Toward the end of this week, on July 15, the Economic Court of Kyiv will continue hearing a rather questionable lawsuit brought by the General Prosecutor’s Office. Called to protect the interests of the state, this time around the prosecutors, perhaps unwittingly, are doing damage to these interests. Proof of this it the lawsuit itself and the decision previously made by the General Prosecutor’s Office. But more on this later.
In the meantime, the readers have to be reminded about two prized assets (the resort center More [Sea] in the southern Ukrainian town of Alushta, and the hotel Ukrayina in central Kyiv. Quite a distance apart, they have one thing in common. The Russian investor, Bank NRB Ukraine, has invested heavily in both of them.
Reviving the resort center in Alushta was no simple task, but everything turned out splendidly. In terms of the level of service and comfort, More ranks on a par with the world’s finest resorts. In addition, the investor has built a modern aqua park and a hotel in Alushta and started up several other recreational sites in the vicinity. As a result, the job market in Alushta (pop. 13,000) added 1,000 new jobs. It is worth mentioning that in the past few years NRB Group invested well over $75 million in various construction projects across Ukraine.
Obviously, the investor had plans for a similarly dazzling revival of the hotel Ukrayina, which was built over six decades ago and has been in need of a fundamental reconstruction for many years. This past October the State Property Fund of Ukraine and the above mentioned investor established a joint venture (in the form of a closed joint-stock company), which was to rebuild and modernize the hotel within a short period. This was preceded by a tremendous amount of work. Suffice it to mention the cost and effort that it took to push this idea through the Cabinet of Ministers, parliament, and the State Property Management Authority under the president of Ukraine. The State Property Fund appraised the hotel’s property in line with the Ukrainian laws. The founders divided the collective investment fund equally between themselves. The State Property Fund was to make its contribution in the form of the property assets of the hotel Ukrayina, and the investor was to contribute $20 million in investment. It will be recalled that this hotel was previously managed by the State Property Management Authority under the president of Ukraine and was transferred to the State Property Fund shortly before the joint venture was established.
At the same time, the legal entity Hotel Ukrayina was closed down or, to be more specific, a decision to this effect was approved. However, because effecting this decision is a rather time-consuming and bureaucratic procedure, according to legal experts, the launch of the joint venture was much delayed. In the meantime, the Orange Revolution swept through Ukraine, and the new leaders began a revision of investment and privatization projects. The hotel Ukrayina, and more specifically its investor, was immediately blacklisted for reasons best known to those in high places.
According to one theory, all the blame for this goes to the infamous State Property Management Authority, headed at the time by the now notorious fugitive Ihor Bakay. The new government was quick to label as suspicious all of its transactions and contractors. After examining inspection materials, already on May 11 the General Prosecutor’s Office issued a decree, which, in part, found the creation of the joint venture Hotel Ukrayina to be illegal, allegedly designed to fraudulently remove the hotel from state ownership in favor of a third party. The General Prosecutor’s Office found the actions by State Property Fund Officials (allegedly acting in collusion with the State Property Management Authority chairman, Ihor Bakay) to be illegal, and accused the investor of violating the obligation to contribute its share to the collective investment fund of the joint venture. (Lawyers of NRB Ukraine claim that court files contain a financial document that confirms that the investor has contributed UAH 54 million, one half of the amount agreed upon, whereas the current Ukrainian legislation allows investors to contribute the second part within one year’s time).
The case has not gone any further than the economic court. The prosecution is not demanding any punishment, which is not something that this court does. It is demanding the revocation of state registration of the joint venture and nullification of the transfer of Hotel Ukrayina assets. Interestingly enough, the prosecution’s main argument is that the state has incurred damages equal to the collective investment fund of the joint venture. However, the State Property Fund owns only 50% of the investment fund, with the other half belonging to the investor.
It remains to hope for a fair trial. Let us hope that the court will take into account the written statement from the new State Property Fund chairman, Valentyna Semeniuk, in which she confirms that the joint venture Hotel Ukrayina was established in keeping with the law. In her view, the joint venture can be dissolved only with the consent of its participants.
There is one more circumstance to be considered. It is ill-advised to create obstacles for a bona-fide and effective Russian investor not only because he can take offence and withdraw from Ukraine. In this case his place might be taken by certain infamous figures, such as those who are secretly controlling Ukraine’s natural gas exports, or runaway oligarchs who seek to use Ukrainian leaders in their political games in Russia. This would not only damage the country’s reputation, but also cause losses in financial and political terms. Yet perhaps the most important aspect to this story is the fact that competing for the right to modernize the hotel were also the owners of the nearby entertainment and commercial center Hlobus [Globe], who previously tried to buy this right from NRB Ukraine. Quite likely, there are also people among the nation’s leadership who are themselves eyeing this prized hotel. How much truth is there to the rumors alleging that one famous person, who claims to have once and for all wound up his (her) own business operations, is also among those vying for the hotel? Even the Prime Minister had her say in the hotel controversy. In her July 30 address, which was aired by several television channels, Yulia Tymoshenko stated that a number of companies will undergo repeat privatization, naming the hotel Ukrayina among them. Notably, this statement came weeks before the court was expected to hand down its ruling. Some might downplay this as lack of experience or inadequate knowledge of laws that specifically forbid pressuring the court. A more realistic explanation in this case is the elementary lack of respect for ownership rights and the investor, which is quite characteristic of the current semi-Socialist government. The country’s investment image pales against the backdrop of such decisions and statements by those in power.
