In early February, draft law No. 8250 was registered in the parliament. Its primary goal was to optimize the structure of the State Property Fund of Ukraine.

The need for structural changes in the Fund coincided with the need to resolve the issue of the management of confiscated russian assets. The specialized Law “On Sanctions” does not give a clear answer as to who exercises such powers on a permanent basis, but gives the government an opportunity to choose a temporary manager of such assets among the authorities and state enterprises.

Given that the measures for the temporary management of the recovered assets were mainly entrusted to the SPFU, the draft law proposed to assign such powers to the agency on a permanent basis.

TI Ukraine analyzed the draft law in the final version proposed by the Main Committee at that time, and in general did not object to the transfer of sanctioned assets to the State Property Fund for their management and sale.

In addition, given the variety of types of assets that can be recovered, it seemed appropriate for the government to retain the authority to determine another responsible management body — on condition of proper regulation of this procedure at the by-law level.

But, as it turned out, in the best traditions of the Ukrainian legislative procedure, on the day of voting, the specialized committee introduced a proposal with a new wording of amendments to the Law “On Sanctions” for consideration by the parliament and immediately considered it.They clarified the provision that the Fund would be able to sell only the assets belonging to residents of states that carried out armed aggression against Ukraine.

As a result, the Verkhovna Rada adopted the draft law in an updated version, and the prospectsfor the sale of sanctioned assets were threatened. Let’s find out why this happened.

What risks the adopted amendments carry?

In the previous version, the draft law provided for the transfer of the assets, recovered into the state’s income, to the SPFU for management, including through their sale. In the voted text of the Law, this provision was allegedly clarified, determining the possibility of the Fund to sale only those assets that belonged to residents of states that carried out armed aggression against Ukraine.

But such changes jeopardize the sale of confiscated assets for at least two reasons.

  • The asset is no longer owned by a resident

Although the issue of the transfer of ownership of assets recovered by the court into the state’s income is not directly regulated by the Law “On Sanctions,” in this aspect, attention should be paid to the provision of Art. 346 of the Civil Code. It provides for the termination of ownership, in particular in the case of recognition of assets as unjustified and their collection into the state income. Considering that in case of application of the sanction, the assets are also collected into the state’s income, we believe that, by analogy with civil forfeiture, the ownership of such assets by previous owners ceases at the moment when the court decision enters into force.

Thus, the amendments adopted by the legislator will make it impossible for the State Property Fund to comply with the requirements of the law and to sell sanctioned assets in general. After all, after the case is considered by the court, the assets no longer belong to the residents of the aggressor states.

  • Not only resident

The sanction in the form of recovery of assets in the state’s income may be applied to natural persons or legal entities, including residents who, by their actions, have created a significant threat to the national security, sovereignty, or territorial integrity of Ukraine or contributed (including through financing) to the commission of such actions by other persons.

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.

Applying the term “resident,” the Verkhovna Rada significantly limits the range of entities whose confiscated assets can be sold, in particular:

  • companies that are not related to russia in terms of their 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 recovery of assets into the state’s income.

According to our information, out of 23 cases of asset recovery, sanctions were applied specifically to natural persons in 21 cases. It is not only about russians, but also about the citizens of Ukraine who contribute to the aggressor. In particular, the HACC has alreadycollected the assets of fugitive President Viktor Yanukovych, Kherson collaborator Saldo, and deputy head of the so-called “Public Chamber of the Donetsk People’s Republic” Kateryna Martyanova, who is also a citizen of Ukraine.

As a result, after the entry into force of amendments to the Law “On Sanctions,” confiscated assets, including such valuable objects as, for example, the Mykolaiv Alumina Plant of Oleg Deripaska (UAH 6.5 bln*), the Demurinsky Mining and Processing Plant (UAH 0.5 bln*) of Mikhail Shelkov and others, will get stuck in the state management without the possibility of further sale. The state already has enough unprofitable assets that it cannot effectively manage.

* value of assets as of 2022 according to YouControl 

It is unknown for certain what justification MPs provided regarding such changes. They might relate to the interest of individual Ukrainian citizens and companies in avoiding the risk of applying sanctions against them and recovering their assets in the future.

But first of all, Ukrainians who faced the consequences of the war will suffer from such legislative activity. After all, the funds received from the sale of confiscated assets are allocated to the Fund for the Elimination of the Consequences of Armed Aggression, at the expense of which the country’s recovery needs are covered. Therefore, the less russian property will be sold, the less destroyed homes, schools, and hospitals we will be able to rebuild.

Separately, attention should be paid to depriving the government of the authority to determine other entities managing confiscated assets. Among various kinds of movable and immovable property, shares or stakes of enterprises in the authorized capital, there are already cases of recovery of assets into the state income, the management of which is not characteristic of, and sometimes inappropriate, for the State Property Fund. We are talking, in particular, about works of art and monetary assets. That is why it is important to preserve the right of the Cabinet of Ministers to transfer such assets to another manager.

What’s next?

The amendments concerning the mandatory ownership of confiscated assets by residents of the aggressor states for their sale obviously need to be excluded. Moreover, the Cabinet of Ministers should retain the right to determine another management body for such assets at the relevant request of the State Property Fund.

As we know, some MPs and the SPFU have already started consultations on possible ways to resolve the current situation. But the options are scarce.

On June 20, the President signed Law No. 3137-IX, which was adopted following the consideration of draft law No. 8250 by the parliament. Thus, the option of vetoing, that is, returning the law to the Verkhovna Rada for reconsideration, cannot be implemented.

On the positive side, the changes related to the management and sale of sanctioned assets will take effect only in three months. There is still time to address the risks.

The most obvious and simple option is to remove the provisions that have not yet entered into force from the adopted law. A similar case has already happened in our legislative practice, when the Verkhovna Rada adopted a law that excluded Article 286-1 “Driving Vehicles in a State of Alcohol, Drug, or Other Intoxication or under the Influence of Pharmaceuticals that Reduce the Attention and Speed of Reaction” of the Criminal Code before it entered into force.

But such a mechanism for introducing amendments is contrary to the law. The Law “On the Rules of Procedure of the Verkhovna Rada of Ukraine” establishes the possibility of amending only the text of the primary legislative act, and not the law on amending this legislative act.

Therefore, from the perspective of the legislative procedure, the option of introducing new amendments to the Law “On Sanctions” will be correct. They can become the basis for a new draft law or can be submitted in the form of proposals for legislative initiatives that are already under consideration in the parliament and whose subject of regulation concerns the improvement of sanctions legislation or the work of the State Property Fund.

Parliamentarians need to pay attention to the following:

  1. The law, with appropriate amendments, should be adopted before the end of the three-month period. This will allow avoiding the risks regarding the impossibility for the SPFU to sell sanctioned assets.
  2. The entry into force of such amendments cannot take place before the entry into force of the provisions of Law No. 3137-IX.

We hope that the parliament will correct the mistakes in time, and the assets of the aggressor and its supporters will be channelled to the restoration of the country.

Author: Andrii Shvadchak, legal advisor at TI Ukraine

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