Category: Issue 10.12

Ukrainian civilian infrastructure, particularly its vital components such as energy facilities and seaports, was heavily targeted by Russian missile strikes, causing severe damage. Combined damage to civilian infrastructure and energy industries already exceeds USD 50 billion. Since the beginning of hostilities, 18 airports, at least 344 bridges and overpasses, and over 25,000 kilometers of roads were damaged.

Considering the extensive scale of damage, the Ukrainian government has been working on the post-war restoration plans since 2022. Since Ukraine has limited resources to implement a reconstruction program on its own effectively, the role of the private sector in rebuilding becomes much more critical. Notably, private sector participation and its leading role in post-war recovery were among the main topics of the Ukraine Recovery Conference 2023 held in June.

The government views public-private partnerships (PPP) as one of the key instruments of private sector engagement in the rebuilding. The current track record of successful PPP projects includes the Olvia and Kherson seaport concessions awarded in 2020. While the full-scale invasion halted seaport activities, the government worked with the concessionaires to sustain these partnerships throughout the war by invoking the force majeure clauses.

However, existing PPP legislation may not meet the urgent requirements of post-war rebuilding. Under the Law of Ukraine On Concession, the standard open tender procedure usually takes around two years to complete (starting with feasibility study development until the concession agreement signing). Understanding that such a procedure may not be suitable for rebuilding purposes, the National Investment Council of Ukraine, together with Ukrainian and foreign advisors, business and government representatives, has developed a bill registered in the Ukrainian Parliament under No. 7508 On Amendments to Certain Legislative Acts of Ukraine to Improve the Mechanism of Private Investments Attracted under the Public-Private Partnership Mechanism to Accelerate Restoration of Objects Destroyed by War and Construction of New Objects Related to Post-war Rebuilding of Ukrainian Economy (Bill No. 7508).

The key purpose of Bill No. 7508 is to simplify the PPP procedures for post-war rebuilding projects while further refining the general PPP regulatory framework. It provides a much shorter PPP tender procedure for projects that will be included in the special lists of state and municipal PPP rebuilding projects. The government or relevant municipalities will approve such lists for state and local-level projects, respectively.

Among the key changes envisaged by Bill No. 7508 is the cancellation of the requirement to prepare a feasibility study and analysis of the effectiveness of rebuilding projects to be tendered. We expect that such simplification will apply to the projects that will be rebuilt to their initial state and will use the existing project design and construction estimates. This change should significantly reduce the time required to select a private partner and implement such projects.

Bill No. 7508 introduces the shortlisting of potential private partners who may skip the pre-qualification stage of the tender for PPP rebuilding projects and shorter tendering terms for rebuilding PPP projects. It also introduces explicit permission to govern PPP agreements by foreign law and the right to waive sovereign immunity for the state partner under direct agreements.

The government is consulting with foreign partners and finalizing Bill No. 7508 before its second reading in the Ukrainian parliament. The expectation is that it will be adopted in early 2024.

Simultaneously, the government undertakes efforts to ensure transparency and accountability in the rebuilding process. DREAM, an online platform that will collect and publish information about rebuilding projects (including PPP projects), entered beta testing in November 2023.

In October 2023, the EBRD, EIB, CEB, and World Bank signed a memorandum to harmonize and streamline their procurement approach during Ukraine’s rebuilding. This involved utilizing the DREAM platform and Prozorro system. They approved the use of Prozorro for tenders that do not exceed thresholds of EUR 130,000 for goods and EUR 5 million for works/services, and they are collaborating with the Ministry of Economy to apply the Ukrainian procurement system for high-value and complex contracts as well. Furthermore, following the adoption of Bill No. 7508 and the establishment of the necessary technical capabilities of the system, it is anticipated that Prozorro will be used for tendering PPP projects, including those supported by these organizations.

By Maksym Maksymenko, Partner, and Rostyslav Mushka, Associate, Avellum

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Large energy companies are taking measures to become green in order to meet targets to reduce carbon emissions. The main stakeholders – investors, customers, rating agencies, and regulators – are pushing energy companies to set more environmental, social, and governance goals publicly. For these companies, the “E” in ESG should be the foundation of their strategy.

Energy Companies in Ukraine

Ukrainian energy companies face a different reality than their European counterparts. They are grappling with survival as Russia has destroyed or damaged more than 50% of Ukraine’s energy infrastructure.

Rebuilding this infrastructure cannot wait for the end of the war; it is happening now. Five priorities have been identified for funding rapid reconstruction, with energy being the first. Ukraine aims not only to restore the power grid but also to decentralize it, making it less vulnerable and guaranteeing the availability of electricity in Ukrainian homes and businesses.

The recent ReBuild Ukraine 2.0 conference in Warsaw underscored the genuine interest and commitments of representatives from both Ukrainian and foreign governments and businesses. The focus was on addressing issues related to the restoration of Ukraine’s energy infrastructure facilities, ensuring energy security, decentralizing energy generation, promoting the development of green energy, and formulating future plans for Ukraine to emerge as a prominent European energy hub.

New Legislation in Place

In June 2023, the Parliament of Ukraine adopted the new law On Amendments to Certain Laws of Ukraine Regarding the Restoration and “Green” Transformation of the Energy System of Ukraine. It aims to ensure the further development of green energy generation on a competitive basis, incorporating the best international practices. Notable provisions include an effective mechanism for issuing, using, and terminating guarantees of origin for electricity generated from renewable energy sources, an improved model for holding auctions for the distribution of support quotas for renewable energy producers, and the right of producers under a green tariff to switch to directly selling electricity on the market.

This law is a game-changer, opening up a new revenue stream and setting the stage for the growth of biomethane production, a sector with immense potential yet hindered by market limitations. The guarantees of origin scheme are particularly crucial for biomethane, offering a mechanism to separate and trade its carbon value. With this scheme, Ukraine could witness a boom in the biomethane industry, attracting investors and developers alike.

ESG for Ukrainian Companies During the War

Concurrently, businesses are implementing ESG approaches relevant to the current realities of the war, such as supporting the army, aiding internally displaced persons, and ensuring food supply. The demand to implement these standards comes not only from business owners and managers but also from society and consumers. Additionally, Ukraine is creating jobs and appropriate training programs for women to master professions traditionally male-dominated.

The EU’s Sustainability Reporting Requirements

Despite these initiatives, Ukraine lacks legislation on ESG monitoring and reporting. Many local players closely integrated into the European economy, some on regulated stock markets, will eventually be required to submit corporate sustainability reports. The EU regulates this requirement through the Corporate Sustainability Reporting Directive, Sustainable Finance Disclosure Regulation, and the EU Taxonomy.

On November 8, 2023, the European Commission adopted the 2023 Enlargement Package, recommending that the Council opens accession negotiations with Ukraine. EU accession implies that EU legislation, including corporate sustainability reporting requirements, will apply to Ukraine. However, there is still plenty of work to be done. Ukrainian companies are still grappling with the need for change, and the development of legislation may prove instrumental in addressing current critical social challenges. These challenges encompass the treatment of employees within organizations, with a focus on providing mental health support. Additionally, there is a need to establish principles of inclusion, taking into account the growing number of veterans with various types of injuries. Equality and fairness are also key aspects that require attention, along with considerations of value creation along the supply chain.

Despite the ongoing war, Ukrainian businesses are demonstrating resilience and adaptability through their ESG initiatives. As Ukraine moves toward EU accession, the looming EU sustainability reporting requirements present a challenge and an opportunity. We also recommend developing legislative initiatives to address social issues in Ukrainian companies that are in this transitional period. With aspirations to become a European energy powerhouse, Ukraine’s path encompasses more than just rebuilding infrastructure; it involves fostering a sustainable and inclusive energy landscape for the future.

By Marta Halabala, Head of ESG, Asters

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As Ukraine is fighting off the brutal invasion by the Russian Federation, the Ukrainian M&A market is at its lowest point, at least in terms of the number of deals, since 2000. Still, interesting trends are emerging and there is great hope for a bright future.

The Activity of Local Buyers

There is a growing activity among successful Ukrainian businesses that have adapted to the challenging circumstances in Ukraine and are now looking for potential strategic acquisitions. One such example is OKKO, one of Ukraine’s leaders in fuel retail, venturing into renewables. OKKO is actively looking to acquire energy production facilities in Ukraine and has a clear strategy for moving forward.

This trend is visible for successful Ukrainian businesses across several industries, including energy, fuel retail, agriculture, etc. Unfortunately, the number of deals is still low, but given potential buyers’ expressed interest, we hope to see an increase in M&A driven by these deals soon.

What’s peculiar, if not surprising, is that the deal terms and structures we come across in our experience are not of a typical “distressed” M&A deal. The parties enjoy roughly equal bargaining power, and deal terms are reminiscent of an “ordinary” M&A transaction. The absence of widespread distressed M&A  in Ukraine in times of a full-scale war is a testament to the resilience of Ukrainian companies.

This trend is similar to the one that occurred in 2014 after the first invasion of the Russian Federation in Crimea and the east of Ukraine. At that time, the total number of deals decreased while the proportion of deals involving Ukrainian buyers and targets increased. One of the reasons for such an outcome is that foreign buyers, understandably, took a more cautious approach toward Ukrainian companies due to geopolitical risks. In contrast, Ukrainian buyers continued to pursue their strategic acquisitions.

Foreign Strategic Buyers

We see that some foreign strategic buyers are expressing cautious interest in Ukrainian companies but are not yet actively acquiring them for the reasons mentioned above. Given the similarity of trends in 2014 and 2023, we expect a gradual increase in foreign acquisitions once the war ends, particularly to pre-2014 levels or even surpassing those.

Despite the overall low activity, some sectors, particularly tech, enjoyed some success. One such example is the sale of DMarket, a marketplace for virtual assets, to Mythical Games, a US-based game technology company.

Private Equity

The overall number of private equity deals has also been relatively low. Various PE funds are looking at Ukrainian companies – especially tech or export-oriented companies – but are reluctant to start actively investing due to the war.

Nevertheless, there are exemplary success cases that predict a more active market in the future. Two such cases are the investments by Horizon Capital into GoIT, a leading global edtech platform, and Preply, an online language learning marketplace that connects tutors to learners globally. These deals give hope for a more active M&A market in Ukraine and the Ukrainian tech sector in general.

Outbound M&A

Ukrainian buyers are now actively considering expanding their business into neighboring markets, such as Poland and Romania. We know several companies are actively exploring their options while others are already closing their deals. For example, Epicentr, a chain of hypermarkets, is investing in Intersport Polska, a Polish retailer, which will allow Epicentr to expand its presence in Poland.

Outbound M&A activity in Ukraine was traditionally low. The number of outbound M&A deals may increase now, as some Ukrainian buyers either run out of Ukrainian companies to buy (as sellers are not actively looking to sell) or perceive outbound acquisitions as safer in the face of the ongoing war.

Conclusion

Despite the challenges of the ongoing war, the Ukrainian M&A market demonstrates remarkable resilience and adaptability. Local businesses across various sectors are pursuing strategic acquisitions, signaling confidence and robustness in the face of adversity. The interest from foreign buyers and the emerging trend of outbound M&A underscore cautious optimism for the market’s future. This enduring spirit of enterprise lays the groundwork for Ukraine’s vibrant post-war economic recovery.

By Mykola Stetsenko, Managing Partner, and Andriy Romanchuk, Counsel, Avellum

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The reconstruction of Ukraine – critical infrastructure, housing, hospitals, and social facilities – is already underway. This major effort has been significantly assisted by international support. Ukraine’s commitment to transparency, coupled with specific regulations under martial law, has been instrumental in achieving this progress.

Reconstruction Management: Pilot Projects: To ensure the comprehensive implementation of reconstruction projects, the government established the State Agency for Reconstruction and Infrastructure Development of Ukraine (Agency) in January 2023. The Agency was formed on the basis of two existing state agencies with extensive experience in implementing infrastructure projects, often in cooperation with international financial institutions. Oversight of the Agency’s activities is coordinated by the Ministry of Infrastructure of Ukraine. The specific legal framework for the first pilot projects, focusing on the reconstruction of six settlements in Ukraine, was adopted in April 2023. This legislation provides for bottom-up management of reconstruction, where projects are prioritized at the local level, prepared for reconstruction (including land allocation, surveys, and damage assessment), and then reviewed and approved by the Agency. The amendments also introduce the delegation of customer functions to the Agency and its local authorities, which will facilitate the reconstruction of private or social projects that do not have relevant experience to manage them.

Transparency and accountability in the Agency’s projects are ensured through DREAM, a dedicated e-platform that collects, organizes, and publishes open data in real time at every stage of reconstruction projects. The establishment of the Agency provides a clear understanding of the responsible authority for future reconstructions and collaborations.

Enhancing Transparency in Construction: The construction industry faced the war during the reform aimed at ensuring transparency. In pursuit of this goal, the Unified State Electronic System in the Construction Sector (E-System) was launched in 2020, laying the groundwork for the consistent digitalization of the entire construction cycle. Currently, the E-System serves as a platform allowing anyone to verify the legitimacy of construction projects online. The system handles a significant part of the decisions autonomously, reducing the influence of the human factor.

Streamlining Construction Procedures: Since the outbreak of the war, several legislative changes have been introduced to speed up the restoration of damaged property and address urgent priorities. The first of these was to simplify the requirements for acquiring and developing land for certain activities. This speedy response aims to provide practical solutions for the relocation of businesses from areas of hostilities, the provision of temporary housing for internally displaced persons, as well as the placement of river, maritime terminals, and other infrastructure facilities. Furthermore, to streamline the repair of damaged facilities, no re-designing and re-permitting is required – instead, a simple set of documents is sufficient.

Moreover, new legislation allows the commencement of complex constructions (so-called CC2 and CC3 complexity classes) during and three months after the war, based on a construction declaration instead of applying for a traditional license. This self-declaration approach, which can be completed within a day through the E-System, is also available to foreign contractors, although they would have to register a representative office and obtain an electronic key from the tax authority. Simplifications have also been introduced to the environmental impact assessment (EIA) procedure, which is becoming effective on December 29, 2023. These changes aim to significantly reduce the implementation period and promote digitization through relevant e-registers. The public hearings of the EIA can be held online, which is especially relevant given the security situation in some regions. At the same time, major reforms in construction legislation are still to come and can be implemented after the signing of draft law No.5655.

De-Risking Mechanism Available to Investors: Lastly, an additional breakthrough is the adoption by the Parliament of draft law No.9015, which allows the Export Credit Agency of Ukraine (ECA) to provide insurance coverage for domestic investments against military and political risks. Subject to the implementation of relevant by-laws, Ukrainian investors will be able to apply directly to the ECA, banks, or insurance companies that cooperate with the ECA, and benefit from war insurance. This, in turn, will significantly expand the opportunities for domestic investments to restore the industrial and processing industries. It is worth noting that many investors have already benefited from obtaining political risk insurance (including war risk) from national ECAs who started providing coverage for Ukraine after a short break in 2022, as well as from international and development institutions who support Ukraine by providing war insurance for projects in Ukraine.

By Oleksiy Feliv, Managing Partner, and Tetiana Storozhuk, Senior Associate, Integrites

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As the full-scale war continues into the second year, Ukrainian companies are facing unprecedented difficulties with attracting capital which is desperately needed to restore their day-to-day business operations and production halted by the military aggression. Predictably, international debt capital markets remain inaccessible not only to Ukrainian private borrowers but also to sovereign entities. The unpleasant situation worsens with high costs of borrowing, which have skyrocketed even more for Ukrainian borrowers since the outbreak of the war due to unsustainable country risk.

However, this gloomy picture is not without silver linings. A few recent noticeable changes cultivate a positive outlook and expectations for capital inflow next year. Notably, international financial institutions (IFIs) have substantially increased vital financial support for the businesses that suffered the most. Moreover, borrowers may not only expect to receive very generous restructuring terms but can also count on the lenders to inject new money to help a company recover from significant losses resulting from the war.

Undoubtedly, IFIs have become more willing to onboard new clients and have made investments in critical infrastructure and new constructions. On the other hand, the Multilateral Investment Guarantee Agency, the Development Finance Corporation, and other export credit agencies are now offering protection for investors and lenders against war risk, although the amount of coverage is still quite limited.   

Undoubtedly, institutional financial support is vital, but it is not enough. Many companies and projects are still unable to meet the eligibility and bankability criteria typically required by IFIs to extend financing. For this reason, investment funds turned their eyes to private investors which historically invested in real estate assets in Ukraine.

A deep crisis in the real estate market, low interest rates on deposits, and a complete ban on making investments abroad have left private investors with no instruments to invest in except, probably, sovereign bonds. Investment funds and companies (especially large retail chains) have grasped such a chance and offered investors covered corporate bonds and lease-revenue bonds backed by real estate assets as more lucrative options compared to sovereign bonds. It is too early to say if the bet succeeds but, hopefully, the issuance of covered corporate bonds may breathe life into the domestic capital market and may allow corporates to attract additional financing.

Unsurprisingly, transacting in domestic governmental bonds (so-called “war bonds”) has been growing exponentially after Russia’s invasion of Ukraine. Sovereign bonds remain the least risky but still relatively high-return instrument for investors. Additionally, FX-linked sovereign bonds help investors mitigate FX fluctuation risk, which is very high in the extremely volatile Ukrainian market. The bonds are very popular among foreign investors (individuals and entities) which are allowed to repatriate interest/coupon payments paid on sovereign bonds outside of Ukraine subject to certain conditions.

This makes bonds even more attractive for investors considering that, as a rule of thumb, divestments and pay-outs of dividends overseas are expressly prohibited. According to official statistics, the government has raised almost UAH 600 billion (approximately USD 15 billion) through public placement of domestic sovereign bonds denominated in local and foreign currencies since martial law was imposed. Sovereign bonds, especially EUR/USD-denominated bonds, are hugely traded in the secondary market and frequently bought by large exporters of commodities as a safe haven for foreign currency proceeds under export contracts. 

We expect that international capital markets will unlikely become more accessible to Ukrainian private and public borrowers until the war is over. Again, IFIs may be willing to subscribe to additional sub-sovereign or sovereign debt as part of their continuous efforts to support Ukraine.

We also predict an overall increase in direct investments and bilateral financing thanks to the coverage against political violence risk which has become available just recently. At the same time, the domestic capital market may, surprisingly enough, become a significant source of affordable capital for Ukrainian private businesses and a viable alternative to expensive corporate loans from either domestic or international lenders.

By Igor Krasovskiy, Partner, Integrites

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.