One of Ukraine’s top investment funds has blurred the lines between public service and private benefit, making millions of dollars along the way.
With more than $500 million under management, Investment Capital Ukraine has been embroiled in scandal since President Petro Poroshenko took office, facing allegations of profiting off a scheme to radically hike the country’s electricity tariffs and of self-dealing by former fund employees who have moved on to government.
The explosive allegations center on ICU managing director Makar Paseniuk, an investment banker who was hired to manage the sale of Poroshenko’s Roshen candy company. Paseniuk denies the allegations.
Paseniuk and ICU deny having any untoward ties with Poroshenko or the government. A firm spokeswoman noted that many Ukrainian public officials started their careers at other financial institutions like Dragon Capital, EastOne and Arta, without attracting allegations of favoritism or self-dealing.
“We are proud of the success of our alumni who have worked in the public sector,” the firm told the Kyiv Post in a statement. “Any perceived benefit to ICU from their decisions is completely coincidental.”
A man with a plan
Paseniuk graduated high school from Episcopal High School, a tony boarding school in the suburbs of Washington D. C. that caters to political families from the U.S. capital.
He returned to Ukraine, graduating from Kyiv’s International Christian University — another ICU in his life — in 1997, briefly working as a financial journalist for the English-language Eastern Economist magazine.
“It was his first job,” said Lidia Wolanskyj, a journalist who owned Eastern Economist while Paseniuk was there. “I remember him as a very smart kid.”
From there, he moved to ING, rising through the ranks to head the bank’s Ukraine investment division. A 2009 lawsuit filed in New York City accused Paseniuk of defrauding investment fund Firebird Management by dumping worthless stocks from a failing alcohol company onto them, but the case was dismissed on jurisdictional grounds and sent to London. Paseniuk denied wrongdoing in a declaration.
The same year, Paseniuk moved to ICU, founded in June 2006. His former ING colleague Valeriya Gontareva, who went on to become a National Bank of Ukraine governor, joined in 2007. The firm is said to have helped Roshen attract foreign financing before the 2014 presidential election, as well as allegedly helping exiled oligarch Serhiy Kurchenko launder money out of Ukraine, an accusation the firm denies.
After Poroshenko’s election to the presidency on May 25, 2014, four ICU employees moved from the fund into top-level government positions at the National Bank of Ukraine, the National Energy Regulatory Commission, the Energy Ministry and the National Communications and Information Regulatory Commission.
But Paseniuk’s own work has blurred the lines between the private and public interest.
On one side, he has acted as the president’s financial adviser, and was hired after the election to oversee the sale of Roshen, which has yet to take place. ICU says the contract ended in April 2016, at the same time that the Panama Papers leak revealed that Poroshenko had set up an offshore in the British Virgin Islands to manage his companies on the same day as the bloody Battle of Ilovaisk, which turned the tide of the war to Russia’s favor.
Paseniuk has been deployed to defend the president when he has been accused of financial wrongdoing, acting in his capacity as financial adviser.
But the investment banker has also been entrusted with performing work on the state’s behalf.
Foreign agent filings with the U. S. Justice Department show Paseniuk agreeing to “subsidize” consulting fees paid by an offshore firm to U.S. lobbyist Ben Barnes Group to “promote the economic and geopolitical interests of the government of Ukraine.” The fees amounted to $220,570 over several months in 2015–2016.
“What the Ukrainian elite really lacks is a competent foreign PR agency and a quality communications strategy,” Paseniuk said of the filings in 2016.
ICU denied that there was any mixing in its work between public and private roles.
“Makar Paseniuk has never held public office nor has he been a government employee,” the firm said. “He has been and remains a business person and investment banker and continues to manage ICU’s day-to-day operations in Ukraine and abroad.”
Cashing in
For ICU, the Poroshenko era has paid off handsomely. One scheme which has sparked outrage while enriching ICU (and other investment banks) immensely is the so-called Rotterdam+ scheme, a government-set tariff on coal that has led to gargantuan profits for energy company DTEK, owned by Ukrainian oligarch Rinat Akhmetov.
The system sets the price of coal not at its Ukrainian market price, but at the price of coal imports in the Dutch ports of Amsterdam, Rotterdam and Antwerp, plus its cost of shipment to Ukraine.
Critics argue that the formula sets a price of coal that’s unfairly high, allowing the Akhmetov-owned DTEK, which owns 70 percent of Ukraine’s coal-based power capacity, to reap huge profits as electricity costs soar around the country.
Some in the Kyiv investment community defend the scheme.
“There was no approach to valuing coal before,” said Oleksandr Paraschiy, head of research at Concorde Capital. “It’s good that they estimated a market price, but of course the way they did it is questionable.”
What remains less defensible is a potential conflict of interest in how the National Energy Regulatory Commission brought the Rotterdam+ formula into existence.
In April 2016, almost immediately after Rotterdam+ was approved by the commission, which is chaired by ICU alumnus Dmytro Vovk, DTEK revealed ICU as a main buyer of Eurobonds it issued in 2013.
In retrospect, buying DTEK’s struggling Eurobonds in late 2015 and early 2016 looks like a smart move. The company was reeling from a default on a separate debt issuance as well as the economic hit it took after Russia’s invasion of Ukraine.
In an interview with Ukrainian media one month after the Rotterdam+ formula went into effect, DTEK CEO Maxim Tymchenko named ICU as a holder of the Eurobonds, saying that other firms including VTB Bank, VR Capital and Ashmore Emerging Markets had also bought the debt instrument.
But the policy’s Ukrainian critics allege that Vovk provided Paseniuk with insider knowledge of the Rotterdam+ policy. ICU was the only fund to be simultaneously managing the president’s assets and benefiting from a pricing formula implemented by a former employee, creating at a minimum the appearance of a serious conflict of interest.
“Of course Vovk is loyal to Poroshenko,” said Paraschiy of the commission chairman, whose term expires this year.
The formula’s development also occurred when former ICU Director Volodymyr Demchyshyn was working as minister for coal and energy.
The commission denied any conflict of interest in a statement to the Kyiv Post, saying “the provisions of the decision do not allow for any mechanisms of possible growth for any single market participant.”
ICU told the Kyiv Post that “one cannot invest in the Ukrainian debt market without having some exposure to the bonds issued by these companies.”
The fund added that it invested in DTEK’s Eurobonds in 2011 before increasing its investment in 2015 and 2016.
“We did this because prices were at extremely attractive levels and the company announced that its creditors were beginning negotiations to restructure the debt,” ICU said.
The National Anti-Corruption Bureau opened an investigation into the pricing formula, but NABU chief Artem Sytnyk said that Ukrainian courts were refusing evidentiary requests in an interview last year.
Time to sell?
Two sources in the Ukrainian banking sector told the Kyiv Post that ICU is selling its Eurobonds in London to Fabien Pictet and Partners (FPP).
In a statement to the Kyiv Post, the fund said “FPP Asset Management did not purchase DTEK Eurobonds from ICU.” A fund spokesman declined to comment when asked if the fund owned DTEK Eurobonds in general.
ICU also denied that FPP was the target of its sale, but did tell the Kyiv Post that its ownership of the DTEK Eurobonds “is currently small.”
Bloc Petro Poroshenko lawmaker Sergii Leshchenko said that any sale would have occurred through a network of intermediary companies.
“(Paseniuk) now is using financial vehicles in London to sell the Eurobonds,” he said. “They had to sell because Vovk is losing his position and there’s too much attention on the scheme.”
The Eurobonds in question, issued in 2013, have tripled in value since their low point in 2015, hitting 107 of their par value.
The beginning of February saw their yield dip slightly, consistent with a major sale.
Depending on how many Eurobonds the firm bought before Rotterdam+ (ICU would not say), the firm stood to make hundreds of millions off the triple fold increase in their value.
An August 2016 valuation of ICU put the fund as having $300 million under management; Paseniuk said in Feb. 2018 that the fund had more than $500 million under management.
Family business
Other aspects of the energy market have begun to reap a profit for the fund. NERC has begun to raise the so-called RAB tariffs on electricity, a system by which tariff proceeds are intended to be reinvested into energy infrastructure, increasing efficiency.
Each Ukraine regional power distributor — oblenergo — has the choice of whether to transition to the RAB pricing scheme. So far five have chosen to do so. They include Vinnytsya Oblenergo, 25 percent owned by ICU and 75 percent owned by Russian-Ukrainian oligarch Konstantin Grygoryshyn.
Andriy Gerus, a former NERC commissioner who sued NERC in a bid to cancel the Rotterdam+ formula, described the pricing scheme as “very profitable.”
Other former ICU employees in government have attracted separate allegations of favoritism.
Ex-central bank chief and former ICU chairwoman Gontareva found herself a target for allegations of favoritism during her time as head of the central bank, from 2014 to 2017, in part over the handling of Platinum Bank. Paseniuk served on the bank’s supervisory board until December 2014.
Platinum was sent into government receivership in January 2017, and was forced to pay back Hr 677 million ($24.9 million) in debt to the NBU. Oleksandr Zhivotovsky, the former chief of investment at ICU, heads the country’s communications commission, which regulates the airwaves.
One Kyiv investment banker, who wished to remain anonymous due to fear of retribution against the source’s business, pointed out that a circle of friends reaping benefits from an acquaintance in power is nothing new for Ukraine.
“It’s the same old story,” the source said.
