Illegal privatization of Ukraine alcohol factories

The joyful scream, which publicly saves the leadership of the State Property Fund of Ukraine (SPFU) over the alleged success of the sales of seven enterprises of Ukrspirt, is designed to deter law enforcement agencies and the public from turning the ZE team into corruption schemes with these state facilities.

Milestones of the “great” alcohol sale of the SPFU

Yes, indeed, on November 11, the State Property Fund sold Marylivsky distillery (Ternopil region) at a privatization auction through the electronic platform Prozorro at a price 2.2 times higher than the starting price. The seventh facility of the subsidiary “Ukrspirt” was sold for 120 million hryvnias. The debut auction for the privatization of the first object of the State Enterprise “Ukrspirt” – “Nemirovsky distillery” (Vinnytsia region) was held on October 15. The plant was sold to LVN Limited LLC, the shareholders of Nemiroff, for UAH 55.08 million (2 million $), which is UAH 5 million (180 000 $) higher than the starting price. The winning company was the only one to apply to participate in the auction.

On December 2, 2020, according to the information on the official website of the State Property Fund, an electronic auction was successfully held for the privatization of the Zalozetsky “place of business and storage of alcohol” from the list of objects of the subsidiary enterprise “Ukrspirt” (Ternopil region, Sborovskiy district, Kabarivtsy village) with 80,010,000 UAH (2,8 mln $). As the management of the SPFU solemnly declared, “six participants competed for the privatization object at transparent tenders, as a result of which the starting price increased 2.5 times – from UAH 32 million (1,2 mln $) up to UAH 80 million (2,8 mln $). This, according to the State Property Fund, is the eleventh successful auction (the author of the article counted only 7 of them) from the privatization of alcohol assets, which take place within the framework of breaking up a government-run monopoly of the alcohol production market”.

After all, as stated by the Fund’s management back in the middle of November, starting from October 15, six plants of the State Enterprise “Ukrspirt” were successfully privatized at online auctions with an increase in the starting sale price. Two auctions did not take place. They, under the current law “On the privatization of state and municipal property” and the statements of the SPFU management, will be put up for re-bidding with a reduction in the starting price.

Therefore, victoriously reporting a significant increase in the starting price of the property of the Zalezetskiy distillery on December 2 during the electronic auction on Prozzoro, Sennichenko and Co forgot to say that it was re-exhibited after its price had been reduced by 2 times (!). So much for your success.

On November 20, 2020, the State Property Fund of Ukraine announced the holding of electronic auctions for the privatization of two objects of the State Enterprise “Ukrspirt”: Voyutitsky (Poltava region, Khorolsky district, Vishnyaki village) and Veshnyakovsky (Lviv region, Samborsky district, Voyutichi village) implementation of activities and storage of alcohol. ”

The first of the named facilities include, in particular, a distillery, a fermentation shop, a production laboratory, and a brewery rectification building. The second one is a bottling shop, production of kvass wort concentrate and polymalt extracts, a water pumping station building, a brewing and yeast fermenting department.

Let’s make a reservation right away that the author of the article, in contrast to his position on the inadmissibility of the privatization of strategic, monopoly, defense, and socially significant state-owned enterprises and companies in the current crisis conditions, considers it expedient to sell state-owned distilleries to private hands. But only based on laws and common sense, and not in the corruption way, as it is carried out today by the leadership of the State Property Fund.

However, before substantively substantiating our position, let us remind readers that before the privatization of the Ukrspirt plants began, it consisted of two holdings – the State Enterprise and the State Concern with the same name – uniting 81 economic entities under its management. About 20 of them are at the stage of bankruptcy. Currently, the sale of distilleries is actively started by the GP.

The author outlined in more detail the history of reforming the Ukrspirt since the early 1990s and the paradoxical appearance of two-state concerns on its basis in his article “Privatization of Ukrspirt: What to Do with Alcoholic Anarchy in Ukraine”.

The beginning of fraud privatization

Since the announcement in the fall of 2019 of large-scale plans to sell the remaining state assets, the WE-team has embarked on an artificial reduction in the privatization value of Ukrspirt plants. The first step in this direction was the adoption by the parliamentary mono-majority of Servants of the People in December 2019 of Law No. 318-IX “On State Regulation of the Production and Circulation of Ethyl, Cognac and Fruit Alcohol, Alcoholic Beverages, Tobacco Products and Fuel”, which will cancel from July 1, 2020, the state monopoly on the production and sale of ethyl alcohol. According to this document, from July 1, 2020, companies of any form of ownership can obtain licenses for the production of various types of alcohol, including as a medicine, as well as for medical and veterinary purposes. Besides, commissioning and the issuance of construction permits for new alcohol production facilities are permitted.

If the “green power”, fulfilling the state, and not their selfish interests, intended to bail out more money for the sale of distilleries, corresponding to their real market value today, it would not abolish the alcohol monopoly but began the privatization of state distilleries along with production licenses and the right to wholesale trade-in “firewater” for 3-4 years. This would ensure the competitiveness of their sale at electronic auctions conducted by the State Property Fund, and at least several times increase the cost of acquiring these state assets by interested “private traders”. And only after the privatization of all enterprises of the “Ukrspirt” and the expiration of their licenses, it would be possible to abolish the state monopoly on the production and sale of this product. The author analyzed this problem in detail in his article “What is the power’s moralism in the matter of abolishing the alcohol state monopoly.” But this, as they say, “only flowers.”

The “cream” of corruption privatization of alcoholic factories

The fact is that the new privatization law adopted by the Verkhovna Rada of the XIII convocation at the end of January 2018 legalized corruption schemes for the sale of “small privatization objects” (with a book value of assets of up to UAH 250 million) without preliminary inventory, expert assessment and putting state-owned enterprises on electronic Prozzoro auctions at residual book value instead of organizing full-fledged tenders. The author wrote about this in more detail in his article “Analysis of the Zelensky-Goncharuk-Milovanov-Sennichenko privatization scam”.

Realizing the absurdity of the situation with the privatization of the factories of the State Enterprise “Ukrspirta”, three people’s deputies from the parliamentary faction “Servants of the People”, among whom was the head of the parliamentary committee on economic development Dmitry Natalukha, submitted to the Verkhovna Rada on May 7, 2020, bill No. 3443, providing for the postponement of the cancellation state monopoly on the production of alcohol from July 1, 2020, to January 1, 2021. On June 17 this document was supported by the relevant committee. However, at the behest of the Office of the President on August 1, the bill was withdrawn from parliamentary consideration.

As a result, in June 2020, the Ministry of Finance (why, one wonders, is not the Ministry of Economy doing this?) Issued licenses for the production of alcohol to the Zirnensky, Kholminsky, Yurkovsky, and Uhersky distilleries. The listed enterprises are not included in the State Enterprise “Ukrspirt”, but only previously used its license for wholesale trade. Naturally, the actual liquidation of the state monopoly SOE significantly reduced the sales value of the Ukrspirt plants privatized in the fall!

But the openly corrupt conditions under which the privatization of state distilleries is carried out did not satisfy the WE-team. On behalf of the Office of the President, the management of the State Property Fund, headed by Sennichenko, invented a new way to circumvent the existing legislation to limit competition in electronic auctions, further reduce the starting price of objects and sell their property to the right hands.

“Leading” corruption innovations of the Head of the SPFU

Sennichenko and Co began to privatize distilleries not as “single property complexes”, but formally – as “places of activity and storage of alcohol”, but in fact – assets of separate units of tangible assets. But if the opportunity to sell at the auctions of electronic platforms Prozzoro state objects of “small privatization” in the form of the UIC is provided for by the Law of Ukraine No. 2269-VIII of 18.01.2018 “On the privatization of state and municipal property”, then the legal definition of “place of business and storage” (in our the case of alcohol) is absent at all. It is used only in the Tax Code, and even then in the section that determines the procedure for the transition of business entities to a simplified taxation system (Articles 298-299 of the Tax Code).

On the one hand, the reason why the management of the State Property Fund resorted to this “innovative” corruption scheme is that all plants of the State Enterprise “Ukrspirta” do not have their independent legal entity, but have the status of structural divisions of this state holding … But on the other hand, such actions by Sennichenko and Co. cannot but be qualified otherwise than as a frank legal “chemistry”.

The fact is that according to paragraphs. 1 and 2 of Article 5 of Law of Ukraine No. 2269-VIII, the State Property Fund of Ukraine may sell distilleries as objects of “small privatization” only or in the form of “single property complexes”, or “structural divisions” of the UICs, or “separate property”.

In other words, initially, the State Property Fund was supposed to sell the plants of the State Enterprise “Ukrspirt” through the electronic platform Prozzoro as structural divisions of this holding. The difference between the latter and “single property complexes” is that all accounting and financial data on factories – structural divisions are reflected and maintained on sub-accounts of “Ukrspirt”. Separately, the state enterprise carries out economic accounting of fixed assets in the form of various types of tangible property (buildings, structures, equipment, vehicles, tools, inventory, etc.) of each distillery.

And only if the sale of the plant as a structural subdivision of the State Enterprise “Ukrspirt” does not take place due to the absence of applications for participation in the electronic auction of Prozzoro, the State Property Fund has, following paragraph 2 of Art. 5 of Law No. 2269-VIII, the right to sell it as separate property. But not in bulk/set, as the SPFU has already done for 7 plants, but separately each unit of property that is on the economic sub-account of Ukrspirt.

The question is: why is it defined in the law, and what is common sense here?

It consists in the fact that the “separate property” of any enterprise, even specified in its item-by-item list, which is sold, does not have to identify features other than the inventory number assigned by the accounting department when the item is registered and is “painted with paint” on this item by some “Uncle Vanya”. Such identification is regulated by Article 21 of the Law “On the Privatization of State and Military Property”.

But real estate objects, for example, in addition to the total area, necessarily have an address and other registration data of the BTI. Complex machines, mechanisms, devices, equipment necessarily have the name of the manufacturer, model, year of manufacture, serial number as attributes of their identification, and the percentage of its natural wear and tear, and, accordingly, depreciation is also reflected in the documents of financial and accounting statements.

However, if you look at the list of the set of the property put up for sale of the same “Zalozetsky place of business and storage of alcohol by the State Enterprise” Ukrspirt “(ie, the eponymous distillery), then, firstly, it does not contain a complete list of formal characteristics of each of the units property. This is fraught with the fact that a more expensive “property unit” can be replaced by another, cheaper one by simply “painting” the inventory number with the same “Uncle Vanya”. Instead of, for example, a “fermentation vat” or “barrel-containers” for storing kvass wort or polymalt extracts, after the buyer pays for the distillery property, a simple bucket under the same “paint” inventory number will be transferred.

Secondly, in the list of assets published in the privatization announcement of Prozzoro, there are many gaps in the numbering of the company’s inventory objects. Accordingly, it is not clear: these gaps arose due to the natural process of writing off some units of property, or were they specially removed by the management of the Ukrspirt and the State Property Fund to further misappropriate them in a corrupt way by high-ranking officials and criminal alcohol functionaries?

Both the first and the second frauds become possible as a result of the absence in the privatization law No. 2269-VIII of 2018 of a mandatory procedure for carrying out an inventory of the property of the “single property complex” of the enterprise before the sale of the “small privatization” object.

The alcoholic factories must be privatized legally, but not in the way of mob rules and corrupted schemes

Someone may argue to the author that, they say, why find fault with the State Property Fund’s management with the consent of the President’s Office and the silence of law enforcement agencies of legislative and regulatory norms, if the starting price of most of the sold distilleries has increased significantly during the electronic auctions?

However, Sennichenko and Co. deliberately resort to legal fraud. They will ultimately lead to financial losses for the state. Therefore, they must be qualified as acts of corruption on an, especially large scale. The fact is that according to Article 191 of the Civil Code of Ukraine, the enterprise as a “single property complex” includes all types of property intended for its activities, including land, buildings, structures, equipment, inventory, raw materials, products, rights of claim, debts, as well as the right to a trademark or other designation and other rights unless otherwise provided by contract or law.

It follows from this legislative norm that if distilleries were sold as “structural units” of the State Enterprise “Ukrspirt”, then the buyers/winners of electronic auctions would have to take upon themselves the payment of tax and other debts to the state and private partners of these enterprises, which were available at the time putting objects for privatization. The State Property Fund would be forced to write them down in investment obligations and monitor their implementation within five years.

And since almost all distilleries 80-90% worked either “in the shadows”, or according to openly criminal schemes, then we are talking about very serious amounts. The latter statement is not only directly confirmed by the results of numerous verification acts of control and auditing bodies, but also by indirect information. For example, the fact that when the next director of State Enterprise “Ukrspirt” begins to face the threat of dismissal due to uncovering by the control authorities of impudent machinations and abuses with the production and sale of products by his factories, he easily increases the profit indicators of his holding.

So, according to the results of 2019, Ukrspirt received UAH 40.3 million in net profit against UAH 21.6 million in 2018. For the first quarter of 2020 – almost 9.3 million hryvnias, which is 151% higher than in the same period last year. And after the acting. Director of this state holding Sergei Bleskun was dismissed by the Ministry of Economy in June 2020 (he blocked this order of the minister through the courts) based on the results of economic activity for 9 months of 2020, Ukrspirt received 28.1 million hryvnias of net profit, which is 63.4% more than in the same period of 2019 (UAH 17.2 million).

As a result of the sale under the illegal status of “the place of business and storage of alcohol to the State Enterprise” Ukrspirt “of selected sets of individual units of the property of each of the distilleries put up for privatization, their financial obligations remained at the State Enterprise” Ukrspirt “, which is built on a holding principle. As a result, when the property of all or most of Ukrspirt’s plants is sold, the state will have to somehow write off the debts of the SOE to the tax authorities and social funds, as well as pay off the accumulated debts and financial obligations under contracts with private contractors.

And this, taking into account the fact that only on the balance sheet of State Enterprise “Ukrspirt” is the property of 46 factories, it can be at least several billion hryvnias. And it is still not known what will be more: the state revenue from the privatization of these distilleries (the SPFU management predicts it at about 2 billion hryvnias), or its losses due to the need to write off / repay their remaining debts and financial obligations on the sub-accounts of the State Enterprise “Ukrspirt”? If we take into account the losses incurred by the state due to the abolition of the state’s monopoly on the production and sale of alcohol, and including the exclusion of a license for this type of activity as an intangible asset sold as part of the EIC’s property, it BECOMES OBVIOUS THE SCALE OF THE FUND’S ALL PRIVATIZATION SCAM STATE PROPERTY, which, instead of selling distilleries as “single property complexes”, illegally privatizes them as selective sets of separate property.

Also, the exclusion of a license for the sale of Ukrspirt assets from the general list of plant property creates a corruption-generating reason for extortion of bribes by officials of either the Ministry of Finance (in our case), or the Ministry of Economy, upon receipt.

Conclusions:

1) The sale by Sennichenko’s department of sets of the separate property of 7 plants of the State Enterprise “Ukrspirt” under the illegal legal status of “places of business and storage of alcohol” became the second example of the invention of “innovative” corruption schemes for the privatization of state assets by the SPFU leadership. The first was the sale of the Kyiv hotel “Dnepr”, which the winner of the electronic auction, and, accordingly, the buyer of this state object illegally paid at the expense of the NBU refinancing funds issued to “RVS BANK” and Bank “Sich”, which in turn provided loans to LLC “Smartland” for the execution of a transaction if the winner does not have sufficient collateral.

2) By the current privatization legislation, there is no legal concept of “places of activity and storage” as objects of “small privatization”. Therefore, its use is an outright criminal offense on the part of Sennichenko and Co.

3) According to the Law of Ukraine No. 2269-VIII of 2018, “separate property” of any “small privatization” object can be sold on Prozzoro sites only after the electronic auction for the sale of the “single property complex” of the structural unit of the State Enterprise “Ukrspirt” has not taken place, and not in bulk, in the form of a “set” of separate property, but only individually.

4) The main trouble for the state due to the invention and use of the corruption scheme for the sale of distilleries by the management of the State Property Fund will be huge financial losses that the state will incur as a result of the fact that the money received as a result of the implementation of these objects will be significantly less than the budgetary amounts required to write off or compensation of tax and other debts of these structural divisions of the State Enterprise “Ukrspirt”.

5) The corruption basis for the invention of Sennichenko and Co. of extra-legal schemes, both for the privatization of the Kyiv hotel “Dnepr” and distilleries, was the abolition of the Law of Ukraine No. 2269-VIII dated 01/18/2018 under the pretext of simplifying the procedures for denationalizing the property of the old division of privatization objects, which classified them by groups A, B, C, E and G, and the introduction of a simplified division of them into “large” and “small privatization” objects (depending on the residual book value of their assets – up to or more than UAH 250 million). As a result, the State Property Fund was relieved of the need to organize and hold full-fledged tenders for the sale of state assets, which, according to the old legislation, obliged it to write out and control investment obligations imposing on buyers, and not on the State Budget (that is, on all citizens of the country) to pay off the accumulated debts of state-owned enterprises.

6) Since the starting point for the construction of a corruption scheme for the privatization of distilleries was the cancellation by the parliamentary majority of Servants of the People by Law No. 318-IX of December 13, 2019, introduced by the President himself as an extraordinary one and adopted by the Verkhovna Rada in two weeks (!), The state’s monopoly on manufacturing and wholesale of various types of ethyl alcohol, then with good reason it can be argued that all this was done at the behest of the President’s Office, and, of course, taking into account the “selfish” interests of its specific functionaries.

7) All the victorious reports of the WE-authorities about the demonopolization of the alcohol production and trade market, as an achievement in the market reform of the Ukrainian economy, are sheer hypocrisy and lies. In all historical times, there has been, and in most modern developed countries there is a state monopoly on the production of this strategic type of product. It provides huge revenues to the state treasury. This became especially evident after the outbreak of the coronavirus pandemic when the demand for alcohol increased hundreds of times. In the same sectors, for example, in hydrocarbon energy (Akhmetov) and in the production of mineral fertilizers (Firtash), Ze-power, due to lobbying by domestic oligarchs of their interests, did nothing to demonopolize these sectors of the economy and is not going to do anything.

Vladimir Lartsev – Director of the Center for Anti-oligarchic Policy

Translation: Kirill Voitsyk