Privatization of State and Confiscated russian Assets as a Ukrainian Wartime Investment Trend

Russia’s full-scale invasion of Ukraine from 24 February, 2022 reduced Ukraine’s investment attractiveness significantly. High military, economic, and political risks deter foreign capital. However, Ukraine sees the crisis as time for decisive action and tries to create new opportunities for investors who are ready to take risks.

The government is now declaring that it aims to ensure a favorable investment environment for implementing a privatization program, including a large privatization program. Trying to smooth out the sharp aspects of martial law, the government is simplifying the onerous privatization procedure, introducing war risk insurance mechanisms, and optimizing tools for protecting the rights of investors. Confiscated russian assets will soon be included in the investment menu of large-scale privatization.

Below, we will outline the main wartime innovations in the field of privatization, raise the issue of privatization of confiscated russian assets and the risks associated with this and review updated instruments that protect and guarantee the rights of investors taking part in privatization.

Wartime innovations in the procedure of privatization of state property

Privatization of state-owned property became an important investment trend during the war. Ukraine has now introduced a number of innovations that significantly simplify and optimize the procedure, as well as improve the position of potential investors.

Thus, Law of Ukraine No. 2486-IX On Amendments to the Law of Ukraine On the Privatization of State and Communal Property and Other Legislative Acts of Ukraine Facilitating the Relocation of Enterprises in the Conditions of Martial Law and the Economic Recovery of the State proclaims that it is aimed at implementing measures, which will increase the investment attractiveness of privatization objects (assets being privatized) and speed up and simplify the privatization procedure. Such measures include, inter alia, the following: (1) the transition of large-scale privatization from a traditional auction to an electronic, transparent one via the ProZorro.Sale system; (2) liquidation of the institute of advisors (companies that prepare an object for privatization), which is claimed to be connected with corruption risks during the election of advisors, delaying the procedure and the risk of challenging the privatization in courts (however, this should not apply to objects, the decision on privatization of which was made before the adoption of Law of Ukraine  No. 2269-VIII On the Privatization of State and Communal Property ); (3) setting the starting price of a privatization object at the auction at the level of its book value (its assets) in accordance with the latest financial statements; (4) introduction of the mechanism of pools of privatization objects; (5) introduction of the investor’s right to purchase the privatization object through buy-out if such an investor is the only one who is registered as taking part in the auction; (6) obtaining special permits and licenses for subsoil use, special water use and emissions of pollutants into the atmosphere simply by way of reissuing them to the new owner.

Let us focus, in particular, on such an innovation as the pool of privatization objects. A pool is formed by combining at once two or more privatization objects, provided one of the conditions established by the Decree of the Cabinet of Ministers of Ukraine On Procedure for the Formation of a Pool of Privatization Objects, is met: (1) the enterprises operate in one economic sector within the same section of the Classification of Types of Economic Activities; (2) the products of one enterprise are or can be raw materials, materials, component products intended for the production of products of another enterprise. As stated by the State Property Fund of Ukraine (the “Fund”), the purpose of the pool mechanism is to enable the privatization of vertically-integrated businesses, instead of buying individual objects, thereby increasing the interest of investors who can make large-scale investments. Thus, the Fund has already announced its plans to sell two titanium production enterprises in one lot (the confiscated Demurynsky Mining and Processing Plant and the United Mining and Chemical Company).

There are peculiarities of legal regulation of the privatization procedure which only apply during martial law. They simplified the preparation of an object for privatization even further and added a number of relevant details. Such peculiarities include, in particular: (1) no requirement to conduct an audit, environmental audit, inventory, or evaluation of the object; (2) setting the starting price of an object at the auction at the level of 1 hryvnia, provided it is impossible to determine the book value of the privatization object (its assets); (3) the auction commission starts developing the conditions of sale after the Fund receives a letter in an arbitrary form from a potential buyer stating the intention to privatize the object; in the letter, the buyer has the right to request the relocation of production facilities from the territories where armed hostilities are conducted and/or where there is a threat of such hostilities to safe territory.

Investments in confiscated russian assets and associated risks

Since the beginning of the full-scale invasion, confiscated russian assets located in Ukraine have been included in the Fund’s investment menu. The beneficial owners of such assets are, as a rule, russian oligarchs who, by their actions, pose a significant threat to the national security of Ukraine or facilitate such actions. The purpose of confiscation of their assets is to replenish the Fund for Elimination of the Consequences of the Armed Aggression. For this purpose, Ukraine has developed a special mechanism, which is provided for by the Law of Ukraine On Sanctions and can be briefly described as follows: Stage I: the President of Ukraine imposes sanctions in the form of asset blocking (prohibition of using and disposing of assets) on relevant individuals or legal entities and companies controlled by them; Stage II: the Ministry of Justice of Ukraine submits to the High Anti-Corruption Court (the HACC) an application for imposing sanctions on such persons in the form of confiscation of assets controlled by them to state coffers; Stage III: the HACC decides to apply the relevant sanction; Stage IV: the ownership of confiscated assets is transferred to the state – to be managed by the Fund.

It is possible to invest in the assets confiscated in such a way by privatizing them through an electronic auction. For a potential investor, the electronic auction procedure for the privatization of confiscated assets is similar to the electronic auction procedure for the privatization of any other state property. From the point of view of preparing an object for privatization, the Fund will nevertheless conduct an inventory and evaluation of such objects.

Obviously, the key distinction of a confiscated asset is that it emerged as a result of a crisis wartime measure, and from a legal point of view, under certain conditions, it can be considered as the state’s serious interference in the right of ownership. When investing in such assets, it is necessary to consider certain legal risks associated therewith. Thus, despite the fact that russia has denounced the European Convention on Human Rights (the “Convention”), unfortunately, its citizens and companies do not lose the right to file a complaint against Ukraine with the European Court of Human Rights. In particular, such complaints may concern a violation of the right to peaceful enjoyment of possessions or the right to a fair trial. Violation of the right to peaceful enjoyment of possessions is checked by the ECHR using a three-part test: lawfulness, legitimate purpose, and compliance with the public interest. If the purpose and public interest of confiscation are clear, then from the point of view of lawfulness, the mere existence of a law is not enough – it must be of high quality, clear, and predictable about the consequences of its violation. Legal experts express the opinion that the Sanctions Law will not meet such criteria in accordance with the assessment of the ECHR. As for the right to a fair trial, there is a risk is that according to the ECHR case law confiscation is of a criminal-law nature. In the event that such a sanction is recognized as a criminal charge, the Convention provides broad guarantees to the sanctioned person, which are not provided for in the procedure for application of sanctions. In practice, the HACC quite often confiscates assets “in absentia”, without the participation of such persons, although it notifies them of the hearing in accordance with the law. Nevertheless, it is very difficult to predict the possible legal position that may be taken by the ECHR in this regard. It is worth considering that the war is a special social, economic, and political situation, the context of which cannot be ignored by the ECHR.

As of April 2024, two more huge cases are pending before the HACC; they involve the assets of such giants as VS Energy Group and HMS Group (Hydromashservice). The Fund actively holds meetings with interested investors, where it acquaints them with potential privatization objects (lots) even before publication of detailed information about them prior to the auction.

Protection and guarantees of the rights of investors taking part in privatization

Striving to simplify and speed up the sale of state-owned and confiscated assets, the state should not forget about one of the main keys to the success of privatization objects among investors – the protection and guarantees of their rights. In this aspect, Ukraine has taken a number of important steps in the course of the war. Firstly, the possibility of a foreign investor applying English law to an agreement for the purchase and sale of an object of large privatization was extended until 1 January 2025. Taking into consideration the fact that the large-scale privatization is only resuming in 2024, it can be expected that the possibility of applying English law will remain after 2025. Secondly, during martial law, the period for challenging an agreement for the purchase and sale of an object was reduced to 3 months (instead of 3 years). Thirdly, the Civil Code of Ukraine was supplemented with a legal provision, which prohibits claiming property from a bona fide buyer (the auction winner) if they purchased it at an electronic auction in the course of the privatization procedure. The norm is adopted to protect an investor in the event that the confiscation of russian assets or their privatization is deemed to be unlawful and the previous owner of the property (the person from whom the asset was confiscated) tries to reclaim the property. In fact, this norm legally “cleanses” privatized assets from future potential claims on the part of previous owners.

Due to war risks, Ukraine has lost many potential new players on the national market, who can enter the market thanks to privatization. War and political risk insurance should mitigate, if not solve, this problem. There are important developments in this direction, in particular in the legal field. On 1 January, 2024, Law of Ukraine No. 3497-IX On Amendments to the Law of Ukraine On Financial Mechanisms for Stimulating Export Activities Concerning the Insurance of Investments in Ukraine against War Risks came into force. It expanded the activities of the Export Credit Agency (ECA) to include insurance and reinsurance of direct investments in Ukraine against war and/or political risks. The issues of determining the list of such risks and the procedure for their insurance by the ECA are on the agenda of both the Cabinet of Ministers and the National Bank of Ukraine. The ECA’s financial capacity is expanding due to the attraction of funds from international financial organizations, foreign states, and banks. The development of a fully functional war risk insurance system in Ukraine is provided for by the Memorandum for Economic and Financial Policy between Ukraine and the International Monetary Fund.


All these rather radical changes introduced by Ukraine are understandable. By introducing them, the state is attempting to compensate potential investors for the risks that arose due to the war. However, among the obviously positive changes, there are also dubious ones in terms of their effectiveness or necessity. Thus, the liquidation of the institute of privatization advisors along with the waiver of mandatory audits, inventory, and evaluation will actually enable to quickly put an object up for auction. But the investor is unlikely to be attracted by the “pig in a poke”. At present it is also difficult to draw a conclusion about the ability of the Fund to effectively prepare an object for privatization without the assistance of advisors. It is not clear whether the State Property Fund will put objects up for auction if it does not receive a letter from the investor about the intention to privatize it. It is also difficult to predict what measures Ukraine will take in the event of cancellation of either confiscation or privatization. In this situation, an investor is a bona fide buyer who should not be responsible with their property for the state’s failure to ensure a safe privatization procedure. Taking into consideration all the above, when investing in Ukraine it is necessary to correctly calculate one’s own risks and take actions to mitigate them. In particular, it is worth conducting negotiations with the State Property Fund on clearing the privatization object from possible encumbrances before concluding a privatization agreement, as well as including in the agreement additional guarantees and compensations in the event that the investor loses proprietary rights to the privatization object.

  • Igor Nagai

    Partner, Lexwell & Partners

  • Denys Ivanok

    Associate, Lexwell & Partners

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