“The sanctions policy has become more systematic, and the state has defined priorities that it tries to adhere to,” says Denys Shkarovsky, partner of VB Partners.
— How has Ukraine’s sanctions policy changed in recent years? What key changes have Ukrainian sanctions legislation undergone?
— Ukrainian sanctions are a fairly new field, launched in 2014 as a response to russian hybrid aggression. And therefore, considering that this institute has existed for less than ten years, it is difficult to talk about changes. Initially, the sanctions were created as an opportunity to quickly respond to challenges to the national security of Ukraine that existed at that time. They were supposed to apply to the state or non-residents. Subsequently, the sanctions mechanism began to be applied to residents of Ukraine, which is illegal.
In 2022, additional mechanisms were introduced as a response to new security challenges. The main change was the possibility for the Ministry of Justice of Ukraine to file lawsuits for the nationalization of assets of persons who are connected to the russian federation, commit actions to support aggression, support the occupying country and its troops directly or indirectly, in particular, pay taxes, invest in russian securities and carry out other indirect forms of war financing.
Over the past year, the sanctions policy has become more systematic. The country has identified the priorities it is trying to follow by developing (1) the Individual Sanctions Roadmap prepared by the International Working Group on Sanctions against the russian federation; (2) Action plan on strengthening sanctions against the russian federation and others.
— Are the currently available mechanisms for the sale of sanctioned property effective?
— It is difficult to talk about the effectiveness of the mechanisms, since they are only half applied. There is a decision to nationalize property, which includes funds, small assets in the form of apartments or vehicles, and large enterprises. In particular, such property includes a share in one of the largest shopping centers Ocean Plaza, plants of the «Aerok» group and other industrial enterprises. The case on the nationalization of dozens of regional energy companies, hotels and other assets is under consideration.
Also, according to the Ministry of Justice, a lawsuit was recently filed regarding the nationalization of a number of machine-building plants that were connected to the HMS group. Thus, the processes have been launched, but no auction for the sale of this property has yet been completed. Therefore, it is difficult to assert something about the effectiveness of the mechanisms in general.
However, considering that less than a year passed from the moment of nationalization to the announcement of the auction, they are rather effective. It will be possible to understand whether the state can cope with such a large amount of property and evaluate the effectiveness of the sale only in a few years.
— What are the risks for honest business in connection with the application of sanctions to counterparties?
— For those who are currently working with russia and Belarus, the question of integrity does not arise. There is a risk for global business that intersects with russians outside of Ukraine. If an international business operates in russia, then the first risk for it is to appear on the list of sponsors of terrorism, which is maintained by NACP (National agency of corruption prevention). This is more of a reputational risk, since there are no direct legal consequences of being on this list. However, this may be the first step to the application of official sanctions by the President of Ukraine at the request of the National Security and Defence Council of Ukraine, and then it will be much more difficult to correct the situation.
The second group of risks includes businesses that have historically acquired assets of russians both in Ukraine and abroad. Such assets may be the subject of a lawsuit by the Ministry of Justice at the HACC, and they may be nationalized. So if you have assets that you have acquired from russians or russian-related companies, in particular indirectly, then it is worth checking whether there are risks of their potential nationalization.
It is worth noting that the Ministry of Justice can file a lawsuit not only against persons to whom sanctions are directly applied, but also against property that is indirectly owned/managed by a sanctioned person and which is hidden from sanctions.
If you have assets expressed in property rights, in property under contracts, they can also be nationalized.
The fourth block of risks is assets or joint ventures with the russians. An example is the case regarding the nationalization of a part of one of the largest shopping centers. Our company was an adviser to the Ukrainian owners on sanctions issues at the stage of communication with the Ministry of Justice and helped to prove that this is indeed a Ukrainian investment, and not an investment that hides russian capital.
Another example can be the case of the Shell company, in which a lawsuit was filed for the nationalization of a share in a Ukrainian company that belonged to russians.
— What preventive measures to minimize sanction risks would you recommend to clients?
— First of all, if you have historically worked with russians, then it is worth checking whether there are no potential risks of sanctions or asset nationalization.
Second, sanctions cases are often related to criminal proceedings against the foundations of national security. And that is why it is very important to monitor all the risks surrounding the business from this side in order to minimize them even more and the nascent stage.
If you are at risk of potential asset nationalization, I recommend proactively communicating with the Ministry of Justice as soon as you become aware of it. It seems that the Ministry of Justice is ready to consider and take into account the proposal, if it is justified. However, despite proactive communication with the Ministry of Justice, it is advisable to prepare your position long before filing a claim for nationalization. Such lawsuits are considered in a very simplified manner within 30 days, and there is no time for the preparation of documents, even for their translation into Ukrainian. If you are not at least 50-60% prepared at the time of filing a lawsuit, you will most likely lose the case.
— How would you characterize the work done by the Ministry of Justice and the HACC in the process of recovering assets from state revenue?
— The Ministry of Justice carries out high-quality work in this direction, and HACC examines these cases in accordance with available opportunities. But the key problem is not in these legislatured, but in legislative regulation.
Of course, if it is a case that involves two or three participants with one asset, then theoretically it can be considered within 10 days or a month. But there are cases in which tens or even hundreds of people are involved, where the same number of assets appear. In these cases, it is impossible to meet the deadlines stipulated by the Code of administrative proceedings of Ukraine. For example, in the VS Energy case, there are over 120 participants, and not all of them are affiliated with this group. In this case, we represent a Ukrainian bank that foreclosed on a mortgage. This is a market transaction, but the specified asset is on the list for nationalization. And there will be more and more such processes. Currently, the nationalization of “Kyivstar” is being discussed, which, obviously, will also be a big burden for the court. It will be very difficult to consider this case within the time limits established in the administrative procedure set for the HACC. And it is important that such lawsuits are not at all characteristic of HACC, which is a court of criminal justice.
— What changes does the legislation require in recovery procedures?
— First, it is necessary to take these cases from РФСС, because they are unsuitable for this court. It is obvious that they should be considered by other courts.
Secondly, it is necessary to cancel the time limit for consideration of such cases, because they are not reasonable from the point of view of the scope of the case.
And thirdly, the Ministry of Justice should take a more thorough approach to defining what is a russian asset to which the sanction should be applied. This would simplify the work of both the ministry itself and the court, as the number of participants would decrease.
Separately, I want to note that there is no responsibility in Ukraine for violating sanctions. In more developed systems, it is provided for violations, assistance in circumvention of sanctions, concealment of assets. Ukraine should implement more complex mechanisms.
