Exception as a Rule: Management of Seized Strategic Property

On June 26, the mechanism of exceptional management of seized assets turns 3. During this time, the ARMA initiated such a procedure more than 10 times in 12 criminal proceedings.

Certain assets require significant financial costs or resources that are available exclusively to the state, and rather require a socially oriented approach than a commercial one. That’s because the malfunctioning of assets can lead to emergencies or interfere with the military-industrial complex and the aircraft construction industry.

The basis for the transfer of such assets to management is the decision of the Cabinet of Ministers. But this procedure is exceptional and should not be applied often.

There have already been a considerable number of attempts to expand the opportunities for such exceptional management: ensuring humanitarian, military, or other needs, protecting cultural values.

It seems that the public management of seized assets is clearer for both the ARMA and MPs. After all, a large number of concluded contracts with asset managers is the result of a special procedure. However, the law on the ARMA laid down a model for minimizing public spending for the management of seized assets. Therefore, increasing the list of exceptions should be done in extreme cases when private managers cannot effectively exercise their powers.

Let’s take a closer look at how the introduced mechanism is implemented.

How were management contracts concluded under a special procedure?

At our request, the ARMA reported that as of March 2024, it had initiated the transfer of assets before the Cabinet of Ministers under a special procedure in 12 criminal proceedings 14 times.

These include the following cases and assets:

• CHPPs in Novoyavorivsk and Novyi Rozdil in Lviv oblast (CHPPs of the Dubnevych brothers);
• seized shares of Donetskoblgaz;
• corporate rights to 26 regional gas companies affiliated with Firtash;
• companies associated with Gazprom;
• Vinnytsia Aviation Plant;
• network of gas stations TATNEFT-AZS-Ukraine LLC;
• Glusco gas stations;
• PJSC Mining Company Ukrnaftoburinnya;
• Mezhyhirya;
• Lviv Insulator Company;
• Research and Design Institute for Atomic and Power Pumpbuilding (the government has not yet made a decision on it).

According to public information, 2 of the above-mentioned assets were transferred to management in 2021 (CHPPs in Lviv oblast and seized shares of Donetskoblgaz), none were transferred in 2022; 5 — in 2023; and 3 — in 2024). In six instances, it involved the transfer of assets in cases of economic and corruption criminal offenses, and in five instances, it was about crimes against national security and war crimes.

At the same time, the issue of transferring assets of this category to the ARMA was mostly initiated by the investigators of the SSU (6 times) and the SBI (twice), whereas the NABU, the BES, and investigators of the Prosecutor General’s Office of Ukraine initiated such transfers only once.

How these management agreements were implemented

As of May 2024, the largest number of assets under the exceptional procedure are managed by:

• PJSC Ukrnafta (Tatneft gas stations network; companies, associated with Gazprom; Glusco gas stations, Sakhalin deposit);
• Naftogaz Group (CHPPs in Novyi Rozdil and Novoyavorivsk, Donetskoblgaz shares, corporate rights of 26 regional gas companies);
• JSC Motor Sich (Vinnytsia Aviation Plant);
• JSC Ukrainian Distribution Networks (Lviv Insulator Company);
• Mezhyhirya, park-monument of landscape art of national importance.

We have established that the following issues may arise with the management of this property:

• delay in the transfer of assets to actual management by the ARMA. From the moment of the court decision on the transfer and until the decision of the government, the assets are left without a designated manager for a long time;
• the need to obtain permission for the concentration of assets. This complicates the transfer of particularly important assets to management and also contradicts special legal regulations under martial law;
• blocking effective corporate rights management due to litigation and other obstacles. Asset owners initiate many proceedings in the courts to prohibit the ARMA from taking asset management actions.

Delay in the transfer of assets to actual management

The average period between the date of the court decision on the transfer of the asset to the ARMA and the adoption of the CMU order on a particular manager is about 555 days. The longest period concerned Mezhyhirya, and the shortest — the network of gas stations TATNEFT-AZS-Ukraine LLC.

The current procedure sets short deadlines for the ARMA to apply to the Cabinet with the appropriate initiative (3 days) and for the Cabinet to instruct the executive bodies to hold consultations about the potential manager (5 days). The remaining actions—the deadline for submitting the draft decision on determining the manager and the deadline for adopting the relevant decision — are not defined.

Short deadlines for submissions and for consultations were established for the quick transfer of assets of particular importance to the manager. It may seem obvious to us that both the ARMA and other public authorities understand that delaying the transfer of assets to a particular manager means risks for the asset and for certain areas of life. But practice shows the opposite. For example, the decision to transfer the Vinnytsia Aviation Plant to Motor Sich took time between August 2022 and November 2023.

And even the decision of the Cabinet of Ministers does not mean that the manager will immediately begin to fulfill their duties. For example, the assets of the Glusсo Group of Companies were transferred by the Cabinet of Ministers to the management of Ukrnafta on September 12, 2023, and the certificates of acceptance were signed only on March 15, 2024.

The Lviv Insulator Company was transferred to the ARMA by a court decision dated August 26, 2022, and the Cabinet of Ministers transferred it to the management of JSC Ukrainian Distribution Networks in April 2024. The Sumy plant Nasosenergomash still does not have a manager, although it was transferred to the ARMA in February 2023.

This underscores the problems of seized asset management and requires improvement of the actual enforcement of existing legislation. Therefore, the ARMA should be more attentive to organizational processes of determining the asset manager and transferring it to management. The investigative authorities should provide full information about the assets required for these processes. It will be very helpful to introduce a planning procedure before transferring assets to the ARMA.

The need to obtain a permit for the concentration of economic entities

To prevent monopolization of commodity markets, the Antimonopoly Committee of Ukraine (AMCU) requires a concentration permit if assets are transferred to the manager.

Concentration includes cases where an economic entity obtains direct or indirect control over the whole or parts of one or more other entities or assets. This happens, for example, when the corporate rights of another company are transferred to the management of a certain enterprise: the assets of the gas stations network TATNEFT-AZS-Ukraine LLC were transferred to Ukrnafta.

In our opinion, such requirements delay the process of transferring assets to management. This position of the AMCU seems strange because a special law determines that during martial law, a concentration permit is not required if it is necessary to prevent emergencies or disruptions in the supply of resources. This provision almost duplicates the provision of the law on the ARMA, according to which the assets of the gas stations network TATNEFT-AZS-Ukraine LLC and the Glusco group of companies were transferred to management.

However, the AMCU, at the request of the ARMA regarding the case of the Glusco group assets, replied that these provisions did not apply. It even fined the previous manager of these assets, Naftogaz Oil Trading LLC, UAH 900,000 for violating the rules of concentration.

Not wanting to repeat the fate of this enterprise, Ukrnafta did not start asset management without the appropriate permission. On December 7, 2023, together with the ARMA, the company filed 18 joint applications with the AMCU, which were returned on December 22 due to the need to establish additional circumstances. New applications were submitted on January 31. Ultimately, these assets were transferred to Ukrnafta based on certificates dated March 16, 2024.

Similar problems can be traced during the transfer of the seized Tatneft gas stations network to Ukrnafta. The government adopted the relevant order on August 15, 2023, and the enterprise and the ARMA applied to the AMCU for permission on May 6, 2024. So, questions arise how long it reasonably takes to submit such application.

Therefore, the AMCU should change its practice regarding the requirement of prior authorization for concentration in such cases. The parliament should expand the range of exceptions to the provisions of the law on the protection of economic competition to include cases of strategic asset management, even outside martial law.

Opposition to corporate rights management by individuals facing criminal charges

Despite the fact that the management of seized corporate rights exceptionally does not require the consent of the owners of these assets, managers still face obstacles.

For example, the management of 26 regional gas companies affiliated with the “Firtash group.” In May 2022, they were transferred to one of the companies of the NJSC Naftogaz group, but in September of the same year, it did not gain control over the regional gas companies, in particular due to numerous lawsuits that block the change of the leadership of companies transferred to management.

In October 2023, the ARMA reported on the creation of an Interagency Working Group of the Security Service of Ukraine on regional gas companies affiliated with Firtash. But even as of April 2024, there were still problematic issues.

Therefore, it is necessary to establish the priority of criminal arrest and asset management measures over security measures in other litigations.

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A year after the launch of the new mechanism, 10 assets have already been transferred to managers under this procedure, and another asset is awaiting the decision of the Cabinet.

However, we see that the implementation of this mechanism leaves much to be desired, both in terms of the speed of decision-making and causing unnecessary obstacles to public managers. Due to downtime, the asset may deteriorate, and property may be embezzled, which, for its part, undoubtedly does not contribute to the smooth functioning of such property.

This is especially alarming, given the talks that the following winter will be difficult for Ukraine because most of the seized assets mentioned by us are precisely objects of critical infrastructure. Therefore, it is time to analyze the mistakes and improve these processes.