Next month will mark one year since PrivatBank was nationalized.
The nationalization sucked $5.6 billion from Ukraine’s state budget — money used to plug the hole left in the bank’s capital by its former owners, Igor Kolomoisky and Gennadiy Bogolyubov.
The December nationalization has spawned more than 400 separate court cases, in Ukraine and as far away as London.
Along with brothers Ihor and Grigory Surkis, the bank’s former owners — Igor Kolomoisky and Gennadiy Bogolyubov — have launched dozens of lawsuits against the National Bank of Ukraine and PrivatBank, as well as an arbitration case in Stockholm.
The litigation is clouding PrivatBank’s future prospects, as is a shady business deal linking the bank’s former owners and a close ally of Ukrainian President Petro Poroshenko.
Multiple Ukrainian news reports — supported by multiple sources within the banking and energy industries — have accused Bloc of Petro Poroshenko lawmaker Ihor Kononenko of arranging a deal by which he would acquire a number of the country’s regional power distributors — or oblenergos — from the Surkises in exchange for arranging that the Surkis family wins positive court rulings in PrivatBank cases.
That deal’s value depends on one condition: that the government increases energy tariffs, pumping millions of dollars more from Ukrainian energy consumers to the regional distributors, and the power plants that feed them.
Kolomoisky denies any wrongdoing at PrivatBank, and says that a pressure campaign from the government forced him to ask the state to nationalize it.
Kononenko did not reply to multiple requests for comment.
PrivatBank spokesman Oleg Serga declined to comment, calling it an issue for the central bank.
NBU Spokesman Andriy Kravets told the Kyiv Post that appellate court decisions in PrivatBank cases involving the Surkis case had “violated procedural law” and that the courts “enacted unjust decisions.”
“When state capital entered PrivatBank, the related parties’ funds were converted into the bank’s capital, according to the demands of the law (the bail-in procedure),” Kravets wrote. “This means that these funds were put into the bank’s capital to minimize the cost to the state of rescuing the financial institution.”
Bailing in
Much of the litigation involving PrivatBank and the NBU revolves around a December decision on which portions of the bank needed to be bailed in.
The bailing-in process meant that certain investors took a loss in order to partly stabilize PrivatBank.
One well-publicized group consists of foreign holders of the bank’s London-issued Eurobonds, around $600 million of which were bailed in as part of a procedure under Ukrainian law.
The Eurobond holders include investors that bought the bank’s debt, as well as parties that NBU officials allege are related to Kolomoisky and Bogolyubov.
That group filed two arbitration suits against PrivatBank in London on Nov. 8, demanding $335 million. The cases could take years to resolve. If successful for the bondholders, they would see the state-owned lender pay out millions to wealthy foreign investors, some of whom are connected to Kolomoisky.
But the bail-in decision’s most powerful casualties could be Grigory and Ihor Surkis. The pair have been associated with Kolomoisky, with Ihor owning a 24.6 percent stake in Kolomoisky’s 1+1 TV channel.
The two — along with other family members — were identified as related parties by central bank officials in advance of the nationalization of PrivatBank.
That allowed the government to convert their deposits into the bank’s share capital at a time when $5.6 billion had, at least on paper, disappeared from taxpayer’s pockets and from depositors who had kept their savings in the Dnipro-based lender.
The Surkises immediately filed dozens of lawsuits, with different members of the family filing individual cases totaling around $300 million, to retrieve their money.
Coincidental timing?
Like many other claims in the Ukrainian legal system, the cases moved slowly for the first few months after their filing.
But on May 17, a lower administrative court ordered that the NBU and PrivatBank pay Hr 1.1 billion ($41.4 million) to the Surkises.
One week later, reports began to emerge in the Ukrainian media about a deal involving Energomerezha, an energy company controlled by the Surkis brothers and Bloc of Petro Poroshenko faction lawmaker Ihor Kononenko.
The reports indicated that the Surkises were selling their stakes in a number of regional energy distribution companies, including Lviv, Ternopil, and Prikarpattia oblenergos.
Over the summer, the Surkises got more positive decisions against PrivatBank, culminating in a Nov. 8 appellate ruling in their favor. The NBU told the Kyiv Post that it filed an appeal to the Upper Administrative Court, and is considering submitting a case to the High Council of Justice.
Two days after the Nov. 8 decision, another report appeared in Ukrainian news website Ukrainska Pravda, claiming that the brothers had relinquished control of the Khmelnitsky, Kharkiv, and Mykolaiv oblenergos to Kononenko.
If true, the Surkis brothers retain ownership of Zaporizhoblenergo, also partly controlled by the oligarch Konstantin Grigorishin. At one point they owned more than one fourth of all of Ukraine’s oblenergos.
Oleksandr Paraschiy, a Concorde Capital research analyst, wrote in June when rumors about the Surkis-Kononenko deal began to emerge that, “it would be very negative for the image of the current government, as well as rule of law in Ukraine, if it’s proven true that somebody from Poroshenko’s entourage is going to use his authority to recover the lost money of the Surkis family (at the cost of the state bank) in exchange for valuable assets in the power distribution sector.”
“If there’s any silver lining to this brewing corruption scandal, then such an operation will make the recovery of bailed-in money much easier for all the bank’s creditors, including its Eurobond holders,” Paraschiy added.
Although nearly every person involved in either banking or energy that the Kyiv Post contacted said that they were aware that Kononenko and the Surkis brothers had cut a deal, not one was willing to go on the record about it.
One individual close to the oblenergos who spoke on condition of anonymity due to fear of reprisals told the Kyiv Post that Kononenko had established an office in Kyiv to manage the energy distributors. The Surkis brothers — who provided their expertise on how to manage oblenergos at the beginning — had proved themselves no longer useful, leading to them being cut loose.
“Something went wrong,” said Oleksandr Savchenko, a former banker and ex-NBU economist who runs Kyiv’s International Institute of Business. “Or from another perspective, it could be an element of earning money.”
“Every (court) decision costs money,” he added. “For us, as a rule, behind every ruling that’s made there is some sort of personified material interest.”
The press secretary for Khmelnitskoblenergo hung up on the Kyiv Post when asked about the deal. Kharkivoblenergo and Mykolaivoblenergo declined to comment, while Cherkasyoblenergo directed the Kyiv Post to a balance sheet which showed the company’s outdated 2016 ownership structure.
Bloc of Petro Poroshenko lawmaker Oleksandr Granovsky, known for his vast connections among Ukraine’s lawyers and judges, has been accused of providing lawyers for the Surkises and pressuring judges involved in the case, issued a statement in response to questions from the Kyiv Post over whether he was involved in the deal.
“I am not aware of any such deals and, as a result, am taking no part in them,” he told the Kyiv Post in a statement. “Moreover, I am unaware of exactly how I could take part in them, if I wanted to.”
He added: “I am acquainted with almost all of the best lawyers in Ukraine, but none of them professionally depend on my opinion or activity.”
Cash on its way
Meanwhile, a potential upcoming change to the country’s energy tariff structure could make the oblenergos much more valuable.
The National Energy Regulatory Commission (NERC) is considering whether to raise consumers’ electricity tariffs by 25 percent.
Estimates vary on how much of this money would go to the oblenergos.
“If that is introduced, all the distribution companies will become much more valuable,” Paraschiy told the Kyiv Post.
Andriy Gerus, a former regulator on the National Energy Regulatory Commission, argued that while the tariffs would increase cash flows in general, the biggest boon would be seen at the end point: the energy producers.
“The money goes to distribution, they pay (state-owned energy distribution company) Enerhorynok, and then they pay money to the (power) producers,” he said. “Now the discussion is about making the pie into a bigger one, so it transitions through and the producers get a bigger piece.”
