As if doing business anywhere in Ukraine wasn’t risky enough, the Russian occupation of Crimea made it riskier on the peninsula.
The Kremlin-installed government in Crimea has made it abundantly clear that state-owned business assets will be nationalized, while private property may face all sorts of headaches due to the likelihood of Russian legislation being soon imposed there.
On March 11, Sergey Aksyonov, the Kremlin-backed acting prime minister of Crimea who is not recognized by Ukraine’s central government, assured private property owners that their assets won’t be touched. However, by severing more than two decades of ties with mainland Ukraine, a free-for-all property grab may ensue.
Crimea is more than sunny beaches and gawking tourists.
The peninsula is home to a number of large enterprises owned by the Ukrainian government and a number of Ukraine’s leading oligarchs.
The crown jewel is state-owned oil and gas monopoly Naftogaz’s subsidiary Chornomornaftogaz, a gas extractor.
Massandra Winery also is government owned, while Ukraine’s richest businessman Rinat Akhmetov owns local utility Krymenergo and the Avlita cargo port. Billionaire Dmytro Firtash owns chemical plants Crimean Soda Plant and Crimea Titan.
Should these enterprises suddenly find themselves under Russian, or at least independent Crimean jurisdiction, they will face a number of challenges, including registration as either a Russian or foreign-owned asset, switching accounting systems, assimilating Russian law and tax system, dealing with new customs, and navigating the policies of a wholly new government.
Then there is the withering investment climate to consider.
First Deputy Prime Minister of Crimea Rustam Temirhaliyev on March 12 said Chornomornaftogaz would be taken over. Crimean parliamentary speaker Vladimir Konstantinov recently stated that Russia’s oil and gas giant Gazprom wants to start drilling in the Black Sea shelf. Also under threat of nationalization are the local branches of Ukrainian Railways and all Ukrainian military installations and property. “Ukrainian private companies, if they are legally registered and operating in Crimea…will work just as well as before,” Temirhaliyev said.
He stated that Russian banks have begun to enter the Crimean market, although Ukrainian banks could continue to operate if they register as foreign banks, and that the transition to the Russian tax system will require about six months.
However, Expert Rating analyst Vitaliy Shapranon published on his Facebook page a decree issued by Aksyonov that imposes limitations on money outflows from Crimean banks and the nationalization of commercial banks. Ukraine’s central bank on March 13 denied introducing any limitations on withdrawing cash through ATM machines or from deposit accounts in Crimean banks.
Experts are predicting “legal chaos” as a result. “Neither Ukrainian nor Russian law has a mechanism for re-registering property rights from one country to another,” argues Ivan Herasymenko, lawyer and director of Investment Service Ukraine. In the worst-case scenario, assets could be re-distributed forcefully, says Dmytro Boyarchuk, director of the socio-economic research agency CASE-Ukraine. Uncertain property rights creates an environment whereby business owners cannot plan ahead or invest since their assets might be seized by a rival in a month.
Analysts and business people alike agree that
the investment climate has changed for the worst in Crimea, which will dampen
growth and modernization. “The presence of Russian soldiers and an uncertain
future has ruined the investment climate,” Mykola Orlov of the law firm OMP
told the Kyiv Post. “The government was not investor friendly to begin with,”
Orlov says. “I don’t expect even Russian private investors to come, let alone
Western investors.”
Kyiv and most Western governments reject the
legality of the upcoming March 16 referendum in Crimea, and thus any
independent or Russian Crimea.
Crimean businesses
Secession could mean the breaking of production
cycles in heavy industry. The chemical factory Crimea Titan in particular,
which produces industrial pigments, is dependent on raw materials from ore-enrichment
plants located in Ukraine. A short-term disruption of supply and sales is
likely. The massive $300 million investment program into the business by parent
company Group DF – also belongs to Firtash – is now under threat as well, the
business website delo.ua reports.
This fate lies in the medium and long-term
future. In the short term, most major Crimean businesses the Kyiv Post surveyed
said that their enterprises were continuing to operate normally, not
experiencing financial troubles or had disrupted supply in and out of the
peninsula. However, representatives of Inkerman Wines and Morskoy Bank stated
that they were reviewing their business plans, since the political situation is
very fluid.
Crimean Vodka Company owner Neil Smith stated
on March 10 that despite the difficult political situation, the company is
working normally. However, he too expects the general investment climate in
Crimea to be “spoiled” for several years. “Despite the different scenarios of
political future for Crimea,” Smith said, “the authorities will need a huge
effort to restore the investment climate.” Crimean Vodka Company owns the
Medoff vodka and Koktebel wine brands.
Crimea is also home to assets owned by other
Ukrainian oligarchs. They include Konstantin Zhevago’s Zaliv shipyard and Solar
Activ solar power facilities, reportedly owned by former presidential chief of
staff Andriy Klyuyev. He denies being the ultimate owner of the company,
however.
Energy projects at
risk
The loss of Chornomornaftogaz would have
immense economic implications for Ukraine. The company produces an estimated
1.65 billion cubic meters per year and has the potential to extract up to 3
billion more, according to Hubs, a local media outlet. However, on March 4
Aksyonov moved to seize this asset outright by attempting to replace its
director Serhiy Golovin with Andriy Ilyin, but the parent company refused to
recognize him. Also, the company stated that armed men had appeared near the
company’s premises.
The dispute over this strategic asset begs the
question if Crimea or Russia will grab the gas-rich fields lying just off the
coast of Crimea. Zenon Zawada of the investment firm Concorde Capital says, “Beyond
Chornomornaftogaz the loss of Crimea will cost the Ukrainian government some of
its offshore natural gas resources in the Black Sea.”
Two potential gas-bearing territories off the
Crimean coast alone hold about 3,000 billion cubic meters of resources and can
potentially provide up to 14 billion cubic meters of gas per year, according to
the preliminary estimates of the Ukrainian government and potential investors.
As of March 13, Chornomornaftogaz is operating normally, Energy & Coal
Industry Minister Yuri Prodan reported.
A number of global stakeholders are following
the Crimean events closely to update their plans for drilling the Black Sea
shelf.On Sept. 25 the Ukrainian government , American energy giant Exxon
Mobil, Anglo-Dutch mammoth Royal Dutch Shell and Romanian oil company OMV
Petrom signed a deal binding them to conclude a production sharing agreement
for the Skifska offshore gas field. However, the actual PSAs were never signed
and no one can be certain if it ever will be.
At an analysts meeting at Exxon Mobil on March
5, Senior Vice President Andrew Swiger declared: “In Ukraine, we maintain our
interest in the Skifska license, but it is on hold due to current circumstances.”
According to shalegas.in.ua, the agreement to
extract hydrocarbons in the Skifska Area could straightaway add $325 million to
Ukraine and increase mid- and long-term national natural gas production by 5-10
billion cubic meters per year, while Ukraine consumes up to 50 billion cubic
meters of gas per year.
Moreover, on Nov. 11 Ukraine signed PSAs with
key European energy companies – Italian Eni and French EDF. The agreements imply
joint drilling at the Black Sea shelf. Now the projects are at risk.
Kyiv Post business
journalist Evan Ostryzniuk can be reached at [email protected].
