When you come to another country, you need to find a local specialist and understand your risks
Nataliia Osadcha, Partner of SIUTKIN&PARTNERS (S&P),
Kyiv, Ukraine, fri, April, 21, 2017
How would you characterize the investment market in Ukraine?
The investment market in Ukraine is very attractive, but is not fully developed yet. It attracts foreign companies, as it is almost impossible to enter a submarket in the West and to get a good profit out of it. Everything there is strictly regulated at the legislative level. In addition, all the niches are busy, and it is very hard to win a market share from some other players. While dealing with large business, we understand that Ukraine is still a very interesting investment market. It stays attractive, despite military actions, political and other risks. The reasons for it are the unique opportunities, the profit and capitalization which can be achieved in this country. Foreign investors admit that only 4 years are enough to make rather heavy investments pay off in Ukraine.
What are the major risks for investors?
Major concerns are raised over protection of property, the supremacy of law, Ukrainian legal system and corruption. Everyone understands that the main risk is the loss of assets. Millions or even a billion can be invested in business and in the end the investor can be left with nothing.
As far as I know, that is exactly what you are dealing with.
You are right. We have been protecting investments in Ukraine for more than 20 years. Over the last 10 years, we have protected a lot of enterprises from illegal seizures and gained a great deal of experience in this area. We know how raiders think and how they act. The risks of asset loss can be calculated. But there are not so many specialists in this area. In order to become an expert in this field, one should devote decades. Sometimes forcible takeovers may last from 1 up to 5-6 years. And only after fighting in such wars, having gained proper experience, skills and knowledge, it is possible to predict the result which may await the investor coming to Ukraine with a high degree of probability. These are systemic issues and they always have typical business mistakes.
Why do investors continue to lose assets in Ukraine? What are their typical mistakes?
Let me draw a parallel. Austria has one of the most difficult ski slopes in the world. That is why injured skiers are regularly picked up by a rescue helicopter. Many skiers are so confident on their skills that they do not take an instructor. As a result, they go off track and fall on their first slope. But wise people take a local instructor, who has been skiing in these mountains for 20 years and who can show them all of the dangerous places. You need to spend just 3 days on learning, but you will remain alive and healthy, while enjoying the fun.
When you come to a foreign country with a different mentality and imperfect system of state administration, you need to find a local specialist and get to know your risks. Western investors often believe that they can figure it out themselves. They make no attempts to find people who would help them to get around these dangerous places. I have had an experience talking once to investor who lost an active asset in Ukraine in the amount of $400 million. If he came to us at the very beginning of his project, he would change the terms of the deal and save his investments. Or he would receive from us a conclusion that it was better not to make such a partnership, meaning he is still in black.
Does it mean that Western lawyers and auditors are unable to help?
After having received a conclusion of well-known foreign companies, some investors still come to us. We explain them that in 3-6 months they will have to face, for example, some difficulties. Forecasting dates are the only mistakes we can have. The consultants who serve them cannot see the whole picture, as it is necessary to take it to a whole new level and consider the bigger picture.
One of our clients was going to buy a piece of land in Ukraine. He received a conclusion of a large foreign consulting company represented in Ukraine that the piece of land is not troubled and they should start the construction on it. We worked with them on other issues, but we were always saying that literally in a few months they would have big problems right up to the criminal charges. The client did not believe us and invested $150 million in the project. As a result, the client faced a huge number of criminal cases as well as a constant search and seizure in the company. When it comes to the matter of saving big investments, a simple lawyer cannot see such risks.
We also started as lawyers. But we moved beyond the pure legal practice. When it comes to the asset security, legal instruments are only a part of this huge process. You also need to evaluate how the opponent thinks, how he will fight for the asset, which method he will use. It is necessary to evaluate what legal and non-legal mechanisms can be used for defense. During the process of illegal seizure, in addition to the above-described legal and strategic components, there are also a number of issues, related to politics and working with media.
The problem is that during the initial audit, investors do not even ask about the risks of losing their assets and how it can possibly happen. And it is not right, because it is not easy to save the company when the conflict went already far enough.
How sensitive are investors to similar situations, happening to them or to other foreign companies in Ukraine?
Very sensitive. They are ready to discuss it actively. But still most of them do not want to believe that they can also be in the same situation. For some reason, many investors naively believe that their partner will never betray them. In fact, he does not betray only if all the terms of the partnership are very clearly spelled out. And for every unfriendly action you take a responsibility. In other words, there are clear rules of the game. But such mechanisms need to be built. Miracles do not happen. When the business process is launched, Ukrainian partners may think (what they often do) that they do not need a foreign investor anymore. Especially, if they see that they will not take any responsibility for that. Unfortunately, this is the mentality. It is different from the mentality of European countries, where business has principles, reputation.
Do many investors return to Ukraine after having already lost their money once?
If a client chooses to work with us, he will not have the reasons to leave. Illegal actions can be carried out not only from competitors, but also from the government. In such cases investors often say that they have to wind up business.
It happens as they cannot cope with the amount of criminal cases, inspections, summons to appear in a prosecutor's office, legal proceedings, etc. And thereby business is practically destroyed. But if we already managed to save the client in a difficult situation, it is much easier for us to continue moving this way. It can also happen that any illegal actions from the side of either competitors or government authorities may turn into sanctions for those or even criminal liability. Then a company has an image of a structure, which does not tolerate any illegal form of abuse. After resolving a conflict once, it develops and implements a strong security system, cleans all vulnerabilities and doubtful places in the corporate structure, documentation and contracts of the company, evaluating all documents from the previously experienced risk points. The number of problems is dramatically reduced. The way of thinking changes too. We have the clients who understand that it is necessary to initiate criminal cases against the government officials, who commit illegal actions. They are asking on themselves, whether there is anything that can be done within the legal framework. As a result, it is clear that no one wants to deal with such a company.
What if the conflict has already begun? What would you recommend to do?
That is to say, we work only with shareholders and CEO, if the conflict has already begun. It is not our whim. The reason behind it is that on this stage confidentiality
is required. At times we just cannot understand how the disclosure of the information has happened, where the leakage occurred. By the way, the companies’ lawyers are often very jealous when the external experts come. But it would be the same, if a therapist was jealous to a surgeon, who had to make a surgery in order to save the patient`s life. If a surgeon does not come on time, this patient will simply die. Then a therapist does not need to treat him. It is exactly the same in business.
Which actions should be taken in order to save the assets?
There is no general prescription. We had cases that were very similar externally, but the methods, actions and strategies for their solution were completely different. Strategy and plan may change several times a day, depending on what steps are taken by the opponent. Very serious wars are fought for serious assets.
Do Ukrainian companies have practice of defending themselves against attacks?
No, they try to solve the problem in a different way. But if you buy your way out once, you will do that constantly, and then your business will be taken away. Foreign companies have the advantage of not working in this manner. They have a clear understanding that there is a rule of law, and it is necessary to act within the legal boundaries. And believe me, acting in legal and public boundaries is the only possible option to get out of the seizure of property situation. The companies which fight in this manner are the flagships for Ukraine. Because you know, they try to change something in Ukraine, behaving this way. As a result, the officials willy-nilly learn to follow the law, realizing that there are couples of norms and regulations which need to be observed and are necessary to follow.
The most significant experience in your practice was probably the situation which happened to a Swiss – Ukrainian company Risoil S.A., which invests in building a grain terminal in Illichivsk port. The amount of $100 million is at stake. And S&P pleads the case for this company, right?
Exactly. Still, we deliberately did not give and do not give any comments and our evaluations on this case throughout the whole process. Nevertheless, we need to admit that it is probably one of the most difficult cases that we have experienced over the last 20 years. As it was already said, for now we just cannot give any comments regarding this case. But when the case is closed, we reserve the right to announce the reasons and history of the conflict.