Government Settles Management of Confiscated Russian Assets

On November 21, the Cabinet of Ministers approved the Procedure for the Management and Sale of Assets Collected into the State Income through the Sanctions Mechanism (hereinafter referred to as the Procedure). Notably, this happened more than a year after the first confiscation of Russian assets. 

For a long time, the authorities have been trying to find a solution as to which entities should manage such property and how. First, the legislator entrusted the determination of the manager to the Cabinet of Ministers, which, in turn, distributed the assets between different ministries and agencies. However, this approach proved ineffective due to significant delays in adopting appropriate decisions or even leaving individual assets without a determined manager. 

The parliament then decided to entrust the management of all confiscated assets to a single authority. To this end, the Verkhovna Rada adopted a law that, from September 2023, assigned the relevant functions to the State Property Fund of Ukraine. But at the same time, dubious changes were introduced to the law, which complicated the management and jeopardized the sale of Russian assets.

Despite the shortcomings of the law, the government tried to neutralize some risks in the approved Procedure. Let’s find out whether they managed to do so.

So how will the assets be managed?

In respect of each asset collected into the state income, the State Property Fund will make decisions on its further management or sale. Determining the fate of the asset will be preceded by an analysis of information about it, in particular regarding:

• material and technical base and human resources,
• status of payments to the budget and counterparties,
• demand for the asset,
• comparison of the economic effect of management or its sale.

In addition, the objects transferred to the Fund will be subject to valuation and inventory. When the asset is absent at the specified location, the agency will initiate an appeal to law enforcement agencies to search for it.  

If the SPFU decides to leave the asset in state ownership, it will be managed in one of the following ways:

• reservation of confiscated corporate rights (shares of companies, shares in their authorized capital) in the management of the Fund;
• transfer of assets for lease;
• transfer of assets for management to other public authorities and agencies.
• transfer of assets to state-owned enterprises managed by the SPFU.

It is important that, along with the ability to transfer assets to other public authorities and agencies, the government has also settled the procedure by which the Fund will dispose of assets, the management of which is not characteristic for it and sometimes inappropriate. We are talking, in particular, about government bonds and cultural values. 

The Procedure also determines the fate of confiscated funds; they will be transferred to the fund for the liquidation of the consequences of armed aggression. Funds from the sale of recovered assets will also be channeled to it, which will take place in accordance with existing privatization procedures or land auctions.

Particular attention in the Procedure is paid to the issues of accounting and publication of information on assets transferred to the State Property Fund, as well as monitoring the effectiveness of their management. 

Thus, the SPFU will keep records not only of assets under its management or subject to sale, but also of court decisions on their recovery. In addition, the Fund will be obliged to publish information about the assets transferred to it for management on its website on a monthly basis and to submit a quarterly report to the Cabinet and the Ministry of Economy on the enforcement of these court decisions.

The Interdepartmental Working Group on the Implementation of the State Sanctions Policy, established under the Cabinet of Ministers, will monitor the effectiveness of the SPFU’s management of confiscated assets. Based on the results of such monitoring, the working group will analyze the state of asset management and provide recommendations to the government.

Shortcomings of the Procedure

One of the main shortcomings of the adopted Procedure concerns the recording of the link between the sale of confiscated assets and their belonging to residents of states committing armed aggression against Ukraine.

Firstly, it is worth mentioning the inconsistency of the subject of regulation of this by-law with the provision of the Law on Sanctions, which establishes the possibility of selling assets belonging to residents of the aggressor states, whereas the Procedure provides for such a possibility if the assets belonged to them before the moment of recovery.

Using this wording, the government probably envisaged amending the law and eliminating inconsistencies regarding the possibility of state-recovered assets being owned by residents of the aggressor countries. But even in this case, the use of the term “resident” still carries risks for the further sale of sanctioned assets.

The term “resident” in the Law on Sanctions is used in the meaning provided by another Law of Ukraine — On the Basic Principles of Forcible Seizure of Objects of Property Rights of the Russian Federation and its Residents. It defines residents solely as legal entities carrying out their activities in accordance with the legislation of Ukraine on its territory, whose founder (participant, shareholder) or beneficiary is directly or indirectly Russia.

Thus, the use of the term “resident” significantly limits the range of entities whose confiscated assets can be sold. In particular:

• companies that are not related to Russia in terms of the ownership structure, but contributed to the creation of a threat to the national security, sovereignty, or territorial integrity of Ukraine;
• any natural persons in respect of whom sanctions are applied in the form of the recovery of assets into the state’s income. 

Another shortcoming is the lack of provisions that would properly regulate the issue of preserving the asset in the state administration or transferring it for further sale.

Such a decision should be adopted considering a number of criteria: the availability of demand for the asset, debt, material and technical base and human resources, comparison of the economic effect of management or sale. However, the Procedure does not establish any indicators for these criteria and does not determine how a certain criterion will affect the decision to preserve or transfer the asset for sale. 

Recently, the Fund reported on the approval of an internal regulation containing criteria for the triage of assets, that is, dividing them into categories that are subject to sale, preservation in the management of the agency, or liquidation through the procedure of termination or bankruptcy. At the same time, the Procedure does not mention the application of this provision to confiscated assets. 

Therefore, in the end, in making decisions on preserving assets in management or transferring them for sale, a significant role will be played not by transparent mechanisms enshrined in the legislation, but by the subjective decisions of officials. This also carries corruption risks for the sphere of management of confiscated assets.   

Neither does the Procedure provide for requirements for the accounting of confiscated assets; the form of its management will be established by the State Property Fund itself. The body has previously launched a register in test mode, which allows viewing the state of affairs with all confiscated assets managed by the Fund. 

However, we have already observed the discrepancy between the SPFU information on the transfer of assets by the government and the register data. Moreover, after the update in early November, some information about the re-registration of assets in the occupied territory was removed from the site, which complicated further public monitoring and recording of possible abuses in the process of transferring these assets to state ownership. Therefore, it is necessary to enshrine the requirements for the relevance and completeness of information when keeping records of confiscated assets at the regulatory level.

The actual exclusion of a part of assets that have been or may be transferred to other management entities from accounting and monitoring is also of concern. 

Since the end of September, the government has identified managers for more than 670 confiscated objects. However, the SPFU transferred only a fifth of these assets. Other managers include the National Bank of Ukraine, the Ministry of Justice, and the Ministry of Culture and Information Policy. The latter received 537 historical, cultural, and material values of Yanukovych for management, estimated at EUR 18.7 mln. 

In view of this, it is important not to lose sight of the significant number of confiscated assets that will be managed by other government agencies or business entities.

A separate remark concerns the already-mentioned monitoring of the effectiveness of managing confiscated assets. The relevant functions were entrusted to the Interagency Working Group on the Implementation of the State Sanctions Policy – a temporary advisory body under the government. The status of this working group, as well as the absence of provisions regulating the procedure and terms of monitoring, gives grounds for doubts about its consistency and objectivity. 

Already at the initial stage of management of sanctioned assets, we noticed abuse in delaying or adopting unreasonable management decisions by key entities. This confirms the feasibility of the idea to introduce monitoring to improve the management of former Russian assets. But the mechanism of its organization and holding needs to be significantly improved, in particular, by designating a permanent and competent body in the field of state assets’ management as the monitoring entity.

Conclusion

The Government approved the Procedure for the Management and Sale of Recovered (Pro-)Russian Assets, which is actually ahead of the necessary changes to the current law that contains shortcomings. The document managed to neutralize some risks associated with the disposal of peculiar assets, as well as clarified the powers of the SPFU regarding the possibility of transferring such property to other public authorities or agencies to improve its management. 

But along with the positive aspects, the Procedure enshrines another existing risk in the law, which significantly narrows the prospects for the further sale of assets. In addition, the document does not provide clear criteria for adopting decisions on the preservation or sale of assets, while the provisions relating to their accounting and monitoring of their management need to be finalized. 

Undoubtedly, this Procedure needs to be improved, but the improvement should be preceded by amendments to the law. Notably, the need for their introduction was previously supported by both the State Property Fund and the Ministry of Justice, but eventually, no relevant legislative initiative was registered. Despite this, legislators have room to implement the necessary changes, so it is only the matter of their political will.