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What does the law on Russian business in Ukraine say?
On May 24, a law came into force that allows collecting assets of sanctioned individuals and legal entities to the state budget during the martial law if they contributed to armed aggression against Ukraine. The new sanctions procedure with a trial in the Supreme Anti-Corruption Court will allegedly take away assets, in particular, corporate rights from Ukrainian companies, Russian businesses and oligarchs who provided financial assistance to the aggressor.
Prior to this law, there were (and still are) other ways to deprive Russians of assets in Ukraine without paying compensation, if there are grounds for such actions. Among them is confiscation by a court verdict, within the framework of criminal proceedings opened, for example, under Article 110-2 of the Criminal Code of Ukraine, i.e. for financing a number of anti-government actions.
Arrested property or corporate rights may be transferred to the ARMA (Asset Investigation and Management Agency) during a rather lengthy pre-trial investigation in such cases. They can also be confiscated through a decision of the National Security and Defense Council [the state structure in Ukraine responsible for imposing sanctions, launching and managing the state of emergency and martial law – ed.], a presidential decree and a special law approving the decree, based on the basic law on the forcible seizure of Russian property if it is owned by the Russian state and related Ukrainian legal entities. Now, perhaps, the state will prefer a new way.
Lawyers call the new procedure quite realistic.
«What is currently being proposed for the confiscation of Russian property, the legislative initiatives that have been adopted are quite realistic and adequate. It is clear that some legal issues need to be improved. First of all, it’s necessary to define more clearly which property is subject to sanctions. We should also work very carefully to prove that assets, property that is physically owned by certain citizens and certain businesses are sanctioned, i.e. Russian, or cooperates with the aggressor state. To do this, first of all, we also need to clearly prescribe the criteria for such proof. However, over time, these and other shortcomings can be corrected in the application of the law,» – Ivan Horodyskyi, a member of the board of the Ukrainian Bar Association and the Ukrainian Association of International Law, explained in a comment to Lviv Now.
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The expert says that in Ukraine, the state has full access to all registers and all tax information, so it’s not difficult to prove the connection that a particular business is Russian and that sanctions should be applied to it. Especially if there are also legal grounds provided by the adopted law.
Business of ordinary Russians in the Lviv region
Due to the closed registers, it is currently not possible to find out which real estate in Lviv or Lviv region as of February 24, 2022 belonged to Russian citizens or persons registered in Russia. However, we were able to obtain from the analytical system YouControl a set of data as of February 24 with Ukrainian legal entities with ties to Russia or Belarus, namely those who have among the founders (and beneficiaries) the citizens of Russia, Belarus, foreigners registered there, Russian or Belarusian companies.
From this data set, we filtred all liquidated legal entities or those undergoing liquidation. In total, we found 235 legal entities in the Lviv region (150 in Lviv) that have various types of ties with Russia. Of these, 15 were registered in 2021-2022. These are mostly limited liability companies, although there are private companies, joint-stock companies and even public organizations. We also found 82 companies and organizations connected with Belarus in the region (53 in Lviv). It is clear that this is not the final number, as Russians and Belarusians may hide their presence in Ukrainian companies behind offshore and/or fictitious persons. In addition, as we noticed, some founders of Lviv companies with Russian citizenship began to rewrite their shares to Ukrainian citizens, but we worked primarily with the data as of February 24, 2022.
After that, we used data from the financial statements of Ukrainian companies and organizations, which were published by the State Tax Service in May last year, to understand which of these companies operate in general. It turned out that only 56 of the 235 companies and organizations related to Russia submitted financial statements for 2020. Among these companies related to Belarus, 14 out of 82 submitted financial statements. This way, the disadvantage of this approach is that we do not take into account companies that were established in 2021 and therefore did not submit reports for 2020, but there are be few.
From the data set with financial statements, we took data on the revenue and net profit (loss) of these companies for 2019 and 2020. We counted 11 companies with partial or completely Russian capital with revenues of over UAH 5 million ($170 thousand) in 2020, and only two companies with partially Belarusian capital with revenues of over UAH 5 million in 2020.
The TOP-5 companies with partially or fully Russian capital in terms of revenue (2020) include Embawood Ukraine LLC (Sambir), UA Pallet LLC (NovyI Yar village, Yavoriv city community), Reykarts and Partners. Ukraine LLC (Lviv), Teploelektroproekt Engineering Company LLC (Lviv), Upotek Ukraine LLC (Busk). Among well-known companies, more than UAH 5 million in 2020 was also earned by Chisto Dry Cleaning Network LLC (Lviv, 7th place).
Embawood Ukraine LLC manufactures and sells upholstered and cabinet furniture. Tamara Polyakova, a Russian citizen registered in the Moscow region, is a co-founder with a 34% share in the company’s authorized capital. The company declared revenues of UAH 98.5 million in 2020 and UAH 72.5 million in 2019. Through the public procurement platform Prozorro since 2016, Embawood Ukraine has signed contracts for the supply of furniture for UAH 4.82 million.
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UA Pallet LLC is engaged in the production and sale, including export of wood pellets for heating, lumber and pallets. The founders of YuA Pallet are Russian citizens Ramzan Beriev (62.5%), registered in the Yavoriv district, and Eset Abdulkhanova (37.5%), now registered in Lviv (formerly in the Gudermes district of Chechnya). UA Pallet declared revenues of UAH 37.5 million in 2020 and UAH 31.9 million in 2019.
Reykartz & Partners. Ukraine LLC was already mentioned in our article about the hotel owners in Lviv. We will recall that the buildings of the Reykarts Medival Lviv Hotel (9 Drukarska Street – 19 Virmenska Street) are registered with this company. Only last year, the company completed the restoration of a building at 19 Virmenska Street with an apartment fixture. According to YouControl, 99.9868% of the company’s share capital belongs to the Cypriot company Reikartz Hotels and Resorts (Cyprus) Limited. The rest – Cypriot Friotron Holdings Limited. The final beneficiary of the Ukrainian society in the Ukrainian USR (state register) is a Russian Yury Vasin, registered in Moscow. Previously, among the beneficiaries of LLC Reykarts and Partners. Ukraine were also Russians Leonid Lavrentyev and Timur Rodionov. The company declared revenue of UAH 33.6 million in 2020 and UAH 38.1 million in 2019.
Teploelektroproekt Engineering Firm LLC specializes in the design and reconstruction of power plants and boiler houses. According to the description of the company’s activities on its website, it was engaged in the reconstruction and design of individual facilities and systems at thermal and nuclear power plants in Russia, as well as nuclear power plants in India, Iran, Bulgaria, Turkey and Finland, built or projected by the enterprises that are part of the Russian state corporation Rosatom.
The founders of the entity are Russian Valery Meshalkin from Moscow (60%) and Ukrainian citizen Dmytro Losev from Lviv (40%). It should be added that in Russia, Meshalkin and Losev since 2012 are the founders of the company of the same name, if you translate it literally into Russian – LLC «Engineering firm «Teploelektroproekt». The Ukrainian company declared UAH 30.8 million in revenue in 2020 and UAH 13.7 million in revenue in 2019. On the Prozorro public procurement platform, Teploelektroproekt won one contract in 2021 for UAH 1.29 million.
Upotek Ukraine LLC has a garment factory in Busk and Kalush, where it manufactures overalls. The founder of the company is Upotek Sp. z o.o. from Rzeszow, Poland, which in turn belongs to FG Textile SIA from Latvia. The final beneficiaries of Upotek Ukraine LLC in the Ukrainian USR are Russian citizens registered in Riga – Konstantin Goer (15%) and Oleksandr Goer (85%). Upotek Ukraine declared over UAH 30 million in revenue in 2020 and UAH 41.3 million in 2019.
Chisto Dry Cleaning Network LLC operates a network of dry cleaners that provide dry cleaning services for clothing, carpets, textiles, footwear, clothing and footwear repair, and cleaning services of the same name. Most branches are located in Lviv and the cities of the Lviv region, some – in the regional centres of the western regions of Ukraine. Tetyana Oleksyshyn, a Russian citizen registered in Lviv, had a 50% share in the company’s authorized capital. The Clean Dry Cleaning Network declared UAH 12.3 million in revenue in 2020 and UAH 13.2 million in revenue in 2019. The Prozorro public procurement platform published 6 reports on concluded contracts with the Clean Dry Cleaning Network for 102 thousand UAH
However, recently Tetyana Oleksyshyn’s 50% share was transferred to Bohdan Oleksyshyn, a citizen of Ukraine who is also registered in Lviv. However, it is still one of the ultimate beneficial owners of the company.
Another company with Russian capital in the Lviv region has a significant drop in revenue in 2020 compared to 2019. This is the construction company LLC «REMM», in the authorized capital of which 33% has a Russian Andriy Polyakov, registered in Vladimir, Russia. The company’s revenue fell from UAH 46 million in 2019 to almost UAH 6 million UAH in 2020. It should be added that in 2018-2019 the company performed emergency recovery work commissioned by the Ukrainian state-owned road construction company Lvivavtodor, and in 2020 reconstructed emergency bridges under contracts with the Road Service in the Lviv region.
Which of them would be taken?
It is possible to recover property from the state during martial law only if sanctions have already been imposed on individuals or legal entities in the form of blocking assets and only if the assets were blocked by the National Security and Defense Council after May 24. Nevertheless, Lviv Now checked for sanctioning those Lviv companies in the YouControl data set that have ties to Russia and operated in 2019-2021. None of these 56 companies are under the sanctions of the National Security and Defense Council, just as their founders or final beneficiaries aren’t under sanctions. Moreover, none of these 56 companies had among their founders the Russian citizens or related Russian legal entities.
Large Russian business in Ukraine is expected to be hiding behind companies from Estonia, Cyprus, various offshore companies and fictitious individuals as ultimate beneficiaries. In the context of the search for their assets in Ukraine, the assets of the Russian consortium of Alfa Group and the so-called Luzhnikov Group are often mentioned. For example, in his article on LB.ua, Verkhovna Rada MP Yaroslav Zheleznyak mentions the soft drink producer IDS Borjomi and the Premier International hotel group, which have direct ties to the Lviv region.
Alfa Group includes the IDS Borjomi International Group in its annual reports. According to reports, the group’s portfolio also includes the Morshynska brand. According to Ukrpatent, the owner of the brand is PJSC «Morshyn Mineral Water Plant» Oscar (Morshyn). 100% of the company’s shares, according to YouControl, belong to the Cypriot International Distribution Systems Limited. According to the company, there are no final beneficiaries, because none of the individuals meet the criteria of the ultimate beneficial owner. The current ownership structure of the entire IDS Borjomi International group of companies is unknown. Moreover, the group’s website www.ids-borjomi.com has closed this spring. Lviv Now only knows that Borjomi water company in Georgia is a division of IDS Borjomi Beverages Co. N.V., registered in Curacao.
It will be recalled that co-founders of the Alfa Group consortium Mikhail Friedman and Piotr Avien came under EU sanctions on February 28. In particular, Friedman was accused of supporting Russian statesmen responsible for the annexation of Crimea and destabilizing Ukraine, as well as supporting Russian actions or policies that undermine Ukraine’s territorial integrity, sovereignty and independence. Later, Friedman and Aven also came under British sanctions. The National Security and Defense Council has not yet imposed sanctions on them.
The «Luzhnikov group» includes Russian citizens – politicians, now Deputy Chairman of the State Duma Alexander Babakov, entrepreneurs Eugene Giner and Mikhail Voevodin. Babakov is under sanctions from Ukraine (NSDC), the EU and the United States. The National Security and Defense Council did not impose sanctions on Giner and Voevodin, but the State Bureau of Investigation is currently inspecting the activities of the entire group in Ukraine.
Journalists of «Schemes» claim that the business of this trio in Ukraine is registered to wives and other close people. In particular, we are talking about the Premier Hotels&Resorts hotel chain, which includes the Premier Hotel Dnister in Lviv.
As Lviv Now reported in February, the building of the Dnister Hotel was registered with PJSC Dnister Tourist Hotel Complex. According to the analytical system YouControl, 62.1272% of the shares of PJSC belong to LLC «Eastern European Hotel Company», and 37.8728% – Pumori Enterprises Investments LTD (Cyprus). In turn, LLC «Eastern European Hotel Company» is 100% owned by the company from Cyprus. Natalia Selivanova, a French citizen, has been named the ultimate beneficiary of the Eastern European Hotel Company and Dnister PJSC in the Ukrainian USR. Journalists of Ukrainian investigative program «Schemes» call her the civilian wife of Vojvodina.
Lawyer Ivan Horodyskyi said in a comment to Lviv Now that there are still some questions about bringing Russian assets abroad, but there will be special mechanisms from Britain and the United States. Now, according to him, there are whole special forces that are directly involved in the search for Russian assets, and here Ukraine, too, can join and send their requests.
Asked how difficult it will be to prove the connection of business with sanctioned persons acting through fictitious persons or relatives, the lawyer said that this was a problem 10-15 years ago, but now the exchange of tax information is working. Since 2015, Ukraine has been in the process of disclosing the ultimate beneficiaries and business owners, so it is not difficult to understand who the real owner is, in principle.
«This information is in the registers, before the war it was public. Currently, access to the registers is limited, but you can, knowing the name of the company, theoretically track any company whose owner, the ultimate beneficiary, is a citizen of the Russian Federation. Even citizenship was mentioned in the registers. More complex corporate schemes, such as trusts, where the actual real owner is one person and the nominal owner of the trust declaration is another person who appears in public, began to go into the past as a way to hide property somewhere in 2017-2019. Now, there are some loopholes, but the problem with offshore is already minimized,» – says Ivan Horodysky.
The loophole is that if a company is a public limited company, its shares may be offered to an indefinite number of investors through a public offering of shares, or they may be freely traded on the stock market as a result of a public company listing procedure. Then it is quite difficult to establish an exhaustive list of ultimate beneficial owners, says the lawyer. However, this is a purely theoretical scheme, and these are isolated cases.
«Any business, including Russia’s, as an aggressor state, for the last 10-15 years has lived in conditions of increased demand for integrity. This provided a clear and transparent corporate structure. And so now we can see who owns the company. It is true that rumours are now circulating that the property of some Russian oligarchs is formally owned by some Ukrainian businessmen, but the actual owners are Russians. Legally, they may not own the business, but in fact, exercise control and make a profit. But these things can be proved in court and they can be the subject of investigative work,» – said Ivan Horodyskyi, concluding that it is almost impossible not to identify the owner, the ultimate beneficiary, if he is Russian.
By the way, there are no legal grounds for deprivation of property and corporate rights in Ukraine of all Russians without exception. On April 1, the Verkhovna Rada passed a bill that allowed for the forcible seizure of real estate, movable property and corporate rights of Russian citizens registered in Russia by foreigners who are founders or final beneficiaries of Ukrainian companies, as well as Russian private companies not related. with the Russian state. However, the president has not yet signed the law, and is unlikely to sign it.
By Dmytro Borysov, Roman Tyshchenko-Lamanskyi
Translated by Vitalii Holich
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