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…

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