Exclusive interview with SCM Director for International and Investor Relations Jock Mendoza-Wilson
— The case appears to others as follows. In May 2011, Cyprus-based EPIC Telecom Invest Ltd, which was allegedly owned by Austrians and later renamed into Raga Establishment Limited, bought 92.79% of Ukrtelecom shares. The deal was struck through Ukraine-based ESU LLC at a privatisation tender at a price of UAH 10,575.10 million (about $1.3 billion at that time). In June 2013, Raga, which by that time had been allegedly purchased from EPIC by Ukrainian ex-banker Denis Gorbunenko, a close ally to Dmitry Firtash, sold ESU and Ukrtelecom to Cyprus-based SCM Financial Overseas Limited (SCM Financial), a part of SCM Group.
The deal price was $860m, to be paid in three stages. In 2013, SCM Financial paid the first tranche of $100m. However, in early 2014 SCM Financial suspended further payments under the purchase agreement after it had taken over running Ukrtelecom and found out the real situation about the asset. SCM Financial stated that Raga had breached the agreement, in particular it failed to perform privatisation obligations under the privatisation agreement between ESU and the State Property Fund of Ukraine and аt the time of signing the purchase agreement in 2013, EPIC/Raga as the seller failed to disclose these violations of ESU's investment obligations before the State Property Fund to SCM Financial as the purchaser.
Between early 2014 and June 2016, Raga took no action. In June 2016, Raga unexpectedly filed a lawsuit with the London Court of International Arbitration (LCIA). In summer 2017, the court sided with Raga, ordering SCM Financial to pay the remaining $760m of the purchase price and $60.5m in interest. In turn, in July 2017 SCM Financial filed an application to set aside the LCIA award with the High Court of Justice in London.
Do we get it right that SCM Financial's current position is to restore the status quo in the contested deal: to return Ukrtelecom to Raga Establishment in exchange of $100m? How do you see the prospects of such dispute outcomes? On what courts does it depend?
— Indeed, it is our position. The outcome of the dispute depend greatly on a ruling of the London court. The hearing on our appeal against the LCIA award will take place there on 23 April 2018. There has been much speculation in the media regarding this issue. We want to explain at what stage the dispute is now, how we see the litigation with Raga and Ukrtelecom privatisation by Raga in 2011, and what further steps we will take to resolve the dispute.
Let's begin with where we are now. We disagree with the LCIA award made in summer 2017. Judge for yourself: the arbitration tribunal ruled that SCM Financial should pay the remaining $760m plus interest for Ukrtelecom shares. At the same time, the rulings of the first instance court and the Appellate Court of Ukraine terminated the Ukrtelecom privatisation agreement made in 2011 between ESU and the State Property Fund, ordered that Ukrtelecom shares be returned to state ownership, and imposed an $81 million fine on ESU for violation of its investment obligations. The grounds for this was ESU's failure to perform its investment obligations during the period when EPIC/Raga owned ESU and Ukrtelecom.
Therefore, the LCIA award leads to unfair outcome: on the one hand, SCM Financial has to pay the remaining price for the business to Raga, and on the other hand, the business for which SCM Financial is forced to pay in full to EPIC/Raga has been in fact confiscated by Ukrainian government under rulings of Ukrainian courts because of violations committed during Raga’s ownership.
We are also concerned that the LCIA confined itself to the formalities of the case regarding Ukrtelecom’s sale to SCM Financial in 2013. The arbitrators turned a blind eye to the conditions under which Ukrtelecom was privatised by EPIC and the people who stood behind it in 2011. Just see yourself: when Ukrtelecom was privatised in 2011, Austria-based EPIC and its CEO and majority shareholder, Peter Goldscheider, were presented as Ukrtelecom's real buyers. Their names as real Ukrtelecom's buyers were presented to the State Property Fund and the Antimonopoly Committee of Ukraine.
However, in the course of arbitration proceedings in the LCIA Raga's witnesses stated that the real ultimate beneficiary who stood behind EPIC in the Ukrtelecom privatisation was Valery Khoroshkovsky (the Chairman of the Security Service of Ukraine at that time — Interfax' note). The secret involvement of a highly ranked government official in the Ukrtelecom privatisation in 2011 raises many questions.
-- It is said that arbitrators demanded the evidence of this beneficial ownership from you.
-- In their testimonies, Peter Goldscheider as the Managing Partner of EPIC group and Robert Shetler-Jones (former Deputy Chairman of the Supervisory Board in Group DF that consolidates Dmitry Firtash's assets — Interfax' note) indicated that Khoroshkovsky was the ultimate beneficiary of EPIC (later renamed Raga) at the time of privatisation and that he stood behind the company. It's strange that SCM Financial would have to prove this when Raga's testimonies are in place confirming these facts. It would be right for Raga/EPIC to give explanations to arbitrators about the involvement of the SBU Chairman and his partner, Dmitry Firtash, in the Ukrtelecom privatisation. Let me point out that Peter Goldscheider refused to appear in the arbitration court under the pretext of his busy schedule when SCM Financial insisted on his appearance and testimony on the issue under a cross-examination.
Let's go more into details. As I mentioned earlier, the Ukrtelecom privatisation price was about $1.3bn in 2011. Raga's witnesses in arbitration proceedings and Denis Gorbunenko in his recent interviews stated that EPIC and Khoroshkovsky had borrowed $300m of this sum from Dmitry Firtash and his Picabo company. The question that has to be answered is, who gave the remaining $1bn for the Ukrtelecom privatisation? No one is likely to believe that EPIC and Peter Goldscheider had so much spare cash to privatise the asset in Ukraine. In fact, EPIC is a small Austrian family consulting and investment business with limited assets in property and telecommunications in Eastern Europe. It is also hard to believe that Peter Goldscheider could raise $1.3bn from Western investors to pay for the purchase.
As you see, there are many questions that can be answered only by Peter Goldscheider.
It is also said that Denis Gorbunenko allegedly bought EPIC Telecom Invest Limited from Khoroshkovsky before the Ukrtelecom sale to SCM Financial in June 2013 and later renamed it into Raga. Anyone who knows even a little about Ukrainian business is unlikely to believe that Gorbunenko's fortune is $1.3bn or that his entrepreneurship helped him buy from Khoroshkovsky the right to claim $860m from SCM Financial, as they state it. Or could Khoroshkovsky have given this as a present to Gorbunenko? Gorbunenko's story in the context of his connections with Rodovid Bank, Mr Firtash and allegedly Nadra Bank is well known in Ukraine. Whose interests does Mr Gorbunenko represent as Raga's stated beneficiary and hypothetical recipient of $860m from SCM Financial?
In English, we would say: "The facts speak for themselves".
— What did EPIC/Raga have to do with the investment obligations assumed by ESU towards the State Property Fund of Ukraine in the course of Ukrtelecom privatisation in 2011?
— First of all, under the 2013 purchase agreement, EPIC/Raga made representations and warranties to SCM Financial that there were no material undisclosed obligations or other material obligations, which, if they would come into SCM Financial's knowledge, could significantly affect its decision whether or not to buy Ukrtelecom. Moreover, the agreement expressly stated that it was EPIC/Raga's responsibility to ensure the performance of ESU's obligations towards the State Property Fund under the 2011 privatisation agreement. Therefore, EPIC/Raga guaranteed to SCM Financial that all the ESU's obligations towards the State Property Fund under the privatisation agreement had been performed and that EPIC/Raga would perform any outstanding privatisation commitments.
Remember that SCM Financial bought ESU and Ukrtelecom from EPIC/Raga in 2013, two years after the privatisation. Before the purchase, we had no possibility to make a preliminary due diligence. This explains why SCM Financial agreed to structure the deal as follows: EPIC/Raga's broad representation and warranties to SCM Financial and the staged payment of a major part of the purchase price within two years after SCM Financial received the ownership to Ukrtelecom shares. Over that time, we wanted to see whether all representations and warranties were met and whether Raga and its former company, ESU, had skeletons in the cupboard. Indeed, the "skeletons" were there, and they are responsible for everything that is happening today around Ukrtelecom in Ukraine, London and Cyprus.
In the LCIA, we explained to the tribunal that it was highly likely that the Ukrainian government would seek the return of Ukrtelecom to state ownership through court proceedings because of ESU's failure to meet the investment obligations agreed at the time of privatisation. We gave confirmation that it was Raga that had defaulted on the obligations. Further developments showed that our assumptions that we could lose ownership of Ukrtelecom because of Raga's failure to meet its obligations were proved to be true. I will repeat myself, under our purchase agreement with Raga, it was Raga that had to bear all the risks and consequences of violations of their obligations. To restore justice, we immediately filed an application to set aside the LCIA award with the High Court of Justice in London in July 2017.
Raga responded by trying to suspend consideration of our application. Describing SCM Financial's appeal as groundless, Raga requested that the High Court should order SCM Financial to place $820 million as security with the court as a condition for considering the SCM Financial's challenge of the award. However, the High Court denied Raga's request, deciding that SCM Financial's challenge to the arbitral award was not groundless and that Raga had no right to any additional security.
We are confident that we will provide the court with sufficient grounds to set aside the LCIA award and refer the case to a new arbitration in April 2018.
-- Did Raga ask the court to freeze assets, as was the case with the nationalised Privatbank that obtained such freezing against Kolomoisky and Bogoliubov or the case of Novinsky v. Grigorishin?
-- It is not the case. If you try to draw an analogy between the disputes of the above-mentioned businessmen, it is irrelevant here. There is not and cannot be any dispute of Akhmetov v. Gorbunenko or Akhmetov v. Firtash or anything of that kind. This is a dispute between Raga/EPIC and SCM Financial Overseas. Neither Mr Akhmetov nor any other SCM Group companies have ever provided any guarantees or surety to Raga under the deal.
As for the situation with the "frozen assets", Raga asked the London court to place $820m with the as a condition for hearing SCM’s challenge of the award. However, the High Court dismissed Raga's motion, as I explained earlier.
EPIC/Raga must have been frustrated by the High Court’s decision and decided to file a claim based on false and pretentious allegations with a Cyprus court against a number of defendants, both associated and not-associated with SCM Group. These defendants do not have any contractual arrangements with EPIC/Raga and were not a party to the dispute with Raga in the LCIA. We believe that Raga's claim against these defendants is baseless and pursued with only goal in mind : to freeze the assets of SCM Group in Cyprus and cause discomfort for the Group through this pressure. Unfortunately, without examining the merits of the case and without considering all the circumstances of the dispute, the Cyprus court issued a preliminary order prohibiting several SCM Group companies to dispose of their assets if the value of the remaining assets owned by the defendants is less than $820m. We believe that the court order is groundless. Raga obtained it through providing misleading and incomplete information to the court. We are confident that the ruling will be overturned in late February — early March 2018.
— Does the court take into account the growth in the Ukrtelecom’s value over the period after the privatisation?
— When we bought Ukrtelecom, we immediately built a highly professional management team that developed a 10-year Ukrtelecom development strategy. The performance of the team helped increase the business profitability. As an example: Ukrtelecom's total losses for 2009-2012 were UAH 0.5 bn, while in 2014-2016 the company generated over UAH 2bn in net profit under our team's management. Ukrtelecom has a stable asset value and generates stable revenues annually. All this plays out against the background of the loss of assets in the Crimea and Donbas.
Having this development strategy in place, Ukrtelecom opened a $400 million credit line with China Development Bank to modernise the company. This is very important both for Ukrtelecom and the country where the telecoms industry plays a huge role in the economy. I believe this is a contribution to the transformation of the telecom industry’s future in Ukraine and a big step forward for Ukrtelecom, considering the company's standing at the time when it was transferred to us by EPIC/Raga and those behind them.
Obviously, the previous owners were seeking quick return on their investment, but it did not happen with Ukrtelecom. On our part, during the whole period we have owned Ukrtelecom since October 2013, we have taken no dividends and reinvested all of its profits into development.
— Did SCM act as a guarantor in the credit agreement between Ukrtelecom and a Chinese state-owned bank?
— No, it did not. There were no additional guarantees or commitments undertaken by SCM under the agreement, only by Ukrtelecom. SCM provided no guarantees or assumed no commitments either under the bonds issued to the Ukrainian state-owned banks, or under the Chinese credit line agreement.
— There is a problem with the perception of the SCM Financial's position, as during the court dispute between Ukrtelecom and the State Property Fund of Ukraine regarding the return of shares into state ownership, you stated that there were no grounds for Ukrtelecom nationalisation.
-- We have always stated and keep stating that all the problems with non-performance of investment obligations emerged due to the fault of the previous owner. When we purchased the asset, we were doing everything we could to strike a reasonable compromise with the government. If you look at our purchase agreement with Raga, you will see that Raga stated that it had performed its obligations or it would perform its obligations at its expense. For two years, they had been doing nothing while we were asking them to cure the breaches and meet their obligations. Perhaps, they would behave differently if we were back to square one when they are the owners and have to meet the obligations they assumed.
We believe that there is the only one right decision for us now: to stand back, return our prepayment and restore the original agreement between Raga and the Ukrainian government so that they can settle their mutual claims with each other.
— Anyway, how is it possible to ensure that the decision of the Ukrainian court is not implemented before the dispute is settled in London?
— It would be fair if Raga assumes liability for its privatisation obligations towards the government. It would be fair to ensure that the Ukrainian government can hold responsible those to whom it sold Ukrtelecom and who assumed significant commitments. Thus, it would be fair to ensure that we can return the shares into Raga's ownership by the time of court hearings in London. We know the date of the court hearing -- 23 April in London —and in theory no further action should take place in Ukraine until the London court makes its ruling. I really hope that the ruling of the London court will be in our favour.
— Are you talking about the obligations both towards the State Property Fund and the state-run banks?
— Towards everyone. Until the ownership issue is settled, the issue of debts to the state-run banks will not be resolved. ESU is the only company that is liable for the debts to the state-owned banks under the ESU-issued bonds However, without the key asset in its ownership, Ukrtelecom, ESU will not be able to meet its debt obligations to the state-run banks, which obligations were "pinned" on it by its previous owners, Raga/EPIC.
— What will be going on with Ukrtelecom during the period of litigation?
— The company is operating as normal. Of course, with multiple litigations, particularly in Ukraine, pending, raising outward investment is uncertain However, Ukrtelecom will keep reinvesting all of its net profits in the development and service quality improvement.
— Does this mean that this year the regional development strategy remains frozen until the issue is settled in court?
— Definitely, the geography span and the horizons will be narrower. I have stated already that we have had a 10-year development programme in place. However, in the current circumstances it is difficult to forecast so far ahead. Ukrtelecom’s management and the whole team are doing everything possible to ensure that the company has a future.
— Can the situation with Rinat Akhmetov's and SCM Group's assets "frozen" by the Cyprus court negatively affect other companies in the Group?
— In fact, the ruling to freeze the assets makes it impossible for certain SCM Group companies to dispose of their assets if the remaining asset value following the sale is less than $820m. I would like to repeat that we have challenged the Cyprus court order and hope that it will be cancelled in late February — early March 2018.
— We have considered extreme scenarios for SCM based on how the situation can unfold. The first one is that you would receive $100 prepayment back and place Ukrtelecom back into Raga's ownership. In the second scenario, the ruling to pay $820m to Raga would be upheld by the court, the Ukrainian government would return Ukrtelecom into the state ownership and you would be left with nothing. Is there a possibility for an in-between scenario: you would come to a direct agreement with the Ukrainian government and keep Ukrtelecom, but you would have to pay $820m?
— We are looking neither for in-between scenarios nor for any benefits for us. We see litigation as a search for a fair solution. Our position is simple: Raga has violated the obligations of the purchase agreement with SCM Financial. Thus, we must return Ukrtelecom shares into Raga's ownership and they must pay back the first tranche of $100m. As soon as this happens, Raga and the Ukrainian government represented by the State Property Fund should then continue a dialogue and come to an agreement with each other. The Ukrainian government can either take back ownership of Ukrtelecom or leave it to Raga.
The real difficulty is to obtain the justice. That's why the outcome of the dispute before the court in London is very important for us.