Sale of AEROC: Successful Test for Confiscated Asset Management System

Author: Andrii Shvadchak, Legal Advisor at Transparency International Ukraine

On December 19, an auction was held to privatize the AEROC company, one of the leaders in the Ukrainian aerated concrete market. According to the results of the auction, the price of the asset almost doubled—to UAH 1.89 billion. However, the peculiar nature of this event lies not only in the status and value of the object, but also in the fact that for the first time, the State Property Fund put up one of the largest assets that Ukraine confiscated from the Russians for auction.

The Fund first started discussing the privatization of large-scale objects owned by Russian oligarchs last March. The first object to be sold was to be the state share of the Ocean Plaza shopping mall, but debts to creditors for more than USD 216 million became an obstacle. One of Deripaska’s former assets, Mykolaiv Alumina Refinery, was also planned to be put up for sale this year, but the blocking of seaports and the risks of shelling make it impossible for it to function properly. 

In addition to the above, the list of large-scale privatization objects approved by the government (the cost of which exceeds UAH 250 million) included 4 more companies that had ties with Russia: Demurinskyi Mining and Processing Plant LLC and VSMPO Titan Ukraine LLC, which belonged to the Russian titanium magnate Shelkov, Motordetal-Konotop LLC belonging to Senator Sergei Kalashnik, and AEROC LLC belonging to the Russian developer Andrey Molchanov. 

The SPFU managed to prepare only the last enterprise from the list for privatization. Read on to find out what investors were competing for, whether there are risks for a potential buyer, and why the sale of AEROC can become a marker for the management of confiscated assets.

From market leader to seizures and debts

Before the war, AEROC held leading positions in the market of concrete products for construction and was their largest supplier in Ukraine. With two plants in Kyiv oblast, the company is able to annually produce more than 1.15 million m³ of end product. In addition, AEROC started building a new plant in the Lviv region, but did not finish it after the start of the full-scale invasion. 

The company closed 2021 with revenue of UAH 1.8 billion and net profit of almost UAH 510 million. However, this was the last profitable financial year for AEROC.

In May 2022, the assets of AEROC were seized and transferred to the management of the ARMA. But at first, the selection of the manager was delayed for 7 months, and after it, the agency could not conclude an agreement with the manager. Therefore, the operation of the company was not established. This is evidenced by both SPFU data and information from the Register of Seized Assets. Moreover, information about the embezzlement of the company’s property was spread in the media.

In October 2023, the court finally confiscated AEROC into state ownership, and the company came under the management of the State Property Fund. But it took the SPFU more than 7 months to establish full control over it and prepare for further privatization—to lift 14 arrests of corporate rights and assets in criminal proceedings. 

However, not all arrests of the enterprise were lifted. Encumbrances on the company’s property continue to operate in enforcement proceedings, so the investor will have to deal with its debts independently. In late June this year, AEROC’s wage, tax, and creditors arrears amounted to UAH 110.8 million. According to the terms of privatization, the new owner will have to repay them, with the exception of 21.3 million debt to the previous founder of the company, AEROC Investment Deutschland GmbH, regarding which Ukraine applied economic sanctions.

Other terms of sale include:

–       preservation of the activity profile of the enterprise;

–       non-dismissal of employees of the company within 6 months after the acquisition;

–       a 5-year ban on selling, leasing, or transferring the enterprise and its assets for management to sanctioned persons, related persons or companies with beneficiaries from the aggressor countries. 

Hennadii Butkevych, a Ukrainian businessman and co-owner of ATB, one of the largest Ukrainian store chains, may become the new owner of AEROC through a controlled enterprise. After the completion of the auction, he has 35 working days to sign the bidding protocol, pay the price of the object, and conclude a contract of sale.

Can the former owner regain control?

Last August, the HACC confiscated 100% of the share capital of AEROC LLC from the Russian company LSR Group, which owned the asset through the German company AEROC Investment Deutschland GmbH. The latter challenged this decision in the appellate instance, but the court upheld it, noting that this confiscation had a legitimate purpose and was carried out solely in the interests of society and to stop the receipt of income by the defendant, the funds from which were directed to finance the defense complex of Russia. However, the former owner still tries to restore the ownership of the asset.

On November 13, 2024, the Constitutional Court of Ukraine began considering a constitutional complaint of AEROC Investment Deutschland GmbH regarding the constitutionality of certain provisions of the sanction legislation, in particular regarding the confiscation of assets, on the grounds of alleged violation of the right to private property, the principle of the rule of law, and the equality of all participants in the trial. In late November, the CCU reviewed the materials of this case and moved to the closed part of the plenary hearing for a decision. 

Should the investor be worried? No, for at least two reasons.

Firstly, the application of confiscation has a sufficient legal basis both on the part of Ukrainian legislation and international law. In particular, in each of its decisions on the recovery of assets into the national income, the HACC justifies the application of this sanction by complying with the criteria of the European Court of Human Rights regarding the restriction of property rights.

Secondly, the Civil Code of Ukraine provides that state property sold to a bona fide acquirer through privatization at an electronic auction cannot be claimed by the previous owner. Therefore, even in a negative scenario, the financial consequences of the confiscation and subsequent sale of the asset will fall on the state and its budget, and not on the new owner. 

What will the sale of AEROC influence?

Confiscation of Russian assets and their sale is the main mechanism of compensation for damage caused by the war, which does not provide for the involvement of external support. In more than two years of its operation, the court confiscated more than 340 objects of real estate and corporate rights that had previously belonged to Russians or accomplices in the war. 

However, the results of their sale are modest: the SPFU managed to sell only four assets. These include two apartments in Odesa, an agrarian company in the Dnipro region, and a packaging company in the Kyiv region. The total income reached UAH 130.5 million—an insignificant amount, especially given that the assets transferred to the State Property Fund are estimated at at least UAH 14.5 billion

In a special study, we found that at almost all stages of working with assets, difficulties and obstacles arise that inhibit or even make it impossible to sell them. Given the unsuccessful results, the sale of one of the largest confiscated assets should prove the effectiveness of the management system of sanctioned assets.

If the sale of the asset fails, this may cast doubt on the ability of the SPFU to ensure the successful preparation and sale of such facilities. Moreover, in case of failure, the issue of the expediency of transferring such assets to the management of the State Property Fund may arise. Some legislative initiatives already propose to authorize the ARMA to enforce asset recovery decisions on a par with the SPFU, but TI Ukraine is skeptical of such ideas. Instead, we consider it important to focus on improving the procedures of management and sale of sanctioned assets.

2024 has already become a turning point in the sphere of large-scale privatization in Ukraine. In September, the UkrainaHotel was sold for more than UAH 2.5 billion, and in October, the saga with the UMCC privatization was successfully completed. Therefore, the completion of the sale of AEROC can become an indicator of the effectiveness of the sanctioned assets management system or the beginning of changes in it.

This publication was prepared by Transparency International Ukraine with the financial support of Sweden.