What Risks Loom After the Nationalization of Companies for Military Needs

A column by Andriy Volkov, Investohills Group’s founder and managing partner, at Glavnoe in UA news portal.

In early November, a decision was made to nationalize assets of Ukraine’s strategic manufacturers, such as Motor Sich, ZaporizhTransformator, AvtoKrAZ, Ukrnafta, and Ukrtatnafta to implement a resolution of the Headquarters of the Supreme Commander in Chief due to the exigency of war. The seized assets were recategorized as military property and handed over to Ukraine’s Ministry of Defense to be managed.

Undoubtedly, the government is fully entitled to nationalize manufacturing companies for military needs during a war. Decisions like that are understandable from the point of view of not only the law but also the morals. However, there are questions about the motives for making decisions on each particular manufacturer that had been nationalized and about the companies’ post-war prospects.

Only two of the temporarily nationalized companies, Motor Sich and ZaporizhTransformator, had links to people who had cooperated with russia directly or had russian nationality. Here, the reference is made to Viacheslav Bohuslaiev, Motor Sich’s owner and president emeritus, suspected of aiding and abetting, and collaborating with the aggressor state, and Kostiantyn Hryhoryshyn, ZaporizhTransformator’s major shareholder and a russo-Ukrainian oligarch, who had been a citizen of russia before 2016.

In both cases, there was a major risk that products made in Ukraine would be supplied to russia via third countries. In fact, there is ample evidence of the installation of Motor Sich’s engines on russian helicopters. So, there is no question about nationalizing these strategic manufacturers. They should have been placed under the control of the Ministry of Defense long ago.

However, the situation with Ukrnafta and Ukrtatnafta, both Ukrainian oil and gas companies, is different. For one, the defense value of these companies is not as evident and clear-cut as with the two companies mentioned above. The decision to nationalize them was made within the scope of combating the oligarchs, a process the Ukrainian government has been lately quite active at.

For instance, NAK Naftogaz of Ukraine holds an interest of 50% plus 1 share in Ukrnafta, which owns the largest Ukrainian refinery in Kremenchuk; an interest of about 42% is held by a group of companies linked to Ihor Kolomoyskyi, an oligarch from Dnipro. Together with Hennadii Boholiubov, his business partner, he also owns about 60% of Ukrtatnafta. NAK Naftogaz owns the remaining shares. By the way, both the National Anti-Corruption Bureau of Ukraine and the Specialized Anti-Corruption Prosecutor’s Office believe that Ukrnafta’s previous management was involved in siphoning off UAH 13.3 billion from the company to the Privat Group. Thus, the nationalization of the company may seem to be warranted. However, it is warranted more in the eyes of citizens rather than the business community.

Many economists believe that the nationalization of Ukrtatnafta and a block of shares in Ukrnafta can hardly be substantiated with security needs as in the case of the remaining three companies, and the nationalization will be challenged in court for sure.

In addition, Ukrnafta’s shares were in free circulation; thus, its nationalization also affected smaller minority shareholders and other investors. In fact, their rights were limited in the process of combating oligarchs on the same footing as the oligarchs.

The situation with AvtoKrAZ is genuinely ambiguous. Everybody and his uncle pretend to “know” that the truck manufacturer is owned by the oligarch Kostiantyn Zhevago, for whom an international arrest warrant has been issued. However, formally, the disgraced oligarch is not its ultimate beneficiary. The company has been undergoing bankruptcy procedure and has hardly been working for several years.

For this reason, two questions arise. Firstly, who did the state nationalize the truck manufacturer from? Potentially, it did from Zhevago, but the reality can be different from expectations. Secondly, what was AvtoKrAZ nationalized for: to resume production or, again, to fight oligarchs? One must realize that the plant has almost been destroyed if one expects to produce military equipment there. It will take huge investments and qualified specialists to re-launch the production process. Does the state have them? It is questionable. Moreover, AvtoKrAZ depends on many suppliers and partners.

For instance, the production process cannot be started without the Poltava Automotive Components Plant (PAAZ), which has not been nationalized, unlike AvtoKrAZ. It is still owned by Kostiantyn Zhevago.

There is also the issue of the huge debt of companies owned by the runaway oligarch. Both AvtoKrAZ and PAAZ are indebted to domestic banks and entities owned by the same Zhevago that had bought their claims at DGF auctions.

So, we can ask the main question now. Let us assume that the state has invested much money in AvtoKrAZ and made it successful. But will it not be required to return the plant back to its owner? If so, it will be a boon to him — an active, profitable truck manufacturing business without any investment on his part.

However, even if we assume that the state won’t return the company, Zhevago – or, rather, the entities linked to him – still hold debt worth dozens of millions of dollars that he will claim from the truck manufacturer once the war is over and the production is restarted. So, the oligarch will be able to take a lot more from the active manufacturer than it is worth right now.

The same applies to AvtoKrAZ’s minority shareholders. It will also be a boon to them if the company resumes operating. And, eventually, to minority shareholders of ZaporizhTransformator and Motor Sich. However, the situation with oil and gas production companies can be different after their return to the owners. With energy prices at their highest, these companies could make huge profits. On the other hand, five years after the war, the prices for oil and gas could go down, and their reserves could be depleted. Accordingly, the share price the shareholders can expect would be very different from the current one.

In fact, the issue of the valuation of shares can become quite acute after the war. The reason is the absence of practice and procedures for the appraisal of shares in companies nationalized by the state. I am certain there will be many investors with whom one would not be able to reach any agreement or do anything. It will only be possible to adopt a special law to specify the share price directly. Thus, the nationalization story evokes more questions than it gives answers. However, it is high time for the government to start thinking about the procedure for settling accounts with companies’ shareholders and owners. It will have to consider two factors: that the companies have not only oligarch owners but also minority shareholders and that creditors hold debt claims against the companies.