CEO of Smart Holding Julia Kiryanova on sanctions against the founder of the company, seizure of property, investments during the war and future of post-war Ukraine in an interview with RBC-Ukraine.
About sanctions and seizure of property
– How would you briefly describe a situation Smart Holding ended up in today?
– In a way today’s situation resembles what we call a perfect storm.
The first wave hit back in 2014. It was the first time we lost a lot. In February 2022, we seem to have returned to those terrible times, but the situation has become much more serious and large-scale for everyone in the country.
The second wave is the economic situation. Surely, the basis for the economic crisis is the war, but it also follows a certain pattern. We realize that now there is very limited space in the country for the development and preservation of business. It has to do with many things, really: the way authorities try to curb inflation with monetary methods, which leads to increase in interest rates when business cannot be credited at all, incredible increase of prices for everything, shortage of goods in certain industries and, of course, an outflow of people who are difficult to keep and to support. This is the most difficult macroeconomic situation in all the years of independence.
The third wave concerns Smart-Holding directly. In a situation where we thought we were fighting the enemy together in the same trench, if you will, our own people started shooting at us in the back. This is how I see the situation.
– The last, third wave is related to the founder of the company and the ultimate beneficiary of the company until January of this year, Vadim Novinsky. Once his share was transferred to the trust, did Mr. Novinsky exert any influence on the activities of the Group? Do you approach him on the work matters?
– He entirely lost entire control since December 2022, as well as any levers of influence from that moment. Transfer of assets took place under the legislative framework of Cyprus. The trust is irrevocable and discretionary. That is, he neither has any influence or control over holding’s operation in any way, nor receives any benefits.
– Do you stay in touch unofficially?
- Of course. The main topic is court proceedings. The fact is that everything that is happening right now with the business is related to sanctions imposed on the founder. Therefore, in our anti-crisis strategies and proceedings, we simply cannot be out of touch with him and his lawyers.
The second aspect is reputational issues. Until then, Smart-Holding, as a business, did not have its own separate entity. Usually, when they talked about Smart-Holding, the one and only reference was Mr. Novinsky.
– Is this relationship with the beneficiary unique to your company? Or does this also apply to other business groups, which are backed by big oligarchs?
– It is difficult for me to comment on the situation with other companies since they all ran their businesses in different ways. It also depends on whether there were foreign partnerships, IPOs, what was the scale of the company’s activities outside Ukraine per se.
Up until then Smart Holding was concentrated in Ukraine only. Everything was reinvested here only. Therefore, this situation turned out to be extremely difficult for us because the association was complete. Regardless of what we do in corporate management or other steps. Now it is already obvious that business needed to have more of its own voice.
– After Mr.Novinsky stepped out of the holding's beneficiaries, did his son Mykhaylo remain in management?
– No. They both left the business completely.
– Despite such steps, at the beginning of May, the court imposed arrest on the corporate rights of 72 companies related to the founder. According to the prosecutor's office, to avoid sanctions, he tried to transfer his assets to citizens of a foreign state with direct ties to Russia. What do you know about new beneficial owners?
– For a better comprehension of the situation, I would break this question into several aspects. First, what is a trust? - This is a contract when you transfer your assets to someone in a trust for preservation and multiplication. There are trustees, there are protectors, there is a board of directors - this is a system of levers that is to secure the absence of the outside influence or interest. Secondly, the trust is an instrument of imitation. This is a management system that is in demand all over the world. For example, Turkish group Anadolu, Belgian holding AB Inbev, as well as trusts and many others.
A trust operates based on the strongest system of corporate governance. If in the past you used to have one center of influence - the beneficial owner, now there are trustees - professional, licensed attorneys. In this case, they have a Cyprus license. But there are trustees for other jurisdictions.
The founder has not managed the business since 2013. He performed only a few functions of a shareholder: approval of strategic initiatives, purchase and sale transactions
– The investigation confirms that the Cyprus international trust, in whose trust ownership he transferred the assets of his companies, carries out its activities on the territory of the russian federation. How can you refute such allegations?
– Let's start with the fact that when we submitted the documents to relevant state registrars and notaries, there were no one single complaint against us. Neither to the documents, nor to how the trust was actually created. For four months, while the trustees were in the register, no one had seen any offences. Then three registrations were canceled in one day.
– Based on what?
– Based on criminal proceedings. And this is when it gets very interesting. This proceeding was opened due to complaint of a private person, allegedly because of the illegality of the trust creation.
But creating a trust itself is not a criminal event. The trust and its creation are appealed in court (if there are grounds). This is a civil case.
However, this complaint was picked up by the SSU and criminal proceedings were opened based on it. According to the "press review" conducted by SSU employees, the trustees are allegedly representatives of the aggressor state. That is, according to the official version, the criminality of the case is the fact that the founder allegedly transferred his assets to benefit russia. But this does not correspond to reality and is more like a series of fibs.
– Mr. Novinsky represented a pro-russia party in the parliament and was an ardent supporter of the pro-kremlin church. Hardly anyone was surprised that he could transfer his assets to persons also connected to russia, isn’t that right?
– There is no logic in this whatsoever. Trustees perform a fiduciary role in trust transactions. They do not have a right to transfer anything to anyone, to act in the interests of anyone, except for the interests of the beneficial owners, descendants, when they come into their own rights. They operate within the scopes of their professional licensed activities. Therefore, the reproach in representation of the interests of amorphous russia is nonsense.
The trustees have already testified under oath in the courts of Cyprus, these statements have been fully witnessed and filed in the criminal case. These are specific facts, not some mythical overview that the SSU is trying to pin on us.
– In that case, where did the grounds to link them with russia come from?
– They are professional lawyers, and indeed, they once had an office in moscow. Services were provided. This is due to their professional activity as administrators and nominal directors.
– Was this before or after the start of a full-scale invasion?
– Of course, it was before February 2022. Many professional auditors and lawyers from the European community had clients in russia. It is almost impossible to find those who have never had such professional connections.
After February 2022, almost everyone refuses such agreements. Some do it faster, some slower. But the process is ongoing. What is there to say when Europe still imports about 15-17% of gas from russia.
Going back to your question, I would like to point out once again: what the SSU presented as evidence in the criminal proceedings was related to their professional services before the full-scale invasion. If Europe saw that they continue to provide any services or act in the interests of the russian federation or its citizens, sanctions would be immediately applied to them. Cyprus is already quite successfully following this path. And even if the trustees are sanctioned, the clients are transferred to other trustees, because the essence of what happened will not change, the assets are transferred irrevocably, and the trustees perform a fiduciary function.
– You call actions of the law enforcement officers in the framework of the case "destructive". What would you say your chances in courts are like?
– Today we refute the allegations in all instances. If everything goes within the framework of the current legislation, we have a big chance to withdraw all charges.
– Who should be responsible for the losses suffered by the company?
– I hate to say this, but we kept silent for a long time because we are for the unity during the war and we do not want the enemy to use this situation for their own purposes in any way. We thought that we would wait for the victory, and then talk about it publicly. But we cannot remain silent any longer. For us, it became an existential question (survival, existence as such, - ed.).
“We offered authorities to look for a new investor together”
– Did the founder consider an option of selling his share in another way, instead of a trust option?
– I became CEO of the company in August 2021, and by the end of April 2022, I had to develop a strategy that, among other things, would provide for the exit from part of the businesses in the holding's portfolio. But the war happened.
If, for some reason, the State believes that loyal Ukrainian investor Smart-Holding is undesirable in Ukraine, we were ready to leave and sell the business. But to whom will we sell it during the war? During the war, unfortunately, there are only scammers, those who want quick money - buy cheap, and then resell at a very high price.
We are looking for strategists for our businesses, that is why we will not deal with the outbids. If someone who is ready to maintain at least the same level of taxes, jobs and continue to invest in Ukraine comes up, we would consider such proposals even today. I said this before the war, during the war, and I can second it now.
- Since the moment of the full-scale invasion, have you had any interest from such "strategists"?
- There were no specific proposals. I offered negotiations to everyone I could. I even suggested that the authorities would look for such investors together with us. If you don't want to see us that much, well, let's find those strategists together.
– Are there any discounts for Ukrainian assets for investors?
– Yes, there are significant discounts in many industries. But we are not ready to go out of business for next to nothing. We have invested hundreds of millions of dollars in Ukraine. Why should we sell our assets, our achievements for next to nothing? Especially in a situation where, despite all the problems and risks of war, they are still ready to invest in Ukraine.
- With whom from the authorities did you initiate such conversations? Who exactly did you approach?
- We invited all representatives of the authorities with appropriate powers to have a dialogue. We are talking about the deputies, relevant ministries, and the Office of the President. We are now ready to communicate. Let's look for investors together.
– What possible development scenarios do you see in this situation?
- If the State takes the assets, we will go to international courts. Or, if, despite everything Ukrainian courts decide to actually get to the point of a case and get acquainted with the arguments, in that case we have no doubt that the truth will be on our side.
What course the situation will take, I do not know. In fact, for the first time in my life, I am in a situation where I cannot say what will happen tomorrow. I don't know. But despite this, I need to support 3000 people.
– How much longer can the company continue working under such circumstances?
– The biggest crisis for the company is related to the blocking of the operations.
That is, there is nothing terrible in the arrests of corporate rights per se. Yes, this makes it impossible to sell corporate rights, pay dividends, change directors, but, in fact, does not pose a threat to any operating activities. In our case, on the basis of an open case (I would like to emphasize: not a court verdict, but simply the fact of the opening of criminal proceedings) - our licenses for gas production were terminated.
As you know, at the same time with the sanctions, the authorities adopted Law No. 2805 (“On Amending Certain Legislative Acts of Ukraine to Improve Legislation in the Area of Subsoil Use,” ed.). According to one of the provisions of this law, State authorities of Ukraine can suspend or revoke a hydrocarbon production license of a company whose ultimate beneficial owner has become a subject of sanctions in the country
But, what is remarkable, in our case, even this was not the reason for suspension of the license. According to the SSU, the State Service of Geology and Mineral Resources of Ukraine saw a discrepancy between declared beneficiaries and those that were re-submitted to the registers. Based on this, they decided that we had incorrect data, so they suspended the licenses.
Now we cannot carry out operational activities. We cannot pay more than 200 million UAH in taxes. The State receives less than 20 million cubic meters of gas, and every day this figure is growing.
Recently, someone from the Ministry of Energy said that Smart-Holding's gas fields are not strategic or critical for the country. Pardon me, but that's what sprinters say, not strategists. When you shut down wells, your pressure drops. When the pressure drops, ability to recover is at risk. So why terminate licenses? Does the State need energy independence? Is it better to import rather than build up domestic production? Is it better that the company could not pay taxes during the war? For people to lose their jobs?
In addition, licenses for two wells with water reservoirs got suspended as well. That is, during the sowing campaign in our agricultural division, the water supply was ceased. To me, this is genocide.
If there are any claims, crimes - arrest the shares. Figure things out, look for confirmation. If you find it, get a court verdict and take the assets, sell or transfer to the State administration. But just like that, without figuring things out, blocking the work is nonsense. And we will continue to fight and prove that the accusations are unfounded.
"A new oligarchy is being created in Ukraine now"
– In your opinion, are there any beneficiaries in this situation? Who is the main stakeholder?
– Truly, complex processes are going on here. There are certain top-level beneficiaries. We have our suspicions, but we are people of business, and we cannot blame anyone without any evidence. There is a decision at the highest level, as I see it, to completely take away all the assets. It may be that they first were passed to the State, and then into someone's private hands. In any case, what I am sure of is that a new oligarchy is being created now. But you and I will see it in a year or two.
If they wish to take the business away to then give it all away to foreign investors, this is a very unprofessional approach compared to how civilized processes of de-monopolization of certain industries or a decrease in the concentration of individual business groups there should be. Remarkably, Smart-Holding is not a monopoly in any industry.
However, such processes should take place under conditions of a proper investment climate in the country, conclusion of appropriate partnerships with foreign investors, guarantee of titles, absence of corruption, pressure, and so on. This is the only path of civilized development.
In this case, we are talking about taking away and then getting claims against the State. Bizarre strategy.
Now the main question for me is how to motivate people. At our southern assets, people have been idle since the beginning of the war. We supported the entire staff (about 1500) until the end of last year. Then we were forced to make certain cuts and continue to support the backbone of the team of 250 "golden" personnel. This is a direct consequence of the war.
At the same time, due to the actions of law enforcement officers, we actually lost the only earning business - gas production. With that money, we distributed resources to other businesses, various humanitarian and charitable projects.
But now we are forced to launch new processes to reduce our staff.
– Have you already started them?
– No. I am postponing this decision as much as I can. I don't know what I'm hoping for. And honestly, I don’t understand where to look for additional reserves. I constantly turn to the Board, show plans, try to delay this decision in every possible way. But unless the situation changes in the near future, this process will inevitably begin.
– When is it in the near future? This month? Until the end of the year?
– If nothing changes, in June-July. And you know, it is very strange for me to see in connection with this the news that Smart-Holding is blackmailing authorities by laying off people. What do they mean by blackmailing? If reserves are melting, and receipt of new ones is blocked, where will the opportunities to support activities of people come from?
We call on the authorities to restore ability to carry out operational activities. To give an opportunity to work, to support our working staff, to pay taxes. In parallel with this, we are ready to continue to defend our rights in legally.
"Because of the war, Smart-Holding lost hundreds of millions of assets worth"
– What is preliminary estimate of the company's losses as a result of a full-scale invasion of the russian federation? Can you name the amount as of now?
– The losses are insane. It is hundreds of millions.
If we talk exclusively about Smart-Holding, and not about our partner businesses, then based on results of 2022, we lost almost 50% of our revenue. But because of gas prices, we got a chance to reallocate resources to support other businesses.
In fact, from the first days of the war, we lost our ability to carry out operational activities at all southern assets: in Mykolaiv, Kherson, Ochakiv. Under constant shelling, we lose property there every day.
In Mykolaiv, the situation is now somewhat better, but we cannot resume operations there. We were planning a big project there: to build an industrial park.
We also had seven shopping centers destroyed. Our hotel in Kyiv does not work. Development projects are shut down in Zaporizhia and other cities.
There is an interesting case on business relocation in the area of polycarbonate. We cannot objectively relocate wells, but we did what we could.
– Are you considering a mechanism for recovering compensation from russia for the damage received as a result of the war? Rinat Akhmetov, for example, has already filed a counterclaim against russia at the European Court of Human Rights for billions of dollars.
– We have already filed 19 claims. For each company separately. Of course, we cannot claim compensation for lost profits or revenue in such claims. We can only appraise value of damaged or lost property asset. We are currently working on the evaluation methodology.
It's not a fast process. Entire Ukraine is waiting in line. But there is no other way how to force the aggressor to compensate for the damage done.
“There is no need to restore the old. We need something new”
– Main assets of Smart-Holding are located in Ukraine. Are you planning to change the focus from domestic to foreign markets? If yes, how?
– Many businesses in Ukraine have already said that they cannot develop due to the economic crisis, war, investment climate, criminal activities, etc., and switched to western markets.
We stay in Ukraine and want to participate in the renewal of Ukraine after our victory. Despite the fact that tomorrow we may not have anything, we still want to be part of the plan to rebuild the country.
And what is remarkable: the strategy, which I never presented in April 2022, in its industrial part remains fully relevant for post-war Ukraine.
It involves development of gas fields, creation of ammonia, development of agriculture. If we really want a quantum leap in the economy, we must move from a resource-rich country to a value-added country as soon as possible.
Another story is port infrastructure and industrial parks. We are sure that it is with such port hubs that new industrial Ukraine should develop.
As for real estate, here we see potential in energy-efficient towns. This project is already deeply developed, and we would very much like to see this project become a large-scale story over time. Eco-technologies, "greening" of the industry is what new Ukraine really needs.
We do not need to restore the old. We need to build something new. Progressive. Eco-friendly. Something that meets new global demand.
I will soon go to foreign investors with relevant proposals. These are projects worth several billion dollars of investments. With these projects, in any case, you need to enter Ukraine. This is not about enriching someone standalone, this is about developing the economy as a whole.
– What should the government do to encourage investors to invest in Ukraine and improve investment climate after the victory?
– Everything has already been said here before me. First, everything must be in accordance with the law. Secondly, a transparent judicial system. Thirdly, the fight against corruption is effective. These are general principles that everyone will demand: all countries that support us, all foreign investors. No-one will give a penny until these basic things are ensured.
Another important point is a strategy of Ukraine as such. What is the target country? What GDP, what economy structure we should have in 10-15 years? We need to see such country. It is a must.
A country becomes subjective only when it has a strong, powerful economy. It is necessary to ensure a balanced tax regime in relation to free economic zones, priority sectors of the economy. When all these rules of the game are in place, investors will come willingly, there will be no need to look for them.