The consequences of nationalization will not take long to appear.
By decision of the Ukrainian authorities, the enterprises Ukrnafta, Ukrtatnafta, Motor Sich, AvtoKrAZ, and Zaporizhtransformator are being transferred to state ownership until the end of the war to meet the needs of the army and the rear. These assets may subsequently revert to the oligarchs who owned them before nationalization. However, given that each of the five enterprises is plagued by problems, the consequences of the government's decision for Ukrainian taxpayers could be quite unpleasant, writes apostrophe.
What was taken from whom, and why the consequences of nationalization will not be long in coming
At a joint briefing on November 7, Secretary of the National Security and Defense Council Oleksiy Danilov, Prime Minister Denys Shmyhal, and Minister of Defense of Ukraine Oleksiy Reznikov announced the transfer of assets of five large enterprises to the state: Motor Sich JSC, Zaporizhtransformator PJSC, AvtoKrAZ PJSC, Ukrnafta PJSC, and Ukrtatnafta PJSC. Based on a decree by President Volodymyr Zelenskyy, the National Securities and Stock Market Commission seized the shares of these companies from private owners and transferred them to the state.
"The seized assets have been designated military property, and their management has been transferred to the Ukrainian Ministry of Defense," stated Oleksiy Danilov. "After martial law ends, in accordance with legal requirements, these assets may be returned to their owners, or their value will be reimbursed."
Denis Shmigal, in turn, explained that the alienation of the assets of these enterprises is due to the fact that their products are critically needed for the Armed Forces and the energy sector, so they must work to ensure defense capabilities.
"Enterprises that were already operating will receive more orders and greater state guarantees for production," the prime minister announced on his Telegram channel. "Enterprises that were currently closed will resume operations. Workers will return to production."
All the enterprises seized for state use are partially or fully owned by well-known Ukrainian oligarchic businessmen. And, coincidentally, all of them are in dire straits.
Ihor Kolomoisky controls 42% of Ukrnafta, Ukraine's largest oil company. Meanwhile, the controlling stake—50% plus one share—is owned by the state, represented by Naftogaz Ukrainy. However, for many years, the company was run by managers associated with Kolomoisky. They did so based on the classic oligarchic principle: profits for themselves, losses for the state.
Igor Kolomoisky and his partner also own about 60% of the shares in Ukrtatnafta. To Gennady BogolyubovThe company's main asset is the Kremenchuk Oil Refinery, which became the target of missile attacks shortly after the massive Russian invasion. As a result, the refinery was almost completely destroyed and is now more of a liability than an asset.
The most efficient of the alienated enterprises is Motor Sich, which is associated with Vyacheslav Boguslayev, recently arrested on charges of treason. The company develops and manufactures engines for military aircraft, particularly helicopters and airplanes.
Moreover, a significant portion of Motor Sich's production was shipped to Russia—not only after the Russian attack in 2014, but also during the war that began on February 24 of this year. Neither the current government nor the previous ones were able or willing to prevent this. One can only hope that the Ministry of Defense, having gained control over production, will stop arming the enemy.
The AvtoKrAZ company, a manufacturer of trucks, including those for military use, is part of the oligarch’s Finance and Credit group Constantine ZhevagoThe company is in decline and produces practically nothing.
Zaporizhtransformator, Ukraine's largest manufacturer of high-power transformers, is owned by another oligarch, a citizen of Ukraine, Russia, and Cyprus. To Konstantin GrigorishinThe importance of transformer production in the current situation of constant blackouts probably doesn't need further explanation. However, the company is in bankruptcy, and it will take considerable effort and resources to breathe new life into it.
The consequences of nationalization will not take long to appear, so the oligarchs are happy with everything
Public reaction to the president's decision was mixed. A significant portion of the population, judging by social media posts, greeted the news with joy: the state had finally fulfilled the proletariat's age-old dream and taken something back from the hated oligarchs!
At the same time, expert economists and lawyers are not particularly enthusiastic about this event, drawing attention to numerous ambiguities in the asset alienation procedure and the lack of clear explanations regarding their future fate.
It is also noted that the state has yet to demonstrate its effectiveness as an effective property owner or production manager. Almost all enterprises that remain state-owned serve as breeding grounds for corruption, operate extremely inefficiently, or are in a state of disrepair. Therefore, the hope that newly acquired enterprises will be an exception and set an example of successful operation is extremely illusory.
According to Yuriy Nikolov, editor of the website "Nashi Groshi," the consequences of the government's current actions are difficult to predict today due to the public's limited information about the reasons behind them and the goals the authorities are pursuing.
"Some of what's known evokes a sense of 'victory,' while others suggest 'betrayal,'" he told Apostrophe. "The list of seized enterprises looks like a 'victory.' Each of these assets is crucial to Ukraine's military economy. Fuel, transformers, helicopters, trucks—all of these are vitally needed products today. From the owners' perspective, this also looks like a 'victory.' Kolomoisky is an oligarch who was deservedly stripped of his citizenship, although this is far from the punishment he truly deserves. Boguslayev is a traitor to the state. Zhevago is a fighter from the Monaco Battalion, hiding from criminal prosecution. Grigorishin is a Russian who plundered several Ukrainian enterprises and fled abroad. These are all people with very bad reputations, and seizing their strategic enterprises seems like a completely logical decision."
At the same time, if we talk about the condition and future fate of the assets, the “victory” looks much less convincing.
"The alienated assets have accumulated a lot of problems," Nikolov explains. "For example, at Ukrtatnafta, there are claims from Tatar shareholders who are currently trying to obtain compensation through the courts for Kolomoisky's seizure of their plant (Apostrophe in October 2007). And at Ukrnafta, there's no room to compare the debts to Kolomoisky's shell companies. So, it actually benefits him that all these problems have now been transferred to the state."
There's also uncertainty about the quality of management of the enterprises. Literally the day after their seizure, the government announced that supervisory boards had already been formed. However, neither the selection procedure for these board members (no open competitions were announced) nor their composition are known.
"According to unofficial sources, the newly formed supervisory boards of these companies include a large number of people who are protégés or associates of the head of the Presidential Administration, Andriy Yermak," says Yuri Nikolov. "Therefore, it seems that the boards are being filled with people who will monitor compliance with certain agreements. As for who reached these agreements, and what they consist of, we can only speculate at this point. One can only say with certainty that such a large-scale seizure of property could not have been carried out without the knowledge and consent of the president."
The consequences of nationalization will not take long to appear.
According to the expert, the current situation surrounding the assets appears to be a redistribution of influence over the operations of these companies. The precise trends in question will become clearer later, when it becomes known who will occupy the management positions at these companies.
Incidentally, the oligarchs themselves have shown virtually no reaction to the state's decisive actions. This may indicate that the decision was either agreed upon with them or, at the very least, did not significantly harm their interests.
"If this decision were truly sensitive for Kolomoisky, then all the media outlets in his media holding would be unanimously against him right now," Nikolov explains. "After all, that's precisely what they're there for—to protect his property. However, we haven't seen any such reaction from the 1+1 channel or other resources owned by Kolomoisky."
Everyone will have to pay
The price society will have to pay for the government's right to dispose of unattractive assets is also unclear today. Many console themselves with the idea that the oligarchs' property was simply taken away. However, this is not the case.
"The problem is that a significant portion of the population, and most likely the Presidential Office, doesn't understand the difference between nationalization and confiscation," Borys Kushniruk, head of the expert and analytical council of the Ukrainian Analytical Center, told Apostrophe. "However, this distinction is fundamental. Confiscation is the gratuitous alienation of property, and in a state governed by the rule of law, it can only be carried out on clearly defined grounds. This is precisely the procedure stipulated by the provisions of the Constitution of Ukraine, which guarantees the inviolability of private property. Property can only be confiscated by a court decision if its owner has committed actions stipulated by law as grounds for confiscation."
At the same time, the main difference between nationalization and confiscation is that the state pays the owner the full value of nationalized property. In extreme cases, the expert believes, if the budget is short of funds during wartime, the state must settle accounts with the property owners after the war's end.
Certainly, the option of confiscating oligarchs' assets seems very attractive to many. However, attempting to implement it could come at a high cost to the state and society.
"After martial law is lifted, asset owners will demand their return," says Boris Kushniruk. "First, they'll appeal to Ukrainian courts. And if the courts don't rule favorably, they'll appeal to international courts. And they're guaranteed to win. Moreover, the main issue in these proceedings won't even be the legality of the decision. After all, confiscating property based solely on someone's whim is completely illegal under any law, national or international. Therefore, the only thing that will be discussed in these courts is the amount of compensation to the former owners."
This is precisely why, after the announcement of the asset seizure, the aforementioned explanation from National Security and Defense Council Secretary Oleksiy Danilov was heard, stating that after the war ends, the authorities intend to either return the enterprises to their owners or buy them out.
However, even here many questions arise to which society has not yet received answers.
Considering that most of the seized production facilities are currently in a state of disrepair, significant public funds will likely be required to resume their operations: to purchase raw materials, acquire new or refurbish old equipment, pay off debts to employees, the budget, partners, etc. The Kremenchuk Oil Refinery, for example, will have to be practically rebuilt from scratch to resume fuel production.
And, judging by the statements made, after the war all of this can simply be returned to its former owners, but in a more or less decent condition thanks to the taxpayers' funds invested in these enterprises.
Moreover, there are doubts that even after significant investments it will be possible to establish mass production at these enterprises.
"The government cites the USSR's experience during World War II, when a huge number of enterprises were converted to wartime production," says Boris Kushniruk. "However, this isn't a very convincing argument. The Soviet Union had the ability to relocate all war-related enterprises to territories out of reach of enemy attack. However, Ukraine is much smaller, and military capabilities have changed significantly since then. Today, we are unable to locate any enterprise in areas guaranteed to be inaccessible to enemy attack. Therefore, if news of the resumption of mass production becomes known, these facilities will immediately become targets for massive air strikes. And ensuring their 100% protection will be virtually impossible."
If the government decides to buy the enterprises from their current owners after the war, the difficult question of the price will also arise. Will the state reimburse Ihor Kolomoisky for the cost of the charred pile of scrap metal that currently stands on the site of the Kremenchuk Oil Refinery, or the cost of the brand-new plant that will be built there? It's absolutely possible that taxpayers will have to pay first to restart production, and then again to purchase it from the oligarch. So far, the government has offered no explanation as to how such a buyout might be accomplished.
Thus, it's safe to say that the long-awaited "dispossession" of the oligarchs will bring many more unexpected surprises to Ukrainian citizens. And not all of them will be pleasant.
"People who are currently celebrating the oligarchs' businesses being taken away must realize that such actions will lead to nothing good," explains Boris Kushniruk. "And, first and foremost, to the population itself—after all, they will have to pay for the government's arbitrary actions out of their own pockets."
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