Confiscation Of Prominvestbank: An Oversight That May Cost Ukraine Dearly
Russian shareholders want to recover PIB market value.
Privat Group represented by a list of 18 companies.
How much was PIB really worth when it was put up for sale?
On March 4, Justice Ministry officials sold 99.8% of Prominvestbank (PIB) shares on the PFTS, bypassing the decision of Stockholm arbitration and the standards of the National Bank of Ukraine (NBU). Russian shareholders represented by Vnesheconombank (VEB) have already announced their intention to recover the entire market value of PIB from Ukraine. The regulator threatened to declare the bank insolvent and the bank’s borrowers during restructuring process said they were not aware of who the new owner of the bank is. The asset is a “suitcase without a handle” after the sale, because the new management’s future policy will be to aggressively collect collateral and not engage in classic banking.
Moreover, in the long run, the confiscation of PIB will weaken the negotiating position of Privat Group in international courts to recover almost $150 million in claims against Russia. That’s why it’s better for the NBU and Justice Ministry to “play back” the move and return to the long-term and proven strategy for collecting penalties from Russia for assets it seized in Crimea.
History of conflict. On May 2, 2018, the arbitration court in The Hague ruled that Russia should indemnify a number of Privat companies in connection with the annexation of Crimea. Signed in 1998 and still in force, a bilateral agreement on the protection of investments created a “window” for recognizing Russia as the ultimate beneficiary of the assets of Ukrainian companies after the annexation of Crimea.
Other large business groups, such as Naftogaz and Ukrnafta, filed similar claims with international arbitration courts to recover compensation from Russia for assets expropriated in Crimea. In particular, Oschadbank managed to achieve recognition not only of the principal amount of the debt of $598 million, but also of potential profit for 2014–2019. The total amount of the lawsuit won was $1.3 billion.
As for Privat Group, it was represented by a list of 18 companies (Everest Estate LLC, Dairis, Aerobud and others) and one individual — Oleksandr Dubilet. The total amount of compensation to the final beneficiaries — I. Kolomoisky, H. Boholiubov and O. Dubilet, approved by the decision of the Hague Arbitration at the UN, amounted to $160 million.
Further, on September 25, 2019, the Kyiv Court of Appeal, in accordance with the provisions of the New York Convention of 1959 on the recognition and enforcement of a foreign arbitral award, seized three Russian state-owned banks: Sberbank, VTB and PIB . At first glance, these banks are the direct property of Russia and can be recovered by the Justice Ministry in compensation for the Crimean assets of Privat Group.
However, a month earlier in August 2019, the Stockholm Chamber of Commerce Arbitration Institute banned Ukraine from selling the arrested shares of PIB. The decision could serve as the basis on several technical points as recognition of the full representation of the party against which the decision was made in court (and Russia usually ignores lawsuits in order to drag out time), such as jurisdiction compliance and others technical legal points.
The specified decision of August 2019 was appealed by Ukraine before the full composition of the tribunal of the Stockholm Chamber of Commerce. But the Arbitration Institute of the Stockholm Chamber of Commerce, by its decision of February 28, 2020, dismissed Ukraine’s complaint about the above decision and forbade Ukraine to sell shares of PIB.
Does the decision of the Stockholm arbitration, which prohibits Ukraine from selling PIB, contradict the Hague ruling of May 2, 2018 that approved the recovery amount of $160 million? Of course not! Russia must return $160 million to Privat Group. Every day of “delay” costs about $10,000 in accumulating interest. However, the toolkit used for the arrest of PIB shares contravenes international law.
Imagine if the Naftogaz team, instead of continuing their lawsuit in Stockholm to recover the entire amount of its claim, simply confiscated Russian gas from storage facilities for $100-$150 million. That would be tantamount to a violation of the decision of the same Stockholm arbitration.
This is exactly what Privat Group did: On March 4, 2020 on the PFTS stock exchange, 99.7726% of PIB were sold for $11 million. I emphasize that the Justice Ministry was actually the initiator of trading in PIB shares. Unlike the case of Naftogaz, Privat Group does not care how legitimate such a penalty was. They received a perfectly legitimate $11 million from the Justice Ministry.
Russia's VEB will have to sue for the arrest and sale of PIB shares in international arbitration exclusively with Ukraine’s Justice Ministry. This complies with the spirit of privatizing profits and nationalizing losses.
Unfortunately, the Justice Ministry will have to answer the following unpleasant questions:
Did the National Bank and the bank’s management participate in its deliberate bankruptcy?
Why was the bank sold for $11 million with a statutory capital of $85 million?
How is the Justice Ministry to prove this in the Stockholm arbitration?
Is the value of the bank underestimated due to its actual arrest and pressure from various nationalist groups for the purpose of bankruptcy?
How much was PIB really worth when it was put up for sale?
Isn’t this just an attempt to bring high-quality collateral through an administrative resource and earn 100% profitability on “quality work with distressed assets?
Has the bank not specifically gone bankrupt with local management based on such a scenario?
All these issues, in hundreds of millions of dollars worth of claims, can settled by the NBU and the Justice Ministry if they recognize that the sale of PIB shares was illegal, an act that perhaps will benefit no one, except Ukraine.