The war for Ukrtelecom: the story of one privatization

The privatization of the national Telecom operator had two unique features. The first is the scale of corruption. Second – details of transactions that in such cases it is kept secret decades, become known very quickly.

Recent history is not rich in dramatic business stories. In most post-Soviet countries most active for the formation of big business period are the 90-ies of the last century in its first half, and its intensive growth – in the second.

Ukraine in this context may be an exception, because here in 2018 the events occur, the likes of which the corporate sector was not in the entire modern history of the country .

We are talking about the privatization of the national Telecom operator, which is the Ukrainian version has two unique features. The first is the scale of corruption which accompanied it and which was involved the first persons of the country. The second feature is that the details of the transactions of this magnitude and with such personal participants usually remain “classified” for decades, if not forever, but in this case, were made public already in less than seven years.

Privatization with four unknowns

Ukrtelecom, the country’s largest fixed line operator and Internet was privatized in 2011, the first year of his presidency, Viktor Yanukovych, after a dizzying rapid preparation for the competition. Despite the fact that the need to transfer the company to a private investor no one in doubt monopoly every year more and more lost in value and in need of modernization, which did not have the resources – procedure preparation and results of the auction caused a scandal. 93% stake in Ukrtelecom was sold to ESU, a Ukrainian subsidiary of a little-known Austrian Fund EPIC. This company is a family consulting and investment firm with a registered Fund of several million euros has not been quite alien to the telecommunications market, having in its portfolio the securities of certain telecommunications companies. However, its financial ability to threaten on an asset such as Ukrtelecom raises serious doubts. The cost of the package amounted to 10.6 billion hryvnia, which at the then current exchange rate was equivalent to 1.3 billion. Also in terms of competition, the Epic is committed for several years to make large investments in the development of the company, as well as to create a network of special liaison for government authorities. The total amount, in spite of its impressiveness, it could be higher if the auction was attended by a large number of candidates. However, they did not have enough even two, which is considered minimally necessary amount for the visibility of competitive struggle: EPIC “fought” for Ukrtelecom one.

Version that the Fund acted not in his own name, and performs a mediating function in the transaction interests of a third person, was immediately obvious due to the small scale of the company, and the Fund itself is not a very convincing denial. About this third person (or persons) for sure you could only say one thing – it is very rich and influential enough that the Ukrainian authorities and regulators, including tax, does not ask too many questions. Boris Kolesnikov, the then Minister of infrastructure, whose maintenance was Ukrtelecom, said that the government of Ukraine in the context of this transaction only care about the price that will be paid to the state budget and the amount of investment in the company.

All this suggests a suspicion that the real beneficiary of privatization is the representative of the authorities or someone close to her business. Most observers agree that the real aim of the people who stand behind the small Austrian firm EPIC is to sell Ukrtelecom someone of the largest market operators received margin in the form of legitimate profit to the EU. The concept of “Family” was just beginning to crystallize, so most sounded names are Dmytro Firtash, Serhiy Liovochkin and Rinat Akhmetov, the founder of the SCM group, which at that time was closed several major transactions, in particular for the purchase of the Central Department store on Khreshchatyk.

Whoever the buyer is, two years later, in the summer of 2013, he fully confirmed its reputation as the intermediate “portfolio”, resold to the company profile of the player – Rinat Akhmetov’s SCM group for 860 million dollars. The amount was calculated as us $ 1.3 billion. paid SPF minus 500 million of loans to Ukrtelecom, the two largest banks of Ukraine – Oschadbank and Ukreximbank.

This deal confirmed two things: 1. Rinat Akhmetov despite his demonic reputation was not related to the starting non-transparent privatization of Ukrtelecom. 2. The asset is moved to a strategic investor, which in contrast to the original purchaser, knows how to manage it. In any other European country, the history of privatization of national Telecom operator this could be considered completed. But in Ukraine, it was just beginning.

All details of the events in Kiev in the summer of 2013 became known three years later, in 2016, when the company ESU, which was sold in offshore and called by the time Raga Ltd, filed a lawsuit against the company demanding payment of the SCM 760 million dollars of the total $ 860 million. The company Raga in the court were represented by Denis Gorbunenko, according to him, bought it from former owners of the ESU and renamed. During the arbitration hearing, the witnesses from Raga announced the names of the former owners. They were in some not quite clear fractions – the head of SBU Valery Khoroshkovsky and the oligarch Dmitry Firtash, with whom the Gorbunenko was connected long years of cooperation. The role of the latter remains unclear in the arbitration was considered that Firtash was more than 75% of shares in Ukrtelecom, and that Firtash has funded the privatization of at least $ 300 million, which he still needs whether Khoroshkovsky, whether Gorbunenko. The impetus for the talks with Khoroshkovsky and Firtash was calls with Bank personally to Rinat Akhmetov, and the role of “facilitator” in the negotiations were done by Sergey Arbuzov, who was then head of the NBU and subsequently Deputy Prime Minister.

A list of these names and their significance in the Ukraine sample 2013 puts a question to which no definite answer was whether the deal for the purchase of Ukrtelecom Rinat Akhmetov voluntary?

It is likely that this is true. The business interests of SCM, has long been spread on the telecommunications market, the assets of the group have been successful cases in the industry – for example, launching and selling Life. On the other hand, 2013 was the peak according to the degree of pressure on business, which led a few months of the Revolution of dignity. Therefore, it is easy to assume that “family”, which at that time meant for Viktor Yanukovych, much more than partners in Donetsk period of his life, strongly suggested to buy the asset, threatening the other business tycoon. Probably true, both of these versions.

The transaction, as follows from all the same materials of the arbitration, was quickly (apparently at the insistence of the sellers, MC). Wanting to protect yourself, the buyer has provided the possibility of a correction amount according to the results of a detailed due diligence of Ukrtelecom. That was supposed to fix all the hidden problems, if identified, will take on the sellers.

Sources close to the negotiations say that this was the whole point of “gentlemanly” agreements of the parties: that SKM has agreed to buy the asset only on the condition that Firtash and Co. will take over full responsibility, including financial, for all obligations of the privatization of Ukrtelecom. The sellers, in case of detection of SCM problems with an asset that had, at its expense, to resolve any such problems in Ukraine. Obviously, Firtash and Khoroshkovsky could comfortably take on such a commitment in 2013. while Yanukovych was in power. But that all changed after the revolution of dignity, when in February 2014. Yanukovych fled the country.

The terms of the transaction included the payment of a sum of 860 million dollars in three tranches throughout the year, until October 2015. The first tranche of $ 100 million, was paid immediately at the time of conclusion of the contract. A second payment of approximately $ 96 million. – had to be done before March 31, 2014. The main payment of 660 million dollars. was scheduled for October 2015. It was assumed that by the time any problems with the UCC will be identified and “brought” EPIC.

The contract also directly written EPIC continuing obligation as the seller to ensure the performance of all obligations under the privatisation agreement between the ESU and the state property Fund in 2011. But these remaining 760 million dollars. the buyer never saw, and that was the reason for going to Cyprus and London court.

SCM, through his lawyers claims that he stopped the payments to the EPIC/Raga after he revealed the real situation in the company.

“The purchase was carried out without a real opportunity to conduct preliminary due diligence. This explains why SCM Financial agreed to such structure of the transaction: extensive representations and warranties from EPIC/Raga in favor of the SCM Financial and installment payment of a substantial part of the price of sale two years after obtaining the ownership of shares in Ukrtelecom. We wanted to see during this time, the representations and warranties and whether the Raga and its former company ESU “skeletons in the closet,” said in an interview with Interfax international relations Director and investor relations of SCM Jock Mendoza-Wilson. According to him, the skeletons were found in abundance – the company was not in that state, which declared the buyers and pay you the agreed amount did not make sense.

Prior to the date of the second payment – 31 March 2014 SKM has identified at least two serious problems with the privatization of Ukrtelecom. First, the so-called rmrc telecommunication network special purpose – was not built in accordance with the technical specifications approved by the SPF and a special communication. In addition, as shown by the audit, the EPIC did not comply with any of the undertaken investment obligations specified in the privatization contract in the amount of 450 million dollars. We also found out that the real value of the initial transaction was only 6.5 billion, and 4 billion provided to state-owned Oschadbank and Ukreximbank. And one of the parties to the transaction and beneficiaries of EPIC Khoroshkovskiy being the Chairman of the security Service of Ukraine, was simultaneously Chairman of the Supervisory Boards of these two banks that just approve the issuance of such major loans. Thus, on the face of the conflict of interest that calls into question the legality of the original privatisation and threaten Khoroshkovsky serious international problems.

Having identified all this, SCM would prefer to withdraw from the deal, but the sellers did not enter into negotiations, which, given the events that took place in Ukraine in late 2013, at least understandable. In March of 2014. the time came for the second payment. SKM asked to confirm the willingness of EPIC (already renamed Raga) to fulfill obligations to the state property Fund, Raga answered by an eloquent silence, which lasted until June 2017.

This was followed by a lawsuit in the London arbitration.

Today not known for certain, are the beneficiaries of the EPIC / Raga a United front against CCM. Given how different was their fate, this is unlikely. Firtash has been under house arrest in Austria and is trying to avoid extradition to the United States. Valery Khoroshkovsky fled from Ukraine to Monaco.

However, given the identity of the person on whose behalf the litigation is conducted for Ukrtelecom with SCM, you can make certain conclusions.

Denis Gorbunenko, which acts as a Cypriot court as the successor of the two oligarchs, can scarcely claim the title of independent figures. One of the owners scandalously ruined Rodovid Bank, 2009 Gorbunenko lived in London, hiding from charges of embezzlement of the Bank’s assets and embezzlement. In parallel, he fulfilled the instructions of Dmitry Firtash and was his confidant in several projects, including the organization of Ukrainian days in London, which was supervised by the wife of the oligarch Lada Firtash.

This version gives the answer to another question – why, in principle, needed to rewrite ESU in third person? This becomes understandable if we recall the current status of Dmitry Firtash – he was forced to in Vienna, and he faces confiscation of all property if a court in the US found guilty of international corruption. Therefore, to rewrite the company’s potential obligations to her for $820 million in nominal owners seems the logical solution.

Again with the prefix “state-“

In may 2017, the state property Fund began the process of return of Ukrtelecom in state ownership. As the formal holder of the shares of the company were Ukrainian ESU, then legally return to state control 92% of the shares of the monopoly was easy. The evidence base was undeniable – buyer in the person of the ESU has not fulfilled two of the commitments – in part of the company, neither in terms of construction of infrastructure for the public sector.

“We believe that now the only solution is to step back, to reclaim the Deposit and to restore the original contract between the state and Raga, so they can solve the claims with each other”, – explained the position of the SCM in dispute with SPF Jock Mendoza-Wilson. The result was predictable – the SPF made the decision on nationalization.

If you follow the letter of the law, considerations of economic justice and even the Ukrainian practice, the buyer company ESU – from the state budget had to be returned the funds paid at the conclusion of the transaction, namely 10.6 billion hryvnia (however, taking into account the devaluation from 8 to 28 UAH per dollar payment, if it be de facto will be 4 times less than original amount – $ 350 million vs 1.3 billion). So did the state of Ukraine in 2006, returning to Viktor Pinchuk and Rinat Akhmetov, the money they paid for the steel giant Kryvorizhstal, which returned to the state for re-resale. However, given the details of the transaction at Ukrtelecom, its political component, as well as the state of public finances and the cancellation of the corresponding decision of the Cabinet, which was a refund Viktor Pinchuk, the story unlikely to be repeated.

The state has won a lawsuit against ESU in the first instance and in appeal. The session of the cassation instance in the case of Ukrtelecom is scheduled for February 20, 2018. The outcome is a foregone conclusion. The acting head of the state property Fund Vitaly Turubarov no secret that SPF is confident in making a final decision on return of a stock operator to the state for crediting to the accounts of the Fund. Sure enough, now that SPF is already preparing an appeal to the Prosecutor General with a request to lift the arrest of a stock operator, which was imposed in the criminal case of underestimation of the privatization cost for prompt crediting to the accounts of the Fund. “We returned the shares, but they must be backed by a property which at the time was inventoryservice and evaluated,” said Torubarov.

At the time the second largest in the history of independent Ukraine, the nationalization of the parties ‘ positions as follows.

Structure SCM want to paid back in 2013, the first tranche of $ 100 million and forget about Ukrtelecom, providing the state and Epic/Raga to sort things out with each other. Make a deal (most likely) under pressure, as the political influence of opponents reduced to zero and began to understand the extent of fraud in the course of the IPO (unfulfilled investment obligations, brought a corrupt manner and outstanding loans of state banks, constructed with violations of network SCS) structures Akhmetov increasingly lost interest in this asset and now just want to get out of bad history with minimal losses. And they can understand.

The real owners of ESU (one or more) through Denis Gorbunenko want to monetize their past political influence to nearly a billion dollars waving in the courts contract from 2013. It is clear that these 760 million is vitally important for each of the former first persons of Ukraine. It is also clear that for Rinat Akhmetov, have lost a significant part of the business in the Donbas, they are not superfluous, so the litigation in London and the Cypriot courts will be difficult and long. The lawyers outline the horizon in a few years.

Ukraine, at first glance, keeps his back to the property the largest operator of fixed communication and Internet.

But de facto the state as the owner of Ukrtelecom lost four years for this sector as technology equals four centuries. To make up for them it is possible only by huge injections of cash. But the state of public finances and the company does not allow them to perform independently and to attract loans from international banks is impossible until the courts between SCM and EPIC on Cyprus and in London. It is also clear that no strategic investor will not be included in the company burdened with such a large-scale commercial disputes, so to conduct real privatization as it was with Kryvorizhstal to the state property Fund will fail.

The good news is that Ukrtelecom is good, as it can be. SKM developed the company and honestly administered, hiring high level managers. If during the period 2009-2012 Ukrtelecom received UAH 0.5 billion of losses in 2014 and 2016 came to a profit of more than $ 2 billion, and that given the loss of assets in Crimea and the Donbass.

In order not to lose the result and not to break again in the financial the peak without the slightest hope for re-privatization, Ukrtelecom as soon as possible to get out of lawsuits, because they block the development of the company, in whatever status it was public or private.

Ukraine at the official level, need to add to the lengthy list of accusations of the former government one more thing – the cynical theft of state property, the largest Telecom operator for the purpose of resale. You also need to maximize the performance of obligations to third parties who are victims of the past political system, and thereby close this story forever, giving the signal to all future investors about the rule of law in the state and respect for the representatives of the corporate sector. Without this Large-scale privatization, which planiruet the Cabinet this year, is hardly meant to be implemented successfully.

Michael Kuhar, an economist at the IMF Group Ukraine

Peter Byrne, independent journalist, former correspondent for Fox News and Al Jazeera in Ukraine

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