The New York Convention of 1958 provides a procedure for courts in member countries to enforce arbitration awards in other member countries. But there is no international treaty or convention regarding the recognition and enforcement of court judgments. A major problem for foreign parties in Russian Federation (RF) courts is the inconsistency of Russian courts in recognizing and enforcing judgments from countries with whom the RF has no formal treaties on that topic. This includes the United States, most of Western Europe, Canada, and Japan.
According to Russian law, disputes involving commercial entities are heard in Commercial (Arbitrazh) courts, while civil cases involving individuals (but not an “individual entrepreneur”) are heard in general jurisdiction courts. Commercial courts are required by the Commercial Civil Procedure Code to recognize and enforce foreign court decisions and foreign arbitral awards if so required by: (1) an international treaty between the RF and the country from which the judgment originated, or (2) Russian federal law. By contrast, the Civil Procedure Code requires such reciprocity only if there is a pertinent international treaty between the RF and the originating country. Because of the narrower scope of the Civil Procedure Code’s rule, many civil (general jurisdiction) courts, including the RF Supreme Court, have refused recognition of a foreign judgment unless there is a pertinent reciprocity treaty. In the absence of a reciprocity treaty, commercial courts have generally looked to federal law, specifically the Russian Civil Code’s reciprocity rule, to decide whether to recognize and enforce a foreign judgment. In some cases, judges have examined whether courts in the originating country have recognized and enforced Russian judgments in its own courts. At least one Russian court has based its recognition of a United Kingdom court judgment on an international treaty having nothing to do with reciprocity.
1. In December 2009, the RF Supreme Court refused to recognize a judgment from Germany because Russia has no relevant reciprocity treaty with Germany to satisfy the requirement of the Civil Procedure Code.
2. In March 2020, the Ninth Cassation Court of General Jurisdiction declined to recognize a judgment from the District Court of North Holland (Netherlands). The Russian court rejected the applicant’s argument that in the absence of a specific reciprocity agreement between Russia and the Netherlands, the European Convention on Human Rights 1950 (joined by both The Netherlands and the RF) should be applied.
3. In July 2020, the City Court of Moscow refused to recognize or enforce a judgment from the British Virgin Islands (BVI) because no relevant treaty exists between Russia and BVI to meet the Civil Procedure Code’s requirement.
4. In a December 2020, the Fourth Appellate Court of General Jurisdiction Appeals refused to recognize and enforce a United States court’s decision because no international treaty exists between the countries that would allow such action under the Civil Procedure Code Article 409(1).
5. In December 2020, the Second Appellate Court of General Jurisdiction ruled that while there was no applicable reciprocity treaty, it could recognize a Finnish court judgment on the basis of reciprocity if there was evidence that Finnish courts recognize Russian court judgments in similar types of lawsuits. Because neither the Court nor the applicant found such evidence except in alimony cases, the application for recognition of the Finnish decision was rejected.
6. In August 2020, the City Court of Moscow denied a request to recognize a judgment from the Netherlands because there was no reciprocity treaty with the RF and the applicant had not proved that Dutch courts recognized Russian judgments.
1. In September 2020, the Ninth Appellate Commercial Court recognized the decision of a United States court because the appellant provided evidence that the United States District Court for the Southern District of New York had recognized and enforced judgments from the Khamovnichesky District Court of Moscow and the Commercial Court of Moscow.
2. In December 2020, the Commercial Court of Moscow recognized the judgment of the District Court of Amsterdam, Netherlands on the grounds that: (1) the Commercial Procedure Code’s list of grounds for recognition of a foreign judgment is not exclusive; (2) the Commercial Procedure Code’s Article 244(1) providing reasons for refusing recognition does not include the absence of an international treaty and/or federal law on reciprocity as grounds for denying recognition; and (3) Dutch courts had recognized Russian court decisions in the past.
3. The Eighth Cassation Court of General Jurisdiction, rather than relying on the Civil Procedure Code’s recognition of foreign judgments only if a reciprocity treaty exists, found that the Austrian court judgment should be recognized if Austrian courts have done the same for Russian judgments. Although the applicant had not provided any such evidence, the appellate court ruled that the lower court should have requested such evidence from the applicant or from the Russian or Austrian Ministry of Foreign Affairs.
4. In the absence of a reciprocity treaty between the United Kingdom (UK) and Russia, the Commercial Court of Moscow found that the Partnership and Cooperation Agreement of 1994 between Russia and the European Union (of which the UK was then a member) was a sufficient basis for recognizing the UK High Court of Justice judgment. The RF Constitution guarantees judicial protection of rights, and because (1) recognition and enforcement of a judgment is part of these rights; (2) Russia is a party to many international agreements protecting individual rights to a fair hearing by an impartial court; and (3) mutual cooperation of states in recognizing each others’ judicial decisions is necessary to protect these rights.
3. Implications for Parties Seeking Recognition of Foreign Judgment in Russian Court
The cases above, and others like them, indicate that general jurisdiction civil courts frequently will, with some exceptions, look only at whether there is a reciprocity treaty between Russia and the originating country, while commercial courts tend to look at other Russian laws and the principle of reciprocity. Based on these generalizations, parties attempting to have a foreign judgment recognized and enforced in Russia should present evidence demonstrating that courts in that foreign country have recognized and enforced decisions from Russian courts, preferably in the same area of law (e.g., business contracts, bankruptcy, child custody, etc.). Such cases must be presented to the court with a Russian translation that is certified by a Russian notary and apostilled if appropriate. The applicant can also show evidence of the foreign country’s other cooperative agreements with Russia (if any), such as the EU-Russia Partnership Agreement since some courts have given weight to such evidence.
The basis of Russian antitrust law is Federal Law No.135-FZ (the “Competition Law”). In 2020-21, two sets of guidelines were issued that are non-binding but nonetheless important in understanding the analysis the Federal Anti-Monopoly Service (FAS) will undertake when considering whether transactions require pre-clearance. The guidelines are significant on a range of issues pertaining to the enforcement of Russian merger control and anti-monopoly compliance.
On June 11, 2021 the FAS issued guidelines (the “Merger Guidelines”) covering several topics, including, inter alia, joint venture (JV) agreements, negative control situations, and non-compete agreements, as detailed below. After more than two years of discussion, these are Russia’s “first complex guidelines on merger control procedures.” For legal practitioners and investors, the Merger Guidelines clarify certain questions regarding merger control rules and make more transparent the FAS’s approach to analyzing transactions.
The Merger Guidelines better define the Competition Law’s test for whether a joint venture (JV) agreement must receive pre-approval from the FAS by stating that it will be reportable if certain asset or revenue threshold values are exceeded and:
1. The agreement between the parties constitutes a “joint venture agreement” (not simply the creation of a new entity) in which the parties will make joint investments in a joint activity and will jointly bear the risks thereof, and the parties’ activities are directly regulated by an agreement for providing goods or services;
2. The parties to the JV agreement are business entities that are competitors in the Russian market; and
3. The JV agreement explains the parties’ “joint activities” in the RF, such as: (1) creating a JV in Russia or acquiring shares in an existing Russian company; (2) creating a foreign company with a Russian subsidiary that will engage in the JV activities in some way; (3) contributing a Russia-based entity or assets to the JV; (4) the JV’s primary business activity will be in Russia (even if the JV is not a Russian entity); and/or (5) the arrangement does not create a JV but involves the parties joining forces to promote goods or services in the Russian market.
Under the Competition Law, FAS approval of mergers is required, inter alia, when a party is acquiring rights in a target company that will allow that party to determine the “conditions for the conduct of business” for the target. The key element is the amount of control the buyer will exercise over the target.
The Merger Guidelines set out clearer criteria for determining if sufficient “control” exists in this context to trigger the requirement of FAS pre-approval. The Competition Law defines “control” as whether: (1) the transaction involves an acquisition of more than 50 percent of shares (or ownership stakes) in an entity or (2) the buyer will acquire the right to name the sole executive or majority of the executive body for the target.
The Guidelines list other indicia of control such as acquiring the power to “give binding directives to the merger target at its own discretion,” and in certain circumstances, the right to block particular decisions of the target if such blocking results in a “negative control” situation. Negative control arises when one party possesses 50 percent of the shares or membership interests of a company and has the right to veto strategic decisions, while the remaining 50 percent of ownership is split amongst other owners such that the first party does not have actual sole control but its vote is necessary to approve any decisions, or alternatively, when the first party has a right of veto that no other party has. The Merger Guidelines introduced the concept of “individual negative control,” meaning that the acquisition of veto rights might be pre-reportable only if the acquiring party will be able to exercise decisive influence over the target’s decisions, provided that other shareholders do not have this right.
Non-compete clauses or agreements that are part of FAS-reportable transactions are considered ancillary to the transaction and are reviewed as part of the normal FAS process. A non-compete clause or agreement in a non-reportable transaction, however, unless the reason for it is manifestly clear, may be voluntarily submitted to the FAS for review. The Merger Guidelines state that a non-compete provision is acceptable if all of the following are true:
1. It serves the “purpose and nature” of the agreement;
2. It applies only to the product market in which the target company operates;
3. The non-compete period lasts only long enough to ensure the purchaser receives a fair return on its investment (usually about five years) and derives profits (usually one to two years after it recovers its costs on the investment); and
4. It does not involve an exchange of information that could facilitate the creation of a cartel or other anti-competitive arrangement.
In March 2020, the Competition Law was supplemented with Article 9.1, setting out procedures for companies to implement internal antimonopoly compliance programs. In July 2021, the FAS issued guidelines for companies instituting such programs. The principal provisions urge companies to adopt antimonopoly compliance rules and recommend certain steps and incentives for doing so. The Compliance Guidelines are non-binding and are meant as a guide for entities whose size, organization, industrial sector, nature of business and other factors make such compliance programs desirable.
The Compliance Guidelines explain that a company may voluntarily submit its draft or final antimonopoly compliance policy to the FAS for review. If the policy is approved by the FAS, the company cannot be found guilty of antitrust violations if it acted consistently with the policy. Companies that do not submit their policies will not receive this protection (though it will be allowed to show evidence that it took all possible measures to ensure compliance).
A company may include anything it sees fit in its antimonopoly compliance policy, but the policy will only be approved if it includes these required elements:
1. An assessment process regarding the company’s risk of anticompetition violations, including a description of risk identification and evaluation methods, relevant operations, persons involved, and the procedures for documenting such assessments and any amendments thereto;
2. Efforts to mitigate those risks, such as employee education about compliance, periodic re-assessments, benchmarks/goals, automation of certain processes, and other preventive measures;
3. Mechanisms to monitor the company’s compliance, e.g., an employee hotline, outside audits or reviews, internal investigations, amelioration efforts for breaches, regular reporting;
4. Identity of a person responsible for implementing and overseeing the policy, who must report directly to management but be independent of undue influence and have sufficient authority and resources to perform their duties adequately.
Two major amendments to Russia’s Personal Data Law took effect in 2021, the first pertaining to disclosure of personal data and the second increasing fines for violating certain data privacy rules. These amendments apply to all keepers of personal data. They are particularly relevant for operators of online resources that facilitate the public sharing of information (such as social media site operators) and those who use data obtained from open sources.
The Personal Data Amendments set out (1) conditions for disseminating personal data to an unlimited number of people when the personal data was made publicly available by the person who is the subject of the data, and (2) provisions enabling an individual to withdraw his/her consent to such dissemination. The amendments create a default presumption that personal data made public by an individual (the “subject”) cannot be further disseminated by data operators, and gives individuals the option of choosing what, if any, of their personal data may be made publicly available and further disseminated by data operators.
Prior to the Personal Data Amendments, a subject’s personal data could be processed (i.e., collected and disseminated) without her consent if she put the data on a public website (or instructed someone to do so for her). The amendments altered this situation significantly by creating and regulating a new category called “personal data made publicly available,” defined as “personal data to which an unlimited number of persons may have access based on a data subject's specific consent for dissemination of the data.”
An individual now must directly consent to the disclosure of his personal data to an indefinite number of people separately from any other consents he gives, and he must choose which personal data (if any) he will allow to be disseminated. Details regarding the content of the consent are to be set out by Roskomnadzor (the agency overseeing data privacy). Individuals may set conditions and restrictions regarding the use of their personal data, by which data operators must abide. Any ambiguity or silence regarding the individual’s consent, conditions or restrictions requires the data operator not to disseminate her personal data. An individual may terminate her consent at any time.
The Data Privacy Amendments also introduced a concept from the European Union’s General Data Protection Regulation, the “right to be forgotten.” This allows a person to request that her personal data be deleted and not publicly circulated and compels data operators to stop processing her data within three business days of receiving her request.
The Administrative Amendments increased liability for violations of personal data protection laws and also created new fines. Specifically, fines for using personal data in a manner not provided for by RF law can now be levied for up to RUB100,000 (~USD $1350) for companies, and for repeat offenders up to RUB300,000 (~USD $4,050). Fines for companies processing personal data without the proper written consent of the individual subject, or against the restrictions or conditions of such a consent, now range from RUB 30,000 to 150,000 (~USD $400 to $2,025), and for repeat offenders, RUB 300,000 to 500,000 (~USD 4050 to $6,750).
If a data operator fails to publish its policy on personal data processing or the requirements for an individual to protect her privacy, it may be fined RUB 30,000 to 60,000 (~USD $400 to $800). Failure to block or destroy personal data upon the subject’s request or to update incomplete, outdated or inaccurate information, or to use data that is not necessary for the operator’s stated purpose, incurs fines of RUB 50,000 to 90,000 (~ USD $675 to $1200), and for repeat offenders RUB 300,000 to 500,000 (~USD $4,050 to $6750). Fines are also increased for corporate officers of operators who commit violations.
As the use of cryptocurrencies and cryptotokens has increased in Russia, the government has grappled with defining, controlling, and taxing these assets. Digital rights were first addressed in Russian law in 2019 and on January 1, 2021, a new law on digital financial assets (DFAs) and cryptocurrency took effect. The new law begins to regulate the issuance, accounting and circulation of DFAs and the use of digital currency in Russia.
DFAs are defined as digital rights similar to issued securities but placed through a blockchain. DFAs include monetary claims, the ability to exercise rights to or demand transfer of securities, and the right to participate in the capital of non-public joint stock companies. A DFA can be sold, bought, pledged, inherited or exchanged for other digital rights. When issued, a DFA is accompanied by documentation much like a securities offering, such as prospectus-like information on the volume of the issue, type and extent of rights attached to the DFA, et alia.
The DFA Law calls for the issuance of DFAs to be done via the same information system as normal securities are in Russia. The Central Bank of Russia will regulate DFAs and approve information system operators (predominantly banks, other credit organizations, or exchanges; all must be Russian legal entities), as well as deciding which types of DFAs may be acquired only by “qualified investors.” The DFA Law sets out requirements for the information system operator that issues DFAs, the DFA exchange operator, and the circulation of DFAs.
All DFA transactions are to be made through DFA “Exchange Operators” screened and approved by the Central Bank of Russia to oversee such transactions. The DFA Law sets out special rules for DFAs that carry the power to exercise any rights attached to shares in a private joint stock company (PJSC) or the right to demand a transfer of such shares. There are also specific requirements for advertising DFAs.
It is thought that a separate and more specific federal law is planned in the near future that will govern the issuance and circulation of digital currencies.
As Russians invest huge sums in Bitcoin and other digital currencies (sometimes referred to as “cryptocurrency”), several signs have pointed to a general hesitation, if not hostility, on the part of the Government of the RF, and especially the Central Bank of Russia (CBR), toward digital currencies from foreign countries. For example, government officials have said that digital currency bears the risk of “undermining . . . money circulation,” that it is too volatile and is used in criminal acts, and that it lacks transparency. Some have theorized that the Central Bank of Russia opposes digital currencies simply because it wants no competitors for its own eventual digital ruble.
The DFA Law clearly distinguishes between DFA’s and digital currency in establishing a basis for regulating the digital currency industry. It defines “digital currency” as:
A ‘set of electronic data’ (i.e., a digital code) that is contained in an information system and can be accepted as a means of payment that is not a Russian or foreign monetary unit or investment, and that holds no rights except for its value to be recognized by the information system where it exists, which need only ensure compliance with proper procedure for issuing that digital currency and keeping appropriate records.
The DFA Law sets out a number of restrictive steps that, practically, result in the banning of all cryptocurrency except a digital currency to be created and issued by the Central Bank of Russia (the “digital ruble”), which, semantically, is expressly defined as not being “cryptocurrency.” For example, RF residents cannot receive digital currency as payment for goods, work, or services because digital currency is not legal tender for payments in Russia.
But Russian residents (apart from some government officials) can purchase foreign cryptocurrency as an investment asset using a foreign operational platform, not a Russian platform. They must declare foreign cryptocurrency assets to the Russian Tax Service, although as of the DFA Law’s effective date, there were no guidelines regarding how to value it, report it, or calculate tax on it. Nonetheless, Russian residents are required to declare to tax authorities their digital currency as well as any civil law transactions and/or operations involving such digital currency. Any claims regarding undeclared digital currency, or any undeclared transaction involving digital currency, will not be enforceable in Russian courts.
In early November 2021, the CBR announced that in early 2022, it planned to prepare a prototype for its digital ruble platform and begin a trial run later in the year to decide whether to release it for public use. Simultaneously, reports emerged that in order to implement the digital ruble plan, Russian lawmakers will pursue amendments to the Civil Code, Tax Code, Budget Code, Administrative Code, and other laws on issues such as the CBR’s power to make rules for digital currency circulation and the acceptance of digital rubles as a form of payment.
At the end of 2021, reports circulated that the CBR was lobbying to have lawmakers ban cryptocurrencies altogether (except its own, of course); for example, Reuters reported that the CBR’s approach to them was a “complete rejection,” with the CBR head confirming she was against the cryptocurrency trade. Media reports circulated that while the Duma (Parliament) was drafting rules for coin mining and exchange, the CBR was trying to prohibit all crypto purchases by Russian residents. In response, experts noted that such a prohibition would serve only to drive crypto investors “underground, making it impossible for the government to collect taxes.”
In the RF, subordinate executive governments exist below the national government, much like in the American federal system. The subordinate executive powers are referred to as “Subjects” of the RF, and comprise Republics, Regions (Oblasts), Territories (Krais), Autonomous Areas (Autonomous Okrugs), Autonomous Regions (Autonomous Oblasts), and Cities of Federal Importance.
During the ongoing COVID-19 epidemic, Subjects of the RF have grappled with enacting measures to protect the public from the disease, using their authority under two federal laws empowering them to enact decrees and other regulations. But there are no administrative procedures or unified administrative and procedural legislation governing the exercise of these powers or specifically for making Covid-related policies, and as a result, Subjects’ executive authorities have acted as if there are no limits on their powers and that they have the right to mandate any regulations without regard to consistency or fairness.
The Constitutional Court of the Russian Federation has expressly stated that when introducing new legal regulations, Subjects must comply with other legal norms such as the RF Constitution. Articles 19 and 75.1 of the Constitution require that:
1. Legislative restrictions must be consistent with maintaining public confidence in the law and state activities, so legal regulations must be consistent and justified, and if necessary, must provide for compensation to parties damaged by any targeted restrictions;
2. Matters similar in legal nature must be regulated similarly. While the RF has no principle of “stare decisis” as in Anglo-American systems, the constitutional principle of equality guarantees citizens protection from discrimination in exercising their rights, and no government may impose limitations on the rights of people in one category that have no objective and reasonable justification to be different from rights of people in the same or similar categories.
3. All restrictions must be proportionate.
But many Subjects’ COVID-19 restrictions fail these standards. For example, Irkutsk Region banned the organizing and staging of theatre, opera, ballet, and other stage performances held by touring or visiting performers, while allowing the same activities by non-touring performers. Not only was this ban unfairly restrictive on touring performances, no provision was made to compensate tour organizers for losses they incurred due to the ban. Similarly, in Ivanovo Region, restrictions on activities in state-owned theatres, symphonies, circuses and cinemas were significantly lighter than those in the same type of non-state-owned venues or in other locations (e.g., museums, exhibition centers and outdoor venues). The non-state-owned entities were subject to restrictions on the number of attendees and incurred additional costs for on-site COVID-19 testing not required for state-owned venues. Such disparate treatment of individuals based on whether or not they work for a state-owned entity may well be unconstitutional because it is not supported by objective circumstances.
In Voronezh Region, an October 2021 Decree prohibited all concert activities, starting the very next day, without compensation to the organizers of such events, and with no advance warning or discussion with the concert industry. Similarly, St. Petersburg imposed bans from October 30 to November 7, 2021 on all sports events (except those exempted by government entities); physical, cultural and entertainment activities (except for theatres and museums); and conventions and exhibitions, celebrations, recreational and other categories of events. For no discernable reason, theatre and museum activities were exempted from these bans. Under the RF Constitution, Subjects are not entitled to prioritize activities carried out by certain performing arts organizations over others since both are regulated by the same law.
In the City of Moscow, a unified regulation governed the work of performing arts organizations, including concert halls, theatres and museums, prior to October 21, 2021, when the Mayor’s Decree banned certain performing arts organizations (including concert halls and concert venues, but excluding theatres and federal cultural institutions, and museums) from activities, contrary to the RF Constitution provisions discussed above.
There is also controversy about ongoing bans or limits on holding personal meetings or gatherings. While Russian law provides that any person has the right to meet with an authority or official to discuss a relevant problem, many Subjects have restricted this right. For example, in Irkutsk Region, in response to Decree No. 279-ug, an appeal was sent on behalf of the Public Representative of the Presidential Commissioner for the Protection of Entrepreneurs’ Rights (the “Entrepreneurs’ Presidential Representative”), requesting amendment of Decree No. 279-ug to meet Constitutional requirements. The Ministry of Culture and Archives of Irkutsk Region replied that a May 2020 Presidential Decree had authorized Subjects to issue such regulations, so they would remain in force. But at the same time, the Ministry sent an inquiry regarding personal gatherings to the Regional Policy Department of the Governor of Irkutsk Region, and the response was that personal gatherings could not be held because it would contravene a June 2021 decision of the Irkutsk Commission of Sanitation and Epidemiology.
This decision appears inconsistent with Federal Law No. 59-FZ "On the procedure of consideration of applications of citizens of the Russian Federation," which does not allow the prohibition of personal gatherings. Further, the Commission of Sanitation and Epidemiology is not authorized to issue or change legal regulations so its meeting decision should have had no effect.
In response, the Entrepreneurs’ Presidential Representative argued that complainants should utilize the already-existing Russian legal process that allows individuals and entities to appeal the infringement of their rights by a Subject to a higher administrative body or official. If these procedures are used, a consistent body of decisions would emerge and decrease the arbitrary and inconsistent rulings among RF Subjects (and other levels of government). This process could be used not only with COVID-19 measures, but many other areas of law that are infringements on rights by the Subjects. The Entrepreneurs’ Presidential Representative is focused on this extra-judicial remedy because it is faster than a court appeal and the authority to whom the process is addressed has more power to effect wide-ranging change. The Representative is using this process to challenge Subjects’ administrative actions that violate the rights of the performing arts industry in particular.
Article 33 of the RF Constitution establishes the “right of petition,” i.e., individuals’ and entities’ rights to appeal to state and local self-government bodies challenging encroachments on their rights and freedoms. Federal Law 59-FZ provides for the right to initiate administrative complaints. Administrative appellate bodies and officials are not judicial officials (as in the U.S.) but are empowered to hear complaints as part of their authority to manage lower bodies pursuant to the RF Constitution. The RF Constitution requires administrative bodies to consider appeals, collect necessary documents and information, and provide direct, complete, clear and logical responses (rather than formal replies requiring additional explanation or rule-making from other authorities or bodies). Failure to follow proper appeals procedures constitutes an administrative offense under the RF Code on Administrative Offenses.
This “top-down” review procedure is consistent with the Russian principle of “linear subordination,” meaning that a higher official has the power to manage activities of a lower one if not otherwise prohibited by law. Accordingly, the national federal Government (the highest level of executive administrative power) is empowered to review decisions made by lower authorities (such as Subjects) as part of its general management, coordination and supervision role, and it may pass regulations overruling those of subordinate bodies. The Government’s review power includes the ability to cancel or suspend acts of subordinate executive bodies such as those in the Subjects. Therefore, it is clear that the federal authorities, upon proper appeal by an individual or entity, may strike down inconsistent and unfair regional and local restrictions in order to systematize a national approach to fighting COVID-19.
In 2020-2021, despite quarantine-related restrictions, privatization of Ukrainian real estate was very attractive for investors. In 2019, when President Volodymyr Zelenskyi and his team were elected, they promised wide privatization of state property across various sectors of the economy, including energy production and co-generation, infrastructure, hospitality, mining, pharmaceuticals, and alcohol regulation, primarily due to the ineffective management of most state-owned enterprises in the post-Soviet era.
Pursuant to the Privatization Law adopted in 2018 and amended several times since then, both large-scale and small-scale privatization gained momentum in 2020-21. Importantly for foreign investors, the Privatization Law did not introduce any foreign direct investment (FDI) restrictions, leaving merger clearance (applicable to foreign and Ukrainian investors alike) as the only significant permission necessary for foreigners to participate in the privatization process. Despite discussions regarding the possibility of introducing FDI screening requirements, such changes are not on the immediate agenda of the Ukrainian Government and may or may not be considered in the future.
The following discussion is an overview of recent privatizations of property in Ukraine, which, despite some flaws, was developing quickly and reasonably effectively prior to the war with Russia that began in February 2022.
In 2020, Ukraine operated its first transparent and open privatization procedure, with twenty-nine participants competing to purchase the 100 percent state-owned stake in the Dnipro Hotel, located in the Maidan Nezalezhnosti (Independence Square), a highly desirable location in the historic and business heart of Kyiv. With a starting bid of 80,923,400 Ukrainian Hryvnia (UAH), the auction proceeded online with the price increasing more than thirteen-fold before ending at UAH 1,111,222,000.22 (approximately USD $39,163,000). This process was widely considered to be an excellent beginning of the new era of privatization in Ukraine.
The privatization auction of JSC “First Kyiv Machine-Building Plant” (a.k.a. the “Bilshovyk Plant”) was announced in September 2021. The Bilshovyk Plant was founded in 1882 and since then had manufactured machines and equipment mainly for the chemical industry. After the break-up of the USSR, the plant became one of many loss-leading state-owned enterprises, as the Soviet state no longer drove demand for the Plant’s products and distribution network. The Bilshovyk Plant’s most valuable assets for privatization were several buildings near the Kyiv city center that sat on a large potential construction site of about 35 hectares.
The privatization sale ended on October 27, 2021, with a purchase price of UAH1,430,000,000 (~ USD $54 million). Aside from paying the purchase price, the buyer was required to meet other conditions, which include:
1. Paying the plant's debts of over UAH 600 million (~USD $22.5 million), including land, tax, and pension fund debt (which had prevented some retirement-age employees from retiring);
2. Keep the plant's Cherkasy branch open and invest UAH57 million (~ USD $2 million) into it in the next three years; and
3. Keep the 300 remaining employees for a certain time period while complying with their trade union’s collective agreement.
Another major factory privatization in 2021 was the auction for the sale of the property complex of SE “Elektronmash” in the Kyiv and Chernihiv Regions. Established in 1965, Elektronmash had been the leading computer producing company in the USSR, and, like the Bilshovyk Plant, had sustained serious losses when it could not compete in the post-USSR capitalist system. With twenty-two auction participants, the enterprise was sold under the small-scale privatization procedure for over UAH970 million (approximately US$36.5 million), 14 times its initial starting price, with the following conditions at the new owner’s expense:
1. Keep the 139 employees for at least six months;
2. Repay the company's debt within six months;
3. Comply with environmental requirements and restrictions necessitated by the building of a recreational center in the Chernihiv Region within six months; and
4. Maintain civil defense structures in readiness for use.
Although these two factory auctions had serious flaws, they were still important steps in the privatization process in Ukraine.
The State Property Fund of Ukraine and the Ministry of Justice are in the process of privatizing several non-functioning former prisons. Using the funds raised in the process, the Ministry of Justice plans to construct new correctional facilities according to Western European standards. One of the most successful examples thus far is the sale of the Lviv Correctional Colony No. forty-eight, which was sold to the Ukrainian IT company SoftServe for UAH377.5 million (~ USD $14.2 million). The company plans to construct a large modern campus at the same location.
The State Property Fund of Ukraine has developed and submitted to the Parliament for consideration Draft Law No. 4572 aimed at further improving the privatization procedure. Among other things, the Draft Law provides for:
1. Prohibiting procedural abuse of the court system intended to prevent the privatization of property;
2. Automatic termination of the employment contract of the director of the privatized enterprise at the beginning of the privatization process to allow for replacement of a former (sometimes non-transparent) director with a technical manager who can manage the preparation of the enterprise for privatization;
3. The possibility of transforming a state enterprise into a limited liability company in its pre-privatization stage;
4. Adding 30 days to the deadline for foreigners to pay for their auction winnings; and
5. Allowing privatization contracts to be governed by English law (previously this was allowed as a limited-term experiment, which has ended).
The Draft Law was approved by the Parliament in the first reading and is awaiting further consideration.
In the meantime, at least sixteen more privatizations are being planned as of December 2021, while some others have been postponed due to Covid-19. On December 20, 2021, the auction will be held for JSC “United Mining and Chemical Company,” a large company developing titanium-zircon deposits and producing rutile, ilmenite, and zircon concentrate, as well as providing concentrate enrichment services. The following sales also are planned for the near future:
1. JSC “President Hotel” located in the Kyiv city center;
2. 99.5667% shares in PJSC “Odessa Portside Plant,” a large company that loads ammonia, carbamide and methanol, and produces the latter two; and
3. 78.289% shares in PJSC “Tsentrenergo,” one of the largest energy producers in Ukraine, which owns three energy and heat-generating facilities.
