Three of Ukraine’s five richest businessmen are set to clash in an English court over an asset in Ukraine potentially worth billions of dollars.
With official documents expected to be made public, the case will likely provide a unique insight into the shady privatization of giant state enterprises in the 2000s and the web of complicated relationships among the nation’s rich, who are often friends and rivals at the same time.
The lawsuit, which could drag on for years, will revisit questions about the unfair redistribution of national assets that marked Ukraine’s privatization process, and made a handful of those close to power super-rich. Not only did those deals fail to benefit the public, the non-transparent transfer mechanisms remain in place, as do many key people.
Victor Pinchuk, Ukraine’s second-richest man whose fortune was estimated at $3.8 billion by Forbes this year, on March 12 sued two of his fellow oligarchs Gennadiy Bogolyubov and Igor Kolomoisky in the High Court of London. In his claim, Pinchuk alleges the duo breached a contract and trust by failing to place a major asset under his ownership.
The asset in question is Kryviy Rih Iron Ore Enrichment Plant, a major ore mining company in Dnipropetrovsk region, which was privatized in 2004 for some $130 million. Its value may have grown more than tenfold since then.
Pinchuk owns significant assets in steel pipe and railway wheel industries, as well as a number of media companies. They are all assembled under his umbrella EastOne investment holding.
He is also a renowned philanthropist who recently signed a pledge to donate half of his fortune to charity through an international initiative started by American billionaires Bill and Melinda Gates and Warren Buffett. Pinchuk is also the son-in-law of former President Leonid Kuchma, who was in power when the privatization of the asset in question took place.
Bogolyubov and Kolomoisky also have significant business interests. They co-own Privat Bank, Ukraine’s largest by assets, as well as a number of media, airlines, iron alloy, manganese and other enterprises, including oil and petroleum companies.
They also co-own oil producer JKX Oil & Gas, which is listed on the London Stock Exchange, and a number of firms in Russia, Australia, Ghana and other countries. These and other assets form Privat Group, the flagship holding of the two defendants.
Bogolyubov lives in London, hence the choice of jurisdiction by Pinchuk and his legal team. Kolomoisky lives in Switzerland. This year, Forbes estimated Bogolyubov’s and Kolomoisky’s fortunes at $1.7 and 2.4 billion, respectively.
In his claim to the High Court, Pinchuk alleges he reached an agreement in July 2004 with Kolomoisky and Bogolyubov that they would purchase Kryviy Rih Ore Enrichment Plant (KZhRK) on his behalf, and transfer the stake to his company at a later date. Pinchuk claims the oral contract was made in the presence of three witnesses.
In August of the same year, the plant was bought by a company controlled by Bogolyubov and Kolomoisky for nearly Hr 690 million, or $130 million at the time. Pinchuk claims he deposited the money for the purchase onto Privat Bank’s account at a non-commercial rate.
According to Pinchuk’s claim, the deposit was withdrawn in March 2005, when his offshore companies bought Kolomoisky and Bogolyubov’s offshore company Alcross that was supposed to control KZhRK, and paid 10 percent commission on top of the purchase price, bringing the cost of the deal to $143 million. But Pinchuk claims it turned out to be “a worthless shell company.”
This financial transaction, which Pinchuk’s legal team said was “well-documented” is at the heart of the legal claim. Oleg Mubarakshin, chief legal officer at EastOne and spokesman for this case, said the defendants’ failure to transfer the asset to Pinchuk after this transaction was a case of “primitive fraud.”
But Ian Terry, a partner at Freshfields Bruckhaus Deringer who represents Bogolyubov in this case, said Pinchuk’s claim is “without foundation.” He told Kyiv Post that “Mr. Pinchuk’s claims against Mr. Bogolyubov will be vigorously defended.”
The legal procedures in British courts are highly formalized and a similar hearing can take up to two and a half years, as was the case between two Russian oligarchs Boris Berezovsky and Roman Abramovich, which started in 2011 and finished earlier this year.
It seems that Pinchuk, however, hopes for a settlement. Mubarakshin says many similar cases in London have ended with a settlement. “Very often, the claimants received everything they asked for (through a settlement),” he says.
Other observers note that, unlike a court decision, a settlement can keep conditions confidential. Moreover, in the High Court of London, all documents and hearings are open to the public, unless all parties specifically request to keep the trial closed. Rupert D’Cruz, a London-based barrister specializing in commercial disputes involving former Soviet countries, says judges are often reluctant to grant such a request, though.
In the Ukrainian oligarchs’ case, the defendants are now expected to submit a written defense addressing the allegations laid out in the claim. Bogolyubov’s solicitor Terry said his client has yet to file his defense. Kolomoisky’s representatives did not respond to requests for comment.
A look back at privatization
Pinchuk’s claim has shed light on the murky privatization process of the early to mid-2000s, with more details expected to emerge as the case progresses. It may also become a unique probe into the secret world of Ukraine’s oligarchs, their styles of conducting business, rivalries and personal lives.
There is a chance that some, including the nation’s richest man Rinat Akhmetov, may become witnesses. Akhmetov’s name already features in the claim twice: first as one of three witnesses to the 2004 agreement, and a second time as a buyer of half of KZhRK in 2007 from the Privat Group duo. Akhmetov refused to comment for this story while the case is in progress.
EastOne’s Mubarakshin says Pinchuk’s legal team is still hoping to avoid calling witnesses, which are used to fill in the gaps left by a lack of supporting documents. “We feel that even without witnesses we have enough proof,” he says.
Until its privatization in 2005, KZhRK was a part of Ukrrudprom, a national holding comprised of 10 iron ore producing plants that controlled about 70 percent of Ukraine’s iron ore market. KZhRK was one of the smaller companies within the holding.
In 2004, a number of oligarchs, mostly Ukrainian, struck an agreement to share out Ukrrudprom, which was soon sealed by a law passed by the pro-presidential majority in parliament.
The law On Peculiarities of Privatization of the State Open Joint Stock Company Ukrrudprom stated that in order to consolidate ownership in some of Ukraine’s major enterprises, only those who already owned at least 25 percent stakes were allowed to take part in the privatization.
Pinchuk, who had no stakes in any of the plants due to be privatized, nevertheless supported the law along with his whole faction in parliament, which gave 36 out of the 276 “yes” votes in the 450-seat Verkhovna Rada. Analysts at the time wondered why Pinchuk, who had no apparent gain from the insider privatization, supported the law.
Most privatization tenders took place in the summer and autumn of 2004. Akhmetov bought out five of the plants, Russian oligarch Vadim Novinsky bought two, and Privat Group – the other three, including KZhRK.
After the Orange Revolution in 2005, the privatization of Ukrrudprom was unsuccessfully challenged in the Constitutional Court as part of an ongoing re-privatization campaign led by the then Prime Minister Yulia Tymoshenko.
That same year Pinchuk and Akhmetov lost ownership of another asset they jointly privatized for $850 million in 2004, the Kryvorizhstal Steel Mill, which was resold for $4.8 billion from Lakshmi Mittal of Mittal Steel, the third richest man in the world at the time.
The sale remains the most expensive Ukrainian privatization deal to date, as well as a textbook case on how the nation lost out on privatizing its biggest industrial assets.
Nearly eight years after its privatization, the ownership of KZhRK is up in the air again. Pinchuk is claiming the property as well as its profits since March 2005, which could run over $2 billion, according to his management’s estimates.
Those estimates might not be that far-off. Last year, Dragon Capital investment bank assessed the value of the plant at $1.36 billion. Also, KZhRK paid out more than Hr 2.4 billion (over $300 million) in dividends in 2009-2011, according to independent audits posted on the company’s website. Information for other years is not available.
Kyiv Post editor Katya Gorchinskaya can be reached at [email protected]
