered by mail to Vanco right before the company became eligible to file arbitration proceedings.  At the time, the letter had been sent to Vanco International Ltd (VIL).  Korniychuk’s direct address to Vanco Prykerchenska Ltd. at his press conference on Wednesday may be a concession aimed at pulling both sides to the negotiating table.

However, it is clear that the government is against any involvement for VPL–which includes in its ranks VIL, Rinat Akhmetov’s DTEK, and two investment firms–in the future of the Black Sea shelf development.  According to Korniychuk, in the event of a amicable resolution, they would be willing to allow VIL to take part in some sort of project:

“We are not arguing the right of Vanco International, which won the competition [to sign the PSA], to develop the shelf.  They can return to it, though maybe with some other commecial terms.  But the shelf certainly won’t be developed by Vanco Prickerchensaka.”

In the past Vanco has stated its openness to hold negotiations, both during the 60 day period necessary before filing for arbitration, as well as during the beginnings of the proceedings themselves.

While Vanco may acquiesce to this pause for talks, they will likely grumble about it as well.  After all, the government was rather quiet during previous 60 day period, which was initiated by an official letter of complaint sent by Vanco to the government and meant to begin a dialog.

Should no settlement be reached and the case proceeds to the Stockholm arbitration court, it appears that Ukraine has a fairly solid argument on its side, according to Kommersant.

The government’s case, which was prepared in March by the law firms Astapov Lawyers and Barlow Lyde & Gilbert, has two prongs: the first concerns violations of Ukrainian law; the second alleges corrupt elements within the deal.

The first prong concentrates on the relationship between Vanco International and Vanco Prykerchenska, alleging that the transfer of the PSA from the former to the latter was against the law.  Indeed, this point has been one of the more questionable acts in the saga — how could VIL win the tender, negotiate and sign the PSA, and then pass off the deal to a separate entity that contains three new players?

Vanco has asserted it was within its rights to do so.  Ukraine’s case argues that this is against the law, saying that a separate agreement had to be reached first.

Other issues within this branch of the argument:

  • While Vanco International of Houston registered to particpate in the PSA tender, Vanco International of Deleware won it.  This allegedly violates article 7 of Ukraine’s law on production sharing agreements. Delaware has a listing for Vanco International Ltd in its corporations databse. Texas has a Vanco International Inc.  From what I’ve heard, Vanco has admitted that VIL is registered in Delaware, despite press reports placing it in Bermuda (the location of VPL) or the Virgin Islands.
  • Vanco International’s application was not submitted in full, violating a regulation concerning the tender.  This apparently includes “providing contradictory information regarding its whereabouts, ownership, jurisdiction and financial status.”  Besides the confusion over locations mentioned above, VPL was created with only $12,000 in initial capital, while pledging to invest about $330 million.  Vanco secured a letter from Citigroup saying the company would attract necessary funds by holding an IPO, but it turns out that this move was planned for VIL, not VPL.  Therefore, “in reaching the decision on determining the winner of the tender, the inter-agency commission was relying on misleading information, a violation of part 1, article 230 of the civil code.”
  • According to the PSA regulations, the company was apparently not allowed to have a stake higher in the production than 50%; the PSA signed by Vanco has it receiving 70% during one phase of production.
  • Part of the area granted to Vanco overlaps with the military training ground Chauda.  As such, Ukraine’s Defense Department should have been involved in the deal.  While the agreement apparently stipulated that Vanco would pay $37 million for the relocation of the training ground, the situation is still “inconsistant with the law on ensuring security of the state.”
  • According to point 34.13.1 of the PSA, which concerns double taxation, Vanco could avoid paying any taxes to Ukraine, thus dropping the government’s share of production.

The government appears to be slightly worried over how these violations will be accepted by the Stockholm court.  There is also the possibility that the joint investment protection agreement reached between Ukraine and Britain may be enacted, due to Bermuda’s status as a British protectorate.  This agreement is investor-friendly, shifting additional burden onto the government’s case.

In response to these worries, there is a second line of argument based on corruption within the deal.

After it emerged that DTEK is involved in the project, observers immediately began questioning if illegal influence could have affected the outcome.  (Actually, ever since the relatively little-known company Vanco won the tender, beating out some other heavy hitters, there have been suggestions that something has been going on behind the scenes.) DTEK is owned by Akhmetov, who is a member of the Party of Regions in parliament — the same party as Viktor Yanukovich, Prime Minister at the time the PSA was signed with the government.

The government’s case calls for two past employees of Vanco International, former vice president John Gorman and former head of production Gabor Tari, to give evidence in favor of Ukraine.  It’s fairly easy to guess the gist what that evidence may be, but for now, it’s just conjecture…


Privat seizes Dniproblenergo

Figures connected to Ukraine’s powerful financial-industrial group Privat seized the offices of electricity distributor Dniproblenergo on Friday, in a move reminiscent of previous Privat-led corporate raids against the downstream oil company Ukrtatnafta and the power generator Dniproenergo.

The Dnipropetrovsk-based Dniproblenergo (the “obl” in the middle comes from oblast, meaning “regional”) is Ukraine’s largest power distributor, providing electricity to about 24 thousand enterprises — around 27% of Ukraine’s consumers.  The state-owned Electricity Company of Ukraine (EKU) controls 75% of the firm, with the Cyprus-based Larva Investments Ltd (a part of the Energy Standard group) owning 15.9% and the remaining 9.1% in the hands of minority shareholders.  This last category includes 3 shares owned by the Privat-connected company Business Invest.

Andrey Martinyuk, the director of Dniproblenergo from 2005-2006, was elected to return as head of the company after board changes made at an April 30th shareholders’ meeting attended by EKU and Privat and held at Dnepropetrovsk’s Palace of Culture. The government’s securities and exchange commission declared the meeting invalid, but Martinyuk continued to assert his legitimacy to the post.

At 8:00 AM on Friday, a few dozen guards from the Privat-controlled private security firm B.O.G. (an acronym for “Security. Protection. Guaranteed.” spelling the Russian word for God) broke into Dniproblenergo’s offices.  According to Kommersant’s account:

Plowing through the gates [to the office], they neutralized [Dniproblenergo’s on-site] security, broke through doors and forcefully ejected the company’s general director Edward Sokolovskiy from the building. Upon arriving on the scene of the altercation, the police were presented with a July 25th ruling from the Zhovtneviy district court of Dnipropetrovsk [declaring] the naming of Andey Martinyuk to the post of general director as legal.

Dniproblenergo’s chief accountant apparently escaped from the raid, managing to take away with her the firm’s official seal.  (Stamps are a big deal for organizations in Ukraine.)  Despite this, Martinyuk is proceeding as if under complete control of the company.

EKU, whose president is the former financial director of the Privat-controlled oil company Ukrnafta, supports the move, citing poor financial performance as the impetus for the change in management.  Martinyuk, the state electricity company’s choice for a replacement, had been the director of EKU’s distribution department.  The Fuel and Energy Ministry is also on-board with the seizure.

The ousted Sokolovskiy, who is connected to Rinat Akhmetov’s DTEK, accuses Privat and EKU of collaborating in an unlawful attempt to replace him.  He denies financial problems, saying that the raid “could be connected to the fact that in 2007, the company increased its profits by 7.5 times — to UAH 86.8 million [$18 million].”  This figure does not match other reports claiming that the profits for 2007 stood at UAH 28.3 ($5.9 million).

The press office of Alexander Turchinov, Yulia Tymoshenko’s first deputy prime minister, announced that the seizure would be examined by a government commission this week.  A statement circulated by his office said that “We will make efforts to prevent raiders attacks by the side of the Privat group.”

The same security firm was used in the October 2007 seizure of the Kremenchug offices of Ukrtatnafta, where once again a former head of the company was reappointed under the guise of saving the firm from financial ruin.

In March 2008, B.O.G. led an attack at Dniproenergo but the raid was expected and rebuffed under the presence of the press.  The fate of the electricity generator remains in limbo, as Privat, Rinat Akhmetov, Tymoshenko and President Yushchenko all have interests in the matter.

Kommersant ends its article by listing a couple of other sites that may fall victim to Privat-led seizures, including the Crimean Generator Systems, Luganskteplovozu and the Dnipropetrovsk (sunflower seed) oil extraction factory TM Oleina.

As the Ekonomicheskie Izvestia article sums up,

Dneproblenergo, together with Dneproenergo and a range of other energy-providing companies, is one of the objects of conflict in the protracted battle [conflict] between the current leadership of the Fuel and Energy Ministry on the one hand and, on the other, the management of the energy companies that was appointed during the period of [former PM] Viktor Yanukovich’s government.

The tactics in this battle include moves such as these dramatic corporate raids, gerrymandered shareholders’ meetings, control over the physical shareholder register, competing judicial decisions and proxy confrontations in the political spectrum.

Of course, while they may make for interesting reading, such events are not very helpful for Ukraine’s business world…

Integrum Update

Two weeks and five emails later:

Dear Hans,

In order to answer you question I had to make a very deep research within the company and the answer is no – we haven’t any connections with them [Integrum Technologies].
Please find all information about our businesses at our web-site –

Kind Regards,

Andrey [redacted]

Far from case closed, but at least some closure from that front