Category: Ukraine

KPD Consulting has successfully represented Greentech in a dispute over the unlawful termination of its electricity supply by operator Zhytomyroblenergo.

According to KPD, “lack of electricity blocked the company’s business activity and several months of negotiations between Greentech management and regional energy distribution company (Oblenergo) had no positive results.”

The firm reported it helped Greentech “not only to restore electricity supply and the company’s activity through the court proceedings but also to recover court costs from the defendant. During the difficult process, the [firm] proved to the court of first instance and the court of appeal that there were no legal grounds for energy supply termination.”

Greentech specializes in the cultivation of cereals and industrial crops, the cultivation of textile crops, and it carries out wholesale trade in agricultural machinery, equipment, and spare parts.

KPD Consulting’s team included Managing Partner Igor Kalitventsev and Head of Dispute Resolution Eugene Litvinov.

The rights and obligations of virtual asset market participants, as well as the principles of state policy for virtual assets circulation recently came close to being set out in Ukrainian law. On September 8, 2021, the Ukrainian parliament, the Verkhovna Rada (the “Rada”) adopted the Law “On Virtual Assets” (the “Law”). The Law is designed to regulate legal relations arising in connection with the circulation of virtual assets in Ukraine.

But the Law was vetoed by the president on October 5, 2021 and returned to the Rada with proposals for further revision. In particular, the president noted that the establishment of a new regulator would result in a significant increase in state budget expenditures, proposing instead to assign responsibility for regulating the circulation of virtual assets to the National Securities and Stock Market Commission.

The Law can be a significant step in the development of the cryptocurrency market in Ukraine. Therefore, we consider it important to let you know about possible changes that, the Law would bring.

Virtual assets

The law defines virtual assets as an “intangible benefit that is an object of civil rights, has a value and is expressed as a set of data in electronic form. The existence and negotiability of a virtual asset is ensured by the system for ensuring the circulation of virtual assets. A virtual asset can certify property rights, including the right of claim to other objects of civil rights.” Virtual assets can be secured and unsecured.

Secured virtual assets certify property rights, specifically rights of claim with respect to other objects of civil rights. A virtual asset is secured by another object of civil rights (the “Сollateral”), the rights of claim that are certified by such virtual asset. In its turn, unsecured virtual assets do not certify property rights.

A person that has obligations under a secured virtual asset must ensure cessation of the virtual asset circulation if the Collateral securing that asset has been lost and the possibility of replacing it is not provided for by the transaction involving the creation/alienation of the relevant secured virtual asset. Thus, for example, if the virtual assets are backed by securities and circulation of those securities has been stopped (due to issuance cancelation, repayment, etc.), the respective virtual assets circulation could also be stopped.

If the collateral is property to which special legal requirements apply (for example, immovable property, currency values, etc.), those requirements must be met under a virtual asset transaction.

If the collateral is encumbered (pledged, seized, etc.), the relevant virtual asset may not be alienated.

All such specific requirements could be quite challenging to apply, taking into account the phenomena of virtual assets.

The circulation of secured virtual assets can also be regulated by government agencies that regulate or register transactions involving the relevant collateral.   

The Law also introduces the concept of “financial virtual assets”, which include:

• Secured virtual assets that are issued by a resident of Ukraine and secured by currency values (the “SVA(CV)”) and
• Secured virtual assets that are issued by a resident of Ukraine and secured by a security or a derivative financial instrument (the “SVA(FI)”).

SVA(CV) will circulate in accordance with the procedure established by the National Bank of Ukraine, while SVA(FI) will circulate in accordance with the procedure established by the National Securities and Stock Market Commission of Ukraine.

Ownership of a virtual asset is acquired (i) upon creation of the virtual asset, (ii) upon the execution and completion of a virtual asset transaction, (iii) by virtue of law or (iv) under a respective court decision.

Virtual assets cannot be used as a means of payment in the territory of Ukraine or exchanged for property, work or services.

Field of application of the Law

The Law applies to legal relations under these circumstances:

• Entities—service providers involved, have a registered address/permanent establishment on the territory of Ukraine.
• Ukrainian law is determined as applicable to the virtual asset transaction
• The virtual asset transaction is being concluded between residents of Ukraine.
• The virtual asset transaction is concluded by the person, which is a resident of Ukraine (the purchaser of a virtual asset) in its own interest.

If Ukrainian law applies to a transaction involving the disposal of objects of civil rights, or to the securing of a virtual asset, circulation of such respective virtual asset is also governed by Ukrainian law.   

Service providers

The Law sets out that a provider of services related to the circulation of virtual assets (the “Provider”) may be a legal entity that meets the criteria established by the Law and carries out one or more of the following activities in the interests of third parties:

• Custody or administration of virtual assets or virtual asset keys
• Virtual assets exchange
• Virtual assets transfer
• Provision of intermediary services related to virtual asset

Foreign legal entities may be Providers.

Financial institutions may only be providers of services related to the circulation of SVA(FI).

The following do not qualify as a Provider:

• A legal entity registered under the law of, or having its registered address on the territory of, a state recognized by the Rada as an occupying state or aggressor state (an “Aggressor”), or if its executives or chief accountant are substantial shareholders and ultimate beneficial owners of such legal entity.
• A legal entity that holds, directly or indirectly (through another individual or legal entity), any participation interest in a resident of the Aggressor.
• A legal entity that has among its participants (founders, shareholders) legal entities registered in a state (jurisdiction) that does not comply with recommendations of international, intergovernmental organizations counteracting to legalization (laundering) of the proceeds of crime or financing of terrorism or financing proliferation of weapons of mass destruction (these currently are: Iran, North Korea) or improperly complying with those recommendations (these currently are: Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Malta, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Uganda, Yemen, Zimbabwe).
• In other cases, as envisaged by the Law.

Business entities may carry out Provider activities if they meet and comply with the requirements established by the Law, subject to obtaining permission for the provision of the relevant type of services related to the circulation of virtual assets.

A permit for carrying out certain types of provider activities will be valid for one year. 

Banking / nonbanking financial institutions have the right to provide services related to the circulation of SVA(CV) on the basis of a banking license / license for foreign exchange transactions and a permit for the provision of services related to the circulation of virtual assets.

The Law sets the following requirements on the charter capital of Providers:

• For residents of Ukraine providing services related to custody and administration of virtual assets or virtual asset keys—the equivalent of at least 70,000 non-taxable minimum incomes (UAH 1,190,000), and for non-residents—the equivalent of at least 350,000 non-taxable minimum incomes (UAH 5,950,000)
• For residents of Ukraine providing services related to (i) the exchange of virtual assets, (ii) providers of services related to the transfer of virtual assets, or (iii) providers of intermediary services related to virtual assets—the minimum charter capital must be the equivalent of at least 35,000 non-taxable minimum incomes (UAH 595,000), and for non-residents—at least 175,000 non-taxable minimum incomes (UAH 2,975,000).

The Law also determines the fee for issuance of a permit for carrying out the activities of the Provider:

1. For residents, the fee is set from UAH 68,000 to UAH 136,000, depending on the type of activity.
2. For non-residents, the fee is set from UAH 340,000 to UAH 680,000, depending on the type of activity.

Establishment of the State Register of Providers is also provided for by the Law.

Public offerings of virtual assets

The Law provides for the possibility of public offerings of virtual assets. In such cases, the issuer of the virtual assets must publish information about the issuer and the virtual asset on the official website of the issuer.

Financial penalties for violations of the Law

Financial penalties for violations of the Law can range from 500 to 7,000 non-taxable minimum incomes (from UAH 8,500 to UAH 119,000), depending on the type of violation.

The Law should not become effective until the respective amendments to the Tax Code are introduced specifying taxation in respect of virtual assets transactions.

By Natalia Selyakova, Partner, and Artur Savin, Associate, Dentons

Avellum has advised MHP on its investment in Ukrainian food technology start-up Foodz.

According to Avellum, MHP received a minority stake in Foodz through two funding rounds. “MHP is the leading poultry producer in Europe and one of the biggest grain producers in Ukraine,” the firm noted. “As a part of MHP’s strategy to support new businesses, the company aims to strengthen its relations with the restaurant business to bring the company closer to the customer.”

Founded in 2020, Foodz is a dark kitchen start-up that has been developing an online restaurant chain in Kyiv. The company has raised over USD 2 million in investments and manages 12 brand restaurants with over 100,000 customers.

The Avellum team was led by Counsel Andriy Romanchuk and Associate Yuliia Chelebii-Kravchenko and included Managing Partner Mykola Stetsenko, Senior Associate Anastasiya Voronova, and Associate Yelyzaveta Kashyna.

Asters has successfully defended PrivatBank before the Solomianskiy District Court against a claim of unlawful personal data usage by Igor Kolomoiskyi, seeking the invalidation of agreements between PrivatBank and the National Bank of Ukraine.

According to Asters, “Kolomoiskyi’s attorneys filed the claim in December 2017, arguing that counsel for PrivatBank and the NBU allegedly used Kolomoiskyi’s personal data without his consent during the performance of the agreements being challenged.” The firm announced that the Court dismissed Igor Kolomoiskyi’s claim against PrivatBank, the NBU, the Ministry of Finance of Ukraine, and their counsel for a second time: “the Court found that the plaintiff failed to address the deficiencies of their statement of claim, as established by the Court in January 2020.”

Asters had again filed “an application for leaving the claim undecided. The Court concluded that the plaintiff was required to properly perform his procedural obligations. However, neither the plaintiff nor his authorized representatives took any measures to address the deficiencies of the statement of claim, as established by the Court as early as January 2020,” the firm reported.

The Asters team included Partner Andriy Pozhidayev, Senior Associates Oleksiy Ukolov and Natalia Mysnyk, and Associate Andriy Tyshchenko.

Over the past years, Ukraine expressed its intention to step on the energy transition pathway, develop energy efficiency measures, phase out fossil fuels, and switch to renewable energy sources (RES). The development of green hydrogen production (based on electrolysis of water using renewable electricity) is part of the chosen direction. Therefore, the Ministry of Energy of Ukraine and more than 20 Ukrainian companies have joined the European Clean Hydrogen Alliance to coordinate efforts to develop hydrogen energy.

According to estimates, Ukraine could establish at least 10 gigawatts of electrolyzed hydrogen capacity by 2030. There is no demand yet in Ukraine for such volumes of hydrogen, so production is mainly being considered for export to the EU. Hydrogen produced in Ukraine could cover one-eighth of the capacity required by the EU to reduce greenhouse gas emissions. Germany has been particularly interested in supporting hydrogen production in Ukraine. According to Germany’s Hydrogen Strategy, Berlin designated EUR 2 billion for hydrogen projects in Ukraine and North Africa, specifically Morocco. Moreover, developing a green hydrogen industry to replace gas could also be a good solution for Ukraine, mitigating the forecasted negative impact of the Nord Stream 2 export pipeline completion.

What Has to Be Done, and Where Do We Stand Now?

Firstly, Ukraine has to clearly outline its strategy in developing green hydrogen projects and establish the relevant regulatory framework.The Ministry of Energy and the National Energy and Utilities Regulation Commission are responsible for regulating the usage of hydrogen in the spheres of electricity and gas and establishing the relevant policy. The Ministry of Environmental Protection and Natural Resources is responsible for the state environmental protection policy, including the preservation of the ozone layer, ecological safety, waste treatment, hazardous chemicals, and carry out state ecological inspections.Ukraine is currently working on its National Hydrogen Strategy and expects to adopt it in the coming months. As of the date of this article, there is no unified statutory act regulating hydrogen in Ukraine. The State Standard of Ukraine DSTU 2655-94 Hydrogen establishes general requirements that apply to hydrogen as a “chemical substance.” Potentially, hydrogen production in Ukraine would require obtaining a generation license, environmental permits (for water usage, air pollution, or in the context of waste treatment), and construction permits – permits for hazardous works and usage of hazardous equipment – and the undertaking of an environmental impact assessment and compliance with its conditions.

Moreover, neither the Gas Transmission System Code nor the Code of Distribution Networks provides the possibility to connect hydrogen projects to the Ukrainian gas transmission or distribution networks and transport hydrogen through the existing gas pipelines. Therefore, certain amendments to the legislation and technical standards regulating production, transportation, storage, and use of hydrogen would be required.

Secondly, technical modernization of the existing gas pipelines could be required to transport hydrogen to the EU. Part of the existing gas pipelines can be used for the transport of blended-in hydrogen. Physical blending up to 2% is already achievable with minor adjustments, and with further adjustments, the percentage could gradually be increased to approximately 10-20%. Studies are still underway to determine the optimal hydrogen share in the mix that can be used in Ukraine’s Gas Transmission System.

Thirdly, rebooting renewables investments and resolving the current issues in this sector is essential for developing green hydrogen projects in Ukraine. RES projects still face some obstacles caused by liquidity issues within the Ukrainian electricity market, such as a retroactive feed-in tariffs reduction, new tax duties initiated, debts to RES producers for generated electricity, gaps in regulatory framework on curtailments, and delays with implementing the new support auctions mechanism.

As of the date of this article, there are several hydrogen pilot projects in Ukraine. The most significant one is the construction of a renewable hydrogen production plant as part of the international Danube Hydrogen Valley project. Ukraine’s largest energy group, DTEK, plans to launch the first pilot project to produce green hydrogen in Ukraine by the end of 2021.

Overall, developing Ukraine into an exporter of green hydrogen to the EU could bring new investments in Ukraine, fundamentally changing the nature of its strategic importance and help it reach the decarbonization goals.

By Glib Bondar, Senior Partner, and Anna Mykhalova, Associate, Avellum

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Integrites Partner and Head of International Arbitration Olena Perepelynska has been appointed as a Member of the Baltic Litigation Fund Advisory Committee.

According to Integrites, being the first of its kind in the CEE region and the Baltics, the BLF will provide financing for legal and associated costs of international investment and commercial arbitration and litigation disputes in the region.

According to the firm, “together with the other Advisory Committee members, experts in law, finance, and business management with an extensive background in international dispute resolution, Olena Perepelynska will consult the BLF Board about perspective legal, quantum, or enforcement implications of particular cases and provide advisory opinions before the Fund renders investment decisions.”

Perepelynska has been with Integrites since 2015. Prior to that, she spent four years with Sayenko Kharenko and a further eight with Vasil Kisil and Partners. Also, since 2016, she has been the President of the Ukrainian Arbitration Association (as reported by CEE Legal Matters on November 18, 2016).

“The Baltic Litigation Fund opens new opportunities for the regional parties seeking financial support for their litigations and arbitrations,” Perepelynska says. “I’m honored to join the BLF Advisory Committee and offer my 18-year experience and expertise to contribute to granting access to justice to the parties in the CEE and the Baltics.”

Equity has successfully represented former Ukrainian Minister of Infrastructure Volodymyr Omelyan before the High Anti-Corruption Court of Ukraine.

According to Equity, “the High Anti-Corruption Court of Ukraine found Volodymyr Omelyan not guilty of committing a crime under paragraph 2 of Article 211 of the Criminal Code of Ukraine. [The former] Minister was acquitted in connection with the lack of mandatory elements of the corpus delicti, in particular: the object of the crime, the objective and subjective sides of the corpus delicti.”

The firm reported that, “according to the indictment, Volodymyr Omelyan had issued a regulatory legal act that reduced state budget revenues contrary to the law, and the subject of such actions were budgetary funds on an especially large scale. The trial lasted about a year and became one of the most high-profile in Ukraine. The decision of the High Anti-Corruption Court of Ukraine is one of the first acquittals among cases of national importance.”

Equity’s team included Partners Olexandr Lysak and Taras Poshyvanyuk and Attorneys Maksym Saliy and Rodion Kokosh.

Esquires has successfully represented Solum before the Darnytskyi District Court of Kyiv in lifting the arrest imposed upon a 3,500-square-meter property purchased at public auction.

According to the firm, the arrest on Solum’s property was imposed by the Ukrainian Security Service, as a material piece of evidence in a criminal investigation. “The investigation relates to the illegal takeover of property belonging to the State Space Agency of Ukraine in 2012,” Esquires reported. “In this criminal proceeding, the notice of suspicion was served to the officials of the enterprise under Art. 191 and 366 of the Criminal Code of Ukraine and the amount of damage caused to the state is estimated to be more than UAH 40 million.”

The firm argued “the absence of any reasons for applying the arrest as a remedy in the criminal proceedings.” The Darnytskyi District Court of Kyiv issued its ruling on June 25, 2021.

Esquires has also represented Solum on a related real estate dispute in 2020 (as reported by CEE Legal Matters on June 19, 2020).

The Esquires team included Partner Opanas Karlin.

Avellum has advised Kazakhstan’s financial technology firm Kaspi.kz subsidiary Kaspi Pay on its acquisition of Ukrainian online payment platform Portmone from Ukraine-based 4i Capital Partners. Kinstellar advised the seller.

According to Avellum, “the acquisition of Portmone gives Kaspi Pay a solid starting platform with a payments license from the National Bank of Ukraine, Visa & Mastercard accreditation, business relationships with thousands of merchants and a wide pool of banks.”

Operating in Kazakhstan and Azerbaijan, Kaspi.kz is a payment, marketplace, and fintech ecosystem developer listed on the London Stock Exchange.

Founded in 2002, Portmone provides online payments and money transfers in Ukraine, offering a portfolio of IT payment solutions for banking, mobile, e-commerce, and service industries.

4i Capital Partners is a private equity investment firm managing investments in Ukraine. It invested in Portmone.com in 2013.

“It was an exciting and a milestone transaction for us and shows that our strategy – acquiring majority stakes in innovative and highly competitive local companies and building top-notch management teams – works,” 4i Capital Partners Managing Partner Alex Munteanu commented.

The Avellum team was led by Managing Partner Mykola Stetsenko and included Counsels Mykyta Nota and Andriy Romanchuk, Senior Associate Anton Arkhypov, and Associates Yelyzaveta Kravtsova, Oleksandr Kozhukhar, Anastasiia Karpenko, Yelyzaveta Kashyna, and Iryna Fonotova.

Kinstellar’s team was led by Counsel Illya Muchnyk and consisted of Partners Illya Sverdlov and Galyna Zagorodniuk, Senior Associate Oleksandra Poliakova, and Associate Zhanna Babych.

CMS has advised DAI Global and the National Securities and Stock Markets Commission of Ukraine on the rules for clearing transactions with securities and licensing terms for clearing institutions.

According to CMS, “the new clearing rules and licensing terms for clearing institutions incorporate the novelties of the New Capital Markets Law that entered into effect on July 1, 2021 … [It] is broadly based on provisions of key EU directives and regulations establishing rules for the operation of capital and financial markets, including MiFID II, EMIR, and MiFIR.” According to the firm, “the New Capital Markets Law aims to change the current financial market infrastructure and to create the new comprehensive legal framework for the proper functioning of the financial markets (capital market, money market, certain commodity markets, and the market for derivatives).”

DAI Global is a private development company that tackles fundamental social and economic development problems caused by inefficient markets, ineffective governance, and instability. It works with a wide range of clients, including national and local governments, bilateral and multilateral donors, private corporations, and philanthropies.

CMS’s team was led by Partner Ihor Olekhov and included Counsel Kateryna Chechulina and Associates Khrystyna Korpan and Iryna Kravchenko.