Zhevago is no longer a cake
Ferrexpo's key problem today isn't who exactly is encroaching on its main production asset, the Poltava Mining and Processing Plant—Kolomoisky or the Luzhniki gang, led by godfather Mishka Voevodin. It's unclear what to do with the toxic main shareholder, who has transformed from a company asset into a significant liability, writes Ukrrudprom.
And this didn't happen yesterday. In 2015, the company lost a couple hundred million dollars in accounts at Zhevago's bankrupt Finance and Credit bank. Plus, he himself became easy prey for law enforcement. Until 2019, the situation was saved by his "friendship" with the powerful Minister of Internal Affairs, Arsen Avakov. This had its price—in particular, Zhevago had to officially register the Espresso channel in the name of his son Ivan and officially pay Avakov's wife and his political partner Arseniy Yatsenyuk. 3,5 million dollars, but it was apparently worth it.
Trying to compensate for the loss of revenue from Finance and Credit, Zhevago decided to fill the void with Ferrexpo. Every year, approximately $30 million of the company's funds were sent to help suffering Ukrainians through the Blooming Land charity, which had all the hallmarks of a fictitious scheme. When the theft scheme was uncovered, Ferrexpo's long-time auditor Deloitte and two independent directors have left.
The company claimed that it would conduct an independent investigation, but naturally found nothing against its CEO and main shareholder (more than 50%).
But the final blow to the situation came with Zhevago's defeat in the 2019 parliamentary elections and the loss of his parliamentary immunity. As a result, three years ago he was forced to leave Ukraine (under the pretext of "I'm sick”) and, as we already know, eventually lead (at least in terms of the size of his fortune) the “Monaco Battalion”, trying to control the processes from his yacht “Z”.
The ongoing processes around Ferrexpo in Ukraine are quite complex, and the trial over the sale of 40% of the Poltava Mining and Processing Plant in 2002 is only part of the story. According to data interim financial report of the company According to the results of the first half of 2021, Ferrexpo still has at least three conflicts in the hot phase. For the sake of objectivity, we'll simply quote what's written in this document.
An investigation and lawsuit related to royalties are already underway against Zhevago.
On February 3, 2022, PJSC Ferexpo Poltava Mining and Processing Plant (PGOK) and LLC Ferrexpo Yeristovsky Mining and Processing Plant (EGOK) received letters from the Prosecutor General's Office notifying them of an ongoing investigation into possible underpayment of royalties for iron ore mining between 2018 and 2021. The letters did not specify the amount of the underpayment. As part of the investigation, the Prosecutor General's Office requested documents related to iron ore royalty payments and requested four representatives of the Group's subsidiaries to appear as witnesses. The Group's subsidiaries are collecting the necessary documents and intend to comply with all legal requirements as part of this investigation. However, due to the current situation in Ukraine, the status and further developments of the investigation are unknown.
On February 8, 2022, EGOK received a tax audit report alleging underpayment of royalties for iron ore mining operations between April 2017 and June 2021 in the amount of approximately UAH 1,042 million (approximately USD 35,618 thousand as of June 30, 2022). The Group has filed objections to the allegations made in the tax audit report, and the case is expected to be heard by the Ukrainian courts in due course. Due to the current situation in Ukraine, it is unknown when the first hearing on the claim will take place or how the aforementioned investigation will develop.
Based on the legal advice received, management believes that PGOK has compelling arguments to defend its position in court and, as a result, no associated liabilities have been recognised in respect of the claim presented in the consolidated statement of financial position as at 30 June 2022, similar to the position as at 31 December 2021.
Zhevago already has environmental claims
In September 2021, the State Environmental Inspectorate conducted an inspection of Ferexpo Yeristovsky Mining and Processing Plant (EGOK) and, on October 1, 2021, issued an order to rectify a number of alleged environmental violations. On October 19, 2021, EGOK received two environmental complaints from the State Environmental Inspectorate.
One of the lawsuits related to a claim of violation of soil removal regulations on a specific land plot, and the State Environmental Inspectorate sought damages of approximately UAH 768 million (US$26,252,000 as of June 30, 2022). The other claim related to an alleged lack of waste disposal documents on a specific land plot, and the State Environmental Inspectorate sought damages of approximately UAH 18 million (US$615,000 as of June 30, 2022). Each lawsuit states that if EGOK does not voluntarily compensate for the damages, the State Environmental Inspectorate will initiate legal proceedings. In November 2021, EGOK submitted written objections to these claims to the State Environmental Inspectorate. The State Environmental Inspectorate did not respond to EGOK's objections or file the claims with the court within a reasonable time of February 2022. Thus, in February 2022, EGOK filed a lawsuit. The Kremenchuk District Prosecutor's Office is conducting an investigation into alleged violations of environmental regulations. A hearing on July 19, 2022, ruled in favor of EGOK, and as of the approval date of these interim condensed consolidated financial statements, it is unknown whether the State Environmental Inspectorate intends to appeal.
Cancellation of the license for the Galeshchinskoye deposit
On June 24, 2021, the Decree of the President of Ukraine was published on the official website of the President (hereinafter referred to as the "Decree"), which put into effect the Decision of the National Security and Defense Council of Ukraine on the application of personal special economic and other restrictive measures and sanctions ("Decision").
Ferrexpo Belanovo Mining (BGOK) is included in the list of legal entities subject to sanctions pursuant to the Decision. The Order and Decision do not provide legal grounds for the sanctions. The sanction imposed on BGOK consists of the revocation of its license to develop the Galeshchinskoye deposit, which is one of two licenses held by BGOK. The Galeshchinskoye deposit is in the exploration phase and is located north of the Group's active mining operations.
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As we can see, not only Poltava, but also Ferrexpo's other two mining and processing plants are under attack today. And it's clear that Kostya is incapable of resolving these problems from afar, effectively "on the run." This means the number of claims against the company will snowball, and ultimately, it will simply be torn apart, unless the state finally intervenes and, to avoid the worst, nationalizes Zhevago's assets, effectively abandoned to their fate in Ukraine.
And finally, a few words about who's really making Ferrexpo nervous with the 2002 deal. Judging by his secondary sexual characteristics, Benya is going through a difficult period in his life right now. Just remember the search 200 security officers conducted last Shabbat, at 5 a.m., at his Bukovel Radisson.
But the Luzhniki guys from VS Energy are doing just fine. They're not even hampered by their clearly visible connection to Deputy Chairman of the Russian State Duma Alexander Babakov. Recently, they even managed to reverse the seizure of two of their Ukrainian hotels: the Dniester (Lviv) and the Lybid (Kyiv). Their lobbyist Boris Baum Not only is he an advisor to Deputy Head of the Presidential Administration Kyrylo Tymoshenko, but he also oversees the Commission for the Regulation of Gambling and Lotteries. So, who would you bet on in such a situation?
DOSSIER: KONSTANTIN ZHEVAGO. THE RISES AND FALLS OF A DOLLAR BILLIONAIRE
Boris Baum: Servants and Managers of the "Luzhniki Brotherhood" in Ukraine. Part 1
Lawyers as Fixers: How Oligarch Zhevago Solved Creditor Problems During War
Fitch Ratings downgrades Naftogaz, Ukrenergo, and Ferrexpo
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