Completely Different Reality
Since the start of the Russian aggression, Ukraine has been experiencing significant changes in its social, cultural and economic landscape. Foreign and local investors are monitoring the developments and market conditions, confirming their interest as the military phase reaches an acceptable level. We had an opportunity to speak with Andrii Moskalyk, partner at Baker McKenzie Ukraine, to discuss the current M&A conditions, reconstruction efforts, risk insurance mechanisms, the status of PPP projects in the oil and gas sector and the evolving dynamics of teamwork in the present environment.
Olga Usenko: Since our last interview, which took place in January 2022 before the war, you have been promoted to partner. How has it been becoming a partner during these challenging times of war?
Andrii Moskalyk: Yes, indeed, this personally feels like a very long time ago as a lot has changed. I consider stepping into a new role under such circumstances as a chance to be part of a coming fundamental market transformation. Obviously, the war has shrunk and reshaped most of the markets and their segments, so we currently face the challenge of operating in a completely different reality where the overall number and size of the projects with a Ukrainian nexus has so far reduced drastically.
Almost all project origination and execution now happens online and this is yet another challenge, because now we rarely have opportunities to meet people face-to-face. The pandemic was the kick-starter for the process of transitioning to online, so we had time to start getting used to it even before the war.
As a global Firm, we are able to reallocate the project expertise across jurisdictions, so part of my present work over the last several months has been to lead foreign M&A transactions in infrastructure out in the Gulf region where I could meet and work with major market players who strategically have had interest in Ukraine and may soon be looking at the Ukrainian market again.
O.U.: Your primary focus is M&A. Could you please share your insights into the M&A landscape in Ukraine amid the war? It seems that we rarely hear about significant deals. Is the market still active?
A.M.: First, IT product and service businesses that are less prone to war remain among the key targets in the M&A market. The AI revolution and military technology are important drivers for the growth of the IT business in the coming years, so we see huge potential in these IT segments.
Second, businesses that have funds accumulated from Ukrainian operations that they currently cannot upstream abroad due to the wartime currency flow restrictions tend to be actively looking for local investment opportunities. Deals in such setups are possible where sellers would be ready to accept national currency in Ukraine. We see such deals mostly in the critical industries where operations sustain the war. These include consumer goods, retail, pharmacology and agriculture to name a few.
Finally, there are foreign strategic and venture capital (VC) investors, mainly from the countries that have traditionally maintained strong ties with Ukraine and for whom our country’s markets and regulations are not “terra incognita”. They are ready to take war-related risks (at least partially) and invest while asset prices could generally be low. Foreign national donor institutions are increasingly involved in the deal funding to share risks and cover for the shortage of investor allocated capital.
O.U.: What types of instructions do you receive from international investors looking for emerging opportunities in Ukraine? Could you tell us about the projects you currently have in your pipeline?
A.M.: These are mostly due diligence and M&A mandates for existing real infrastructure assets located in the safer Ukrainian territories. The reality for the country is that the possibility to effectuate projects overwhelmingly revolves around security of the assets and infrastructure. IT product and military technology businesses are at the top of the list for the VC investors and VC is the industry where we also receive project investment structuring instructions. We need to understand that the interest remains volatile and dynamic — especially of those investors that do not yet have any Ukrainian market presence — because the security situation is changing all the time.
In infrastructure projects, many clients with a presence in the country are focused on preserving and safeguarding their existing assets. Thus, many of such mandates we get are around legal assistance to ensure their contracts survive the wartime without the need to pull out of the country to later start everything from scratch. I view this as a positive tendency because it clearly shows the investors maintaining their determination to roll out their investment programs once the security situation improves to acceptable levels. In some way, this is a deferred investment appetite that will, hopefully sooner rather than later, burgeon out into actual infrastructure development.
O.U.: Let’s move to the energy infrastructure sector, which is your primary area of expertise. Given the significant damage to our energy infrastructure caused by missile attacks, have you noticed any efforts toward reconstruction and immediate projects aimed at improving the situation?
A.M.: Yes. We have been advising corporate clients on several projects to develop the infrastructure for the generation of new energy sources to replace the capabilities destroyed by Russia. Notably, these efforts go beyond conventional types of energy generation and are undertaken not just by the energy companies. For example, biogas installations and wood chip sourcing technologies would be used for these purposes. So far, these appear to be initial and non-systematic efforts, and we hope they will serve as success stories to be multiplied and scaled up once the pilots are finalized and go live.
O.U.: When it comes to the reconstruction process, what are the specific requirements and opportunities? Could you elaborate on risk insurance mechanisms and how they are practically being put into action?
A.M.: A major reconstruction process by the private sector would be possible once the security situation improves to sufficient levels. This could occur even before the end of the war, if the anti-missile, air defense and other systems reach that level, but until then, we expect the state-owned players to play the key role. Again, we see a significant potential and deferred interest of foreign businesses in this space.
Foreign governments are thankfully starting to roll out insurance programs in Ukraine to cover war-related risks. For example, the US International Development Finance Corporation has launched the war-risk coverage program for businesses regardless of whether they are of US origin. Energy generation businesses are generally eligible to obtain insurance if their application is deemed acceptable. Overseas Private Investment Corporation, known as OPIC, provides financing and insurance solutions (such as political risk insurance) for US investors, contractors and exporters that are investing in developing and post-conflict countries.
O.U.: What is the current status of PPP projects in the oil and gas sector? Do you see interest from global energy leaders in post-war recovery efforts?
A.M.: The pre-war production sharing agreements (PSAs) concluded in 2020-2021 remain effective and we are not aware of any existing PSA investor that has changed the strategy in respect of the planned exploration and development of their oil and gas blocks. The dynamics differs though, as the further the particular block is from the frontline the more acceptable it is for the companies to do the actual field works. It ultimately comes down to the objective factors such as stable security of the areas and land plots chosen for seismic exploration and drilling, condition of the infrastructure needed to connect the sites with the various supply systems, contamination of lands with mines and other consequences of the active phase of the Russian invasion of Ukraine and availability of the service companies’ capabilities.
Moreover, we are aware that foreign companies are actively interested in the new PSA blocks and are looking into the options that are on the table. These include not only petroleum but also metals, such as lithium or rare metals. The Cabinet of Ministers of Ukraine by its Resolution 132 of 2023 developed the list of PSA blocks that can be put up for tender as a priority. The PSA setups and the list of investors will be formed depending on when and in which configuration the blocks are going to be placed on the market. The Ukrainian Parliament has passed, in the first reading, Draft Law 4344, which, if finally passed into law, will significantly impact on how the bidders will have to prepare their bidding strategies as compared to the previous PSA tenders.
Finally, the investors that already hold mining licenses or have such business partners may consider co-applying for their conversion into PSAs without a tender to be able to apply the PSA benefits to such mining projects. If there is such intention, they need not wait for the new tenders to be announced.
O.U.: How would you characterize the market conditions within which your practice operates? As a recently promoted partner, what are your main objectives for your practice?
A.M.: The market continues to be volatile and very sensitive to the security situation in our country. For example, despite the hot phase of the war, several foreign investors were seriously considering investments in the agricultural businesses, both upstream (agriculture production and breeding) and midstream (elevators and logistics). Some had to hold off as the new Russian attacks on the seaport infrastructure would break the business chains. On the other hand, with the development of the alternative export pathways, we see that interest is picking up and trust that it will soon gain major results. In energy and mining, the investors tend to wait and protect what they already have in Ukraine; while some, as I said before, consider entering the market taking the opportunity of minimal competition. Thus, our current work often involves building legal strategies to protect the existing assets and structuring planned market entries. Those with whom we are working naturally radiate optimism, and this should be an integral trait to successfully operate in the new reality.
What we know for sure is that Ukraine has all the essential elements to win the battle with the rest of our allies and that on reaching that point, the shape of the Ukrainian markets and industries will be nothing like before the full-scale invasion of our country. Our practice needs to stay attuned to where the M&A and infrastructure projects markets are moving, so that we are able to continue providing the legal services on the most complex, challenging and significant local and cross-border deals. This is also so that we are not only following the legal market trends but also setting them. This is the key objective and, as team, we are making every effort to move in that direction.
O.U.: Amid the ongoing war, how have you managed your team’s work? Have the principles of lawyers interacting within the Firm’s team changed over time? What is more and less effective?
A.M.: The support we have received over all these months from our global Firm has been as immense as it’s been crucial. No matter how it sounds, the war showed to our Ukrainian team that our Firm is truly supportive and international yet united and integrated. In these circumstances, it has been much easier to manage the work, keep the team motivated and ready to take on the work that requires a creative approach. Most of our projects are such that clients expect a lot of added value, which prompts us to constantly think outside the box.
As new generation lawyers become part of our team, we see that the motivating factors are changing. Robust corporate policies, large precedent and legal knowledge bases remain the bedrock. But the interesting part is also how to create an environment where each individual feels autonomous enough to be willing to step outside of the existing boundaries and feel comfortable about being genuinely creative. Micromanagement and tight controls do not give the sense of accomplishment or a quality product. Any team member is welcome to propose ideas and any formalized hierarchy of reporting often undermines value creation. As our position in the market is primarily about such value creation for our clients, it would be unachievable if our lawyers did not have the environment where this value can be created. In my view, we have managed to set this environment within the practice and continue refining it as we move along.