Company of discord: Ukraine wants to undertake debts of Mr. Akmetov's Ukrtelecom

Author : Olena Holubeva

Source : 112 Ukraine

A high-profile case of Ukrtelecom shares' recovery, the biggest Ukrainian fixed line telecoms operator, makes a new and quite unexpected turn. In the light of litigation between the Rinat Akhmetov’s company and the Raga Establishment, which is unofficially tied to Dmytro Firtash, the state’s attempts to place Ukrtelecom back on its balance sheet tinge a kind of strange color. Under current conditions, the return of Ukrtelecom to Ukraine is a favorable situation to Akhmetov himself. Apparently, everything is happening upon his own consent. At the same time, Ukrainian taxpayers shall pay for this “salvation” at their own expense like they did in PrivatBank's case. The debts of Ukrtelecom estimated at millions of dollars, and the owners are not going to pay them now
21:44, 15 January 2018

Open source

In May 2017 it emerged that the State Property Fund of Ukraine (SPFU) had initiated the return of Ukraine’s largest landline operator, Ukrtelecom from the hands of Rinat Akhmetov to state ownership. The Fund won the primary court on October 11, 2017, as well as the appeal on October 19. The court confirmed the decision to terminate the sale and purchase agreement No.KPP-582 concluded on March 11, 2011. The agreement between the SPFU and ESU Ltd. concerned 17,376,189,488 ordinary registered shares in Ukrtelecom JSC, which accounted for 92.791% of the corporation’s registered capital. At the end of December, the Fund turned to the Bailiff’s Service of the Kyiv court of appeals requesting the court ruling to be enforced by returning the stock of shares in Ukrtelecom to state property. However, the process is temporarily stalled, as ESU used its last procedural chance to file a cassation appeal. The SPFU explained that its request to the Bailiff’s Service will not be dealt with until the case is heard.

While talking to off the record, officials of the SPFU expressed they were acting without apparent enthusiasm but were rather enforcing the order from the top. Even the cause for initiating the litigation appeared rather far-fetched – a commission investigating the fulfillment of investment obligations argued that while transferring the special communication line (which had been built fulfilling the investment obligations) to the state, Ukrtelecom’s owner, ESU did not transfer all of the equipment. It was impossible to transfer it, as the equipment was located in Ukrtelecom's buildings, which ESU obviously did not want to give away.

Nevertheless, some experts say that the story becomes more logical if one assumes that the transfer of the government stock in Ukrtelecom is happening in agreement with Akhmetov himself and with his consent. “I think, SCM would benefit from giving the stock to the state by court order and then buy it back at an attractive price through a different affiliated company. Obviously, if SCM is still interested in this asset”, a lawyer and partner at Berylstone Denys Fetysov told

An expert on the Ukrainian telecommunications market, Roman Khimich suggests that when looking at the situation surrounding Ukrtelecom, one needs to remember that as soon as any assets owned or controlled by Rinat Akhmetov or his affiliates are in question, any possible miracle becomes possible. “I really don’t think it makes any sense to look at the situation around Ukrtelecom from a strictly legal point of view”, - Khimich concluded.


Related: New rules of game: How state enterprises will be privatized in Ukraine

Privatised and sold to Akhmetov

From the very beginning, a tender for the sale of Ukrtelecom in 2011, was surrounded by controversy. For the benefit of ESU (which was owned by another company – EPIC), the terms of the tender cut off absolutely every investor who was willing to participate. Peter and Brigit Goldscheider, Franz Lansschutzer, Gustav and Marina Wurmbrock, all Austrian nationals, were claimed beneficiaries of EPIC. The media suggested that the real owners of EPIC were the highly influential at the time Head of the Presidential Administration Serhiy Lyovochkin (current MP from the Opposition Block) and the oligarch Dmytro Firtash. “The asset attracted a lot of interest at the time, including that of western and Russian corporations. All of them were cut off. This is why the tender as such did not happen in the end. The state-owned corporation was sold at a price slightly exceeding its initial auction price”, - Khimich said. The SPFU sold 92.79% of Ukrtelecom’s shares for $1.3 billion.

Notably, in May 2017 the Prosecutor General’s office claimed that it was in the middle of prejudicial inquiry as part of a criminal investigation into the underpriced privatization of the government stock in Ukrtelecom. The Prosecutor General’s press secretary Larysa Sargan announced that the investigation discovered an undervaluation of the stock in Ukrtelecom in the amount of $56.6 million. Also, the investigation found an unlawful allocation of $7.68 million from the state budget. As a result, notices of suspicion were issued to Viktor Yanukovych, Mykola Azarov, Yuriy Kolobov, Serhiy Arbuzov and other individuals. At the time of the investigation, 100% of the corporate rights of TriMob Ltd. and 92.79% of shares in Ukrtelecom were arrested.

Nowadays, the company is owned by entities affiliated with Rinat Akhmetov. Representatives of SCM emphasize that the company did not “directly or indirectly participate in the privatization of Ukrtelecom in 2011, hence, was not responsible for price setting during the tender. A company belonging to the SCM group purchased shares in Ukrtelecom indirectly from Raga Establishments Limited (known as EPIC Telecom Investment Limited at the time) in 2013, two years after the enterprise was sold.

However, the government’s enthusiasm regarding Ukrtelecom, as well as the litigations initiated by the company’s original owners in foreign courts, form a very interesting puzzle, where the state picks a side in a conflict between oligarchs, which is hardly in line with the public interest.

Related: Akhmetov's company wants to terminate contract of sale of Ukrtelecom

The enterprise is a squeezed orange

“Note that the whole story about Ukrtelecom's sale from the beginning to the end was a manipulation. Practically Ukrtelecom was never bought for money from the state – the loan for the acquisition of the shares originates by Ukreximbank and Oshchadbank,” Roman Khimich says. Indeed, in May 2013 the state banks Oshchadbank and Ukreximbank redeemed ESU bonds for 70 and 78 mln dollars (according to the January 2018 currency rate). The bond debt to Oshchadbank and Ukreximbank is still unpaid and the amount is 161.2 million dollars. Ukrtelecom doesn’t comment on that. The banks are still in litigation with the company. Note that Kyiv Economic Court has partially satisfied the claim by Oshchadbank against ESU and ordered to recover 29.8 million dollars of the bond debt against the defendant, postponing the execution of an order for one year.

In case the shares of Ukrtelecom are returned to the state, Oshchadbank and Ukreximbank (both owned by the state, - ed.) most probably will have to write off the bonds from the balance and the state shall increase their capital on this amount, according to Denis Fetisov. “But no one really knows how this will happen in actual practice. There are lots of choices for the development of the situation,” he says.

Also, the expert reminds that Ukrtelecom has loan obligations to the Ukrainian subsidiaries of the Sberbank of Russia. According to the Finbalance, who cited the materials of the pre-trial investigation by the General Prosecutor’s Office, the debt of Ukrtelecom to the bank amounts to 49 million dollars. The liquid assets on pledge of the financial institution for the loan made 250 mln dollars. This debt also became the subject of a court proceedings between the company and the bank. Apart from that, there’s a loan for 50 mln dollars at China Development Bank. “And it is still unclear how the situation will change (the situation with the uncovered loans in the banks with privately owned capital, -,” Fetisov said.

New shareholders didn’t invest into Ukrtelecom and milked the company best to their ability. "Instead of investing their own funds as they promised to, they got new million dollar loans at the expense of Ukrtelecom. One can say they “put the company through the wringer”," an employer, who had worked at Ukrtelecom many years, told off the record.

Therefore, he claims, on the surface, the company “meets all of the contemporary requirements: great marketing, sales, advertising, branding”. “But in a truly powerful corporation, all of this is based on the real interaction with customers, on the high technical quality of services. Great marketing efforts at the time when 10% of the customer base is not working and does not renew – this may be called a “cargo-cult”. External characteristics are seemingly in place, but nothing is functioning”, - the source told

Related: Ukraine’s earnings from privatization reach 5-year high

He also told that Ukrtelecom’s new management (appointed by the owners) “has restructured the company, has fired a lot of employees, especially from the cable line departments and from customer support”: “Now there are no employees, one out of ten telephones works (from the half of customer base that still remains) and notably the Internet service subscriber base has started to shrink too. Moreover, a significant contribution to the active sale of the property is also worth pointing out”.

At the time of the sale, the company was in decent condition. “The Internet service subscriber base was growing, the fraction of not functioning telephone lines was less than 0.1%, repairs were carried out within 1-2 days in the overwhelming majority of cases. The loans taken for the construction of the network were paid back on time. All this despite the fact that in the aftermath of the 2008 crisis, the company’s situation was rather difficult, especially regarding the repayment of loans in foreign currency. Also, cut-off and damaged cables were reinstalled and repaired day and night, even though the issue of cut-off cables was not easier than it is nowadays”, - the source told

Indeed, experts agreed that the issue of cut-off cables was a way to go for Ukrtelecom. The thing is Ukrtelecom still uses copper cables, which are always very lucrative for looters. “The state has distanced itself from this problem and it has grown into a disaster. This problem is essential not only because it requires constant capital investment in the repair of the stolen infrastructure. Each instance of theft leaves subscribers temporarily without communication. When it happens again and again, it hurts the subscribers’ loyalty, encouraging them to give up on Ukrtelecom’s services and seek a different provider”, - Roman Khimich said.

Experts explain that provision of landline services is impossible without cables, while the idea of installing fiber optic in individual apartments is very expensive. 

Furthermore, Ukrtelecom finds itself in a position where subscribers in Ukraine and globally are gradually moving away from landline to mobile communication. And despite the negative impact of all these factors, the company can still be attractive to potential investors and buyers, particularly for domestic mobile service providers in Ukraine. To this day, Ukrtelecom remains Ukraine’s largest landline service provider. “Having acquired the asset, local mobile service providers would be able to provide integrated services including plans that combine mobile, landline and Internet services. This allows the company to implement cross sales, as well as to introduce loyalty programs for customers: price reduction on certain kinds of services in exchange for the acquisition of other services”, - Khimich told

Related: Court of Amsterdam freezes assets of Akhmetov

When the Oligarchs Squabble

Ukrtelecom’s litigation with Raga Establishment shed an entirely new light on the procedure of returning Ukrtelecom’s shares to state ownership.

Raga Establishment is a company owned by Denys Gorbunenko, the ex-chairman of the Board at Rodovid Bank (although various media outlets are suggesting the company has informal ties to Dmytro Firtash). The source close to Raga told that Firtash is not a shareholder of Raga, however, he did “lend $300 million to the company or its shareholders”. Earlier, the media reported quoting Gorbunenko that the money was lent for the privatization of Ukrtelecom. Also, an unnamed source close to Raga claimed that Gorbunenko has managed a number of Firtash’s assets in the past.

Therefore, the company that Firtash lent $300 million to, filed a lawsuit against Rinat Akhmetov and his holding, demanding him to pay $760 million.

Raga claims the company sold shares in Ukrtelecom to Akhmetov for $860 million at the time. Lawyers familiar with the litigation explained that according to the terms of the agreement on the acquisition of Ukrtelecom, Akhmetov-controlled companies agreed to pay for the shares in Ukrtelecom in three stages. The first transaction amounted to $100 million, which SCM transferred and acquired the stock in the corporation. The second and the third transactions were supposed to constitute $100 million and $660 million respectively. However, those transactions have not been executed to this day.

In order to get the remaining $760 million, in June 2016 Raga filed a lawsuit in London court seeking to prohibit the operation of property belonging to SCM Financial Overseas Limited (SCM FO). SCM FO is the company through which Akhmetov acquired Ukrtelecom (UA Telecominvest, Cyprus). “Considering the notion that the corporation might hide its assets, the court ruled a freezing order in regards to its property”,- the source explained. He also pointed out that Raga began the litigation after its failed attempts to obtain the debt owed by SCM, which had been restructured. The source told that according to the agreement, the second and the third transactions ($100 million and $660 million respectively) were supposed to occur in March and October of 2015.

The source claims that between 2013 and 2017 all of SCM FO’s assets were stripped out. The company that owned assets worth several billion was bankrupt by the time the court proceedings began. According to the source, SCM FO was emptied out in three stages – SCM Capital’s 44% were sold to SCM Holding in 2013. The shares valued at around $1 billion were actually sold for $21 thousand. During the second transaction, shares belonging to the First Investment Bank were stripped out. Lastly, in 2017 companies Pluscom (provides a wide range of construction and management services of modern multiservice communications systems and distributed telecommunications systems) and BVI Company were moved.

It should be noted that asset undervaluation is considered a serious violation of British jurisdiction. Hence, the court considered Raga’s claims that the transactions regarding the sale of SCM FO’s assets should have been at least $167 million. In reality, however, those assets were sold for a mere $200,000. Consequently, the $167 were supposed to be returned to SCM FO by 31 December 2017. But that did not happen, the money was not transferred.

Related: Akhmetov's company to appeal against court decision to "freeze" 820 million dollars

Raga initiated another important court proceeding in London. The company turned to LCIA, the London International Arbitrary Court, suing SCM FO and asking the court to confirm the debts that this company owes to Raga. The final hearings in this lawsuit began in May 2016, and the interim decision was made in June 2017. The court confirmed the number of debts, USD 760 million. According to the ultimate decision, which the court made in September 2017, the amount of added reimbursements made 60 million U.S. dollars. Thus, Raga demands that SCM FO return USD 820 million.

Within this case, Raga also initiated three proceedings on Cyprus. The first one concerns the bankruptcy of SCM FO, which currently is an insolvent blank check company without any assets in support; the related companies still have not paid 167 million dollars. The goal of this proceeding is to recognize the company bankrupt and assign the liquidator of the failed company that enjoys the right to initiate returning of the stripped assets. This is legally possible if it appeared that the assets had been stripped due to the default of the creditor, Nick Marsh said. Another Raga’s proceeding on Cyprus aims to recognize the decision of the London Arbitrary Court.    

Third proceeding is the most interesting as in this case, the prosecution asked the court to recognize frauds committed by ten defendants, which participated in stripping assets off SCM FO – which eventually led to the insolvency of this company. Among the defendants are SCM’s owner Rinat Akhmetov, director for profit participation rights and foreign assets management Roman Bugayev, another two directors and some of the people involved in selling off SCM Holding and SCM Capital. On December 27, 2017, the court ruled that the ten defendants are involved in stripping the assets off SCM FO.

As reported earlier, these companies own Akhmetov’s basic assets including those in Ukraine. Among those are shares of PUMB bank, 100 percent of capital stock of Shakhtar stadium, 100 percent of capital stock of ESPV Limited company (owns the profit participation rights of Esta Group, SCM’s branch holding in the real estate sector); UMBH (Ukrainian Machine Building Holding), which owns over 50 percent of shares of Donetskgormash JSC; 100 percent of shares of Parallel Nafta, which owns the profit participation rights of Parallel fuel group; 100 percent of shares of DTEK holding and other assets.

Among those assets, there is also 100 percent of the capital stock of UA Telecominvest company (Cyprus), part of Ukrtelecom holding. This is the company bought by SCM FO.

The appeal, in this case, is slated for February 27.

On January 5, the Dutch court froze the assets of SCM Management B.V, DTEK Management B.V., DTEK B.V., DTEK Grids B.V., Metinvest B.V., Premium Household B.V.

Related: Akhmetov rose in Bloomberg rating of billionaires placed 393rd


Save non-private oligarch

Against this backdrop of Rinat Akhmetov’s debacle abroad, Ukrainian authorities decide to nationalize Ukrtelecom. Our talk partners from the market admit that these processes in interconnected. It may happen that Raga will find nothing to obtain from Rinat Akhmetov, in case of “nationalization” of the company and bankruptcy of SCM FO.

A source close to Raga told that within court proceedings SCM twice applied to stop the proceedings referring to the court proceedings in Ukraine (on surrender of shares into the state property) and investigative actions (in terms of the pre-trial investigation held by the General Prosecutor’s Office).

Interestingly, that the state “began to move” with Ukrtelecom only last spring when the proceedings in LCAI were already on.

At the same time supposing that Ukrtelecom will be nationalized, Ukraine will witness the PrivatBank history repeating, though to a lesser extent. As it is known, the state bought the bank from Ihor Kolomoisky and his partners for $1 because of 4.1 bln capital deficit. The hole was plugged with the funds from the state budget. PrivatBank was saved by taxpayers. Vitaly Vavryschuk, Director of the Department of financial stability at the National Bank of Ukraine, reported in his column on Economic Pravda that every Ukrainian shall pay over $100 for the nationalization of PrivatBank.

Ukrainian government will have to write off the debts of Ukrtelecam and increase the capital state banks by this sum. The “sum” means billions of hryvnias which were practically stolen from the state in prior years and the taxpayers shall cover it at their own expense. The claims of private creditors shall apparently get stuck in litigations with legal structures they are registered at. Thus a beautiful story about rescuing a strategic state enterprise is turning into a rescue operation of a Ukrainian oligarch.

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