The Significant Red Lines. Why the situation facing Ferrexpo may hinder foreign direct investment into Ukraine

The text has been shortened and edited for clarity.

It is a remarkably hopeful sign of future success that Ukraine has stayed stalwart under pressure from so many different angles. The aid blockages, the military casualties, the civilian casualties, the endless bombardment, the destruction of infrastructure, and the cultural patrimony – are part of the visible picture, where some of those pressures are more visible than others.

Anti-Ukraine propagandists like to smear the country as dysfunctional because of corruption. It’s true that there have been shocking levels of corruption in some social and political life areas in the past, not least because of Russian influence. But in general, the conversation on the topic lacks nuance. Corruption in Ukraine has been as much a tool of Moscow’s colonial rule as a legacy of the old Soviet system. Over the past 20 years, an increasing part of Ukrainian society has campaigned for a change in the country’s governance model to establish the rule of law and root out corrupt practices. So now, that Ukraine is now officially a candidate for EU membership and has begun the laborious process of accession its primary challenges are government accountability and the implementation of anti-corruption reforms. 

As the US Special Representative for Ukraine’s Economic Recovery, Penny Pritzker said:

«Ukraine needs to invest constantly in the fight against corruption and that government and citizens must monitor each other to achieve the necessary standards».

The EU also recommends that Ukraine continue building a credible track record of investigations, prosecutions, and final court decisions in high-level corruption cases. In particular, those which include the seizure and confiscation of criminal assets. These kinds of reforms will be important for incentivizing direct foreign investments in Ukraine and supporting the countryʼs recovery.

So as Ukraine battles for survival in war, it simultaneously battles for internal reform and renewal. No easy task, and probably impossible for any other country to pull off – but Ukraine can and will do it. 

However, there is one thing that Ukraine needs to be particularly cautious about. It concerns cases that can arise troubling the violation of Ukraineʼs international law obligations and fundamental principles of the rule of law by the courts of Ukraine. 

An illustrative case is the story of Ferrexpo, a huge company backed by large amounts of respectable foreign investment. It is the third-largest iron ore pellet exporter in the world. It is listed on the London Stock Exchange — and is a constituent of the FTSE 250 index. In 2021, the company’s revenue was US$2.5bn, but because of war, its revenue declined in 2022 to around US$1.2bn. The company is a critical partner to premium European steel makers, who supply high-quality steel to European carmakers.

Ferrexpo’s founder and former majority shareholder is Kostyantin Zhevago, together with his family he holds a 49.3 percent stake in the company. However, the company shareholders include many institutional investors, pension funds, and private individuals. The top five institutional shareholders of Ferrexpo plc are from the USA and UK and include names like BlackRock, Schroders and Wellington, in addition to some of the world’s largest sovereign wealth funds in Europe, the Middle East and Asia.

But the companyʼs usefulness for Ukraine is also important. Since its initial public offering on the London Stock Exchange in 2007, Ferrexpo Plc has invested more than US$3 billion into its Ukrainian operations, paid more than US$1.3 billion of direct taxes in Ukraine, also provides direct support to local communities in Ukraine, and is one of the largest employers in the Poltava region of Ukraine, with a workforce of 10,000 employees and contractors. In 2022, Ferrexpo established a Humanitarian Fund and to date, Ferrexpo has committed to US$19 million to support people affected by the war.

Now to go to the heart of the controversy. Ukrainian law enforcement agencies have initiated criminal proceedings against Konstantin Zhevago related to his bankrupt Finance and Credit bank, which was never part of the Ferrexpo group. In January 2023, the Ukrainian Deposit Guarantee Fund initiated proceedings against Zhevago seeking damages of more than UAH 45.9bn for the liquidation of the Bank. He was accused of embezzlement and money laundering, for which as yet he has received no conviction as the French courts (have refused to extradite him. The problem arises when prosecutors move against Ferrexpo in pursuit of the «missing funds» from Zhevago’s collapsed private bank.

The Ukrainian government has frozen Ferrexpo’s assets in Ukraine — actually over 50% of its shareholding in its mining subsidiaries. But as soon as Zhevago’s former bank and Ferrexpo are separate entities, one shouldn’t punish all the shareholders in Ferrexpo because of the acquisition of one of them. However, letʼs not get ahead of ourselves before getting any convictions in court.

Meanwhile, prosecutors have also gone after Viktor Lotous, the chairman of the board of Poltava Mining, one of Ferrexpoʼs subsidiaries, for allegedly illegally mining 20 million cubic meters of «crushed stone» between 2015 and 2021 without a license. The companyʼs position is that the minerals in question are not a separate mineral resource, but that it is a waste product resulting from the crushing of iron ore during the technical process to produce iron ore pellets. Viktor Lotous was arrested and detained for 38 days. He was offered bail of almost UAH 1 billion, a record for Ukraine. In the end, the company paid just under half that to get him out. 

Currently, law enforcement authorities are demanding compensation for «damages» totaling $4.31 billion, which significantly exceeds the companyʼs total revenue from the sale of its main products.

Treating Ferrexpo poorly is a bad signal to Ukraine’s international partners.

The issues with the rule of law, private property rights, and hobbling the highly productive and beneficial companies are very critical points for international investors. And Ukraine needs to be extra careful in crossing these red lines.