The case of Smilyansky and Ukrposhta. What happens to state property during the war?

Five years ago, the Verkhovna Rada passed a law that abolished the list of property not subject to privatization. The state has not received a new list of state-owned enterprises that cannot be sold. A number of MPs appealed to the Constitutional Court to prove that the absence of such a list contradicts the Basic Law (Article 85, paragraph 36). However, their appeal has not been considered for five years (!).
During this time, the parliament could have approved a new list, but this did not happen either. Moreover, the government adopted a resolution on the alienation and lease of property of state joint stock companies. This document does not contain clear criteria that would protect property important to national security.

When the legislative branch failed to fulfill its direct responsibilities, it was the third branch of government, the judiciary, that stepped in. This year, the Grand Chamber of the Supreme Court ruled that state-owned joint-stock companies such as Naftogaz, Nadra Ukrainy, and Ukrposhta cannot sell property transferred by the state to their authorized capital at their own discretion.
Yet on September 18, the Grand Chamber will hear the case of Nadra Ukrayiny. This company is demanding a review of the previous decision of the court. The reason was the amendments to the law “On Management of State-Owned Property” that the parliament adopted in the spring. These changes, starting in the spring of 2024, explicitly stipulate that the heads of joint-stock companies in which the state holds 100% of the shares may sell the companies’ property.

What happened to strategic enterprises?

The parliament, upon the government’s proposal , approves a list of state-owned objects that are not subject to privatization. These are the objects that are important for national security.
MP Oleksiy Movchan (Servant of the People), who is a member of the Verkhovna Rada Committee on Economic Development, is convinced:

Why was the list canceled?

Oleksiy Movchan

Member of Parliament, Member of the Verkhovna Rada Committee on Economic Development (Servant of the People)

When it comes to the list, the logic embedded in the Constitution is outdated and does not meet the requirements of the times. In the canceled list, about 40% of enterprises were bankrupt. There were also hairdressing salons and even the state-owned enterprise “Khor Virevky”.

Olena Belyanevych, Doctor of Law, Professor, disagrees with this sweeping generalization. She emphasizes that the Constitution should be respected:

Why is the lack of a list a direct threat to national security?

Olena Belyanevych

Doctor of Law, Professor

When the parliament recognized the list of objects not subject to privatization as invalid, it actually refused to implement the provisions of the Constitution. Thus, the Parliament violated one of the principles of the legal order: the authorities and their officials are obliged to act only on the basis, within the limits of their powers and in the manner provided for by the Constitution and laws of Ukraine. This has created a gap that can only be filled by a law that defines a list of state-owned objects that are not subject to privatization. The absence of such a list is a direct threat to the country's national security and state sovereignty in the context of the war for independence. It is unlikely that the judiciary, in the state it has found itself in as a result of the 2019-2024 “reforms,” will be able to prevent the destruction of state property relations. Individual court decisions can protect certain objects in a particular way, but they cannot protect the legal order in its entirety.

MP Movchan explains that four years ago the Cabinet of Ministers introduced a draft law (4020) on the list of strategic enterprises that are not subject to privatization, but it passed only the first reading. This year, amendments to the law on corporate governance were adopted. The government, according to the MP, should develop bylaws that provide for the justification of ownership of state assets, and next year, according to Movchan, there should already be a list.
However, the Verkhovna Rada should be careful when selecting the list of companies to be included in the list. At one time, the strategic enterprise Motor Sich was not included in the list. That is why it managed to be privatized despite being the largest manufacturer of helicopter engines. The first stage of privatization took place five days after Leonid Kuchma’s inauguration. It was this plant that could have “landed” Russian aviation.
The Security Service of Ukraine filed a suspicion of negligence over the privatization of the plant three years ago. And now the state is proceeding against the former head of this enterprise, Vyacheslav Boguslaev.

Bohuslaiev took control of the Motor Sich plant in the 1990s
photo: ukrinform.ua

Bohuslaiev actually became the owner of the enterprise and eventually tried to sell it to the Chinese. Now he is suspected of treason. In its decision, the High Anti-Corruption Court in the case filed by the Ministry of Justice noted that Boguslaev’s actions were aimed at supplying aircraft engines to Russia, which led to the accumulation of new and modernization of old Russian aircraft. Boguslaev’s lawyer Rostyslav Kravets, of course, denied this during the trial.

During the war, the government realized that it needed to protect strategic enterprises and is already talking about nationalizing Motor Sich. The same applies to the private joint-stock company AvtoKrAZ, which produces trucks.
The situations with Motor Sich and AvtoKrAZ are not isolated cases. For example, the privatization of the Luhansk Ammunition Plant in 2001-2009 resulted in the state losing the opportunity to remove most of the production lines of this largest ammunition enterprise from the war zone. As a result, the gigantic facilities ended up in the hands of the Russian aggressor intact. The Luhanskteplovoz plant was privatized in 2010 and sold to the Russians.
Ukraine is not the only country that makes mistakes during privatization. For example, after privatizing its railways in 1994, Britain spent six times more on railways than its European neighbors. In 2015, according to polls, the British supported the nationalization of the company.

Why is Ukrposhta losing…?

Since not everything could be privatized in Ukraine, the process of corporatization was developing in parallel. This is the transformation of state-owned companies into joint-stock companies, with the state as the absolute owner of the shares.
Through corporatization, Ukraine formed the authorized capital of these companies by transferring state property in the form of various assets (money, real estate, trademarks, inventions, patents, etc.).

In return, the managers who headed these companies were supposed to effectively dispose of this property and increase the companies’ income, making them economically stable and independent of subsidies.

In practice, however, the “corporatization” scheme sometimes works quite differently. After being transformed into joint-stock companies, state-owned companies sell off some of the property they have been given at their own discretion.

Currently, Ukrposhta, which is run by Ihor Smelyansky, has sold the post office in the president’s hometown, the center of Kryvyi Rih. And now the company, which previously earned money from rent, is renting an office from the new owner. Such stories are not isolated. Smelyansky has expressed a desire to sell even the Main Post Office on Khreshchatyk, which has a symbolic meaning for the whole country.

In 2019, Ihor Smelyansky saw no need to use the Main Post Office building in Kyiv and wanted to sell it.

Frankivsk Regional Council’s appeal to the government to prevent the closure of Ukrposhta branches

In other words, it may happen that the state, which owns Ukrposhta shares, will at some point find itself the owner of pieces of paper that are not backed by property. And all that will remain is the Ukrposhta logo. And the activities of this enterprise are extremely important in times of war, and in the competition it loses to private operators. But in times of war, the state cannot depend on business for strategic issues.

The Holka civic initiative contacted Smelyansky, the head of Ukrposhta, to find out how much property Ukrposhta has sold since 2019 and to get answers to other questions. In fact, the company, which has state property under its management, responds to the information request only with the tariffs for services.

The management of the state-owned Ukrposhta informs that it may not report on the property it disposes of

Oleksiy Movchan (Servant of the People), a member of the Verkhovna Rada Committee on Economic Development, explains why Ukrposhta does not provide information upon request:

Why does Ukrposhta not provide information upon request?

Oleksiy Movchan

Member of Parliament, Member of the Verkhovna Rada Committee on Economic Development (Servant of the People)

Before Ukrposhta became a joint-stock company, the state owned its property. Now the state owns the shares. Accordingly, the joint-stock company is already hiring a manager to manage this property. If you want to know whether the manager is managing effectively, you should ask Prime Minister Denys Shmyhal or the Ministry of Infrastructure about this data, among other things. They have to keep an eye on it, because they are the owners of the shares. Otherwise, the whole world is moving towards putting everything in private hands. Only not the way we did it in the 90s, when we gave it to oligarchs, but to entrepreneurs on a competitive basis.

MP Serhiy Vlasenko (Batkivshchyna), who signed the petition to the Constitutional Court along with 50 other MPs, emphasizes: 

Why are Ukrposhta or Oschadbank important to the state?

Serhiy Vlasenko

Member of Parliament (Batkivshchyna)

Ukrposhta or Oschadbank are important for the state not only because of their functions. Speaking of Ukrposhta, a postman in a village is not just a function. This is an important person for the entire community who carries cash pensions to those who cannot get to an ATM and provides communication in the community. It's about the periodicals that people read, and don't forget that digitalization is not everywhere. People still receive letters. It's the same with Oschadbank. It's not just an extensive network of branches like other banks. It is also a structure that performs socially important functions.

As a result , the state has to sue the joint-stock companies it created – Nadra Ukrainy and Ukrposhta – and return property that they should not have sold. Such cases have already reached the Grand Chamber of the Supreme Court.

In the case of Ukrposhta, the subject of the dispute is the ownership of non-residential premises, which the company registered as private property, although this property is state-owned. This is likely to be done with a view to selling such real estate in the future.
The prosecutor’s office emphasizes that Ukrposhta does not own the property, it only manages it, and the owner is the state represented by the Ministry of Infrastructure. Therefore, the “main post office of the country” had no right to re-register these premises.

State-owned enterprises can indeed sell the property they do not need to fulfill their functions, but there must be clear criteria for this. The money received from such sales should be used to implement state programs approved by the government, but definitely not for large salaries for management. It can be used to strengthen the education and healthcare sectors, etc. This is how the state fulfills the social function of owning state property, ensuring the constitutional rights of citizens.

MP Vlasenko explains why the Constitutional Court has not considered the petition filed by MPs in 2019: 

Why has the Constitutional Court not considered the MPs' submission?

Serhiy Vlasenko

Member of Parliament (Batkivshchyna)

The court is not working properly. They report that decisions are being made, but we are talking about small bodies - senates. There are not enough judges there to make decisions by the full court. Meanwhile, there is a common thesis that the state cannot be an effective manager, that everything should be given to private hands. But it is fair to say that 80% of what has been privatized does not work effectively. The land of strategic enterprises was often given away for construction of residential complexes. It is easier to make money than to create jobs and strengthen the country's economy. Large countries are returning to public administration. There is not a single country where the state's share in the economy is zero. And such industries as railroads or oil and gas production should never be private at all. But some “new faces” in our government do not understand this.

For example, one of the recently dismissed deputy heads of the Presidential Office, Rostyslav Shurma ,was responsible for one of the “reforms” that resulted in the creation of the state enterprise “Forests of Ukraine”. A government decree stipulates that the enterprise can become a joint-stock company. That is, the property of this enterprise may be treated the same as the property of Ukrposhta.

After the forests, Shurma took on the water industry reform. Only now they decided not to go through a state-owned enterprise, but to create a joint-stock company directly.

Rostyslav Shurma is no longer on Bankova Street, but the government decrees on the creation of state-owned enterprises that have every chance of becoming joint-stock are still in effect. If they become joint-stock companies, citizens will know as much about water or forests in Ukraine in response to their inquiries as they do about the property of Ukrposhta.

What should the government do immediately?

On September 18, 2024, the Grand Chamber of the Supreme Court will hold a hearing on the application of NJSC Nadra Ukrayiny to review the decision due to newly discovered circumstances. If the decision is in favor of Nadra Ukrayiny, other joint-stock companies with a 100% share of state property will be able to rely on it to justify the sale of such property without any safeguards.

That is why, in order to resolve the situation, the Verkhovna Rada should approve a list of property not subject to privatization. There is no reason to expect the Constitutional Court, which has been considering the MPs’ complaint for five years, to make a decision in the near future.

As for the government, it must immediately submit a list of state-owned objects not subject to privatization to the Verkhovna Rada for approval. It should include both objects that are important for national security and objects of social purpose.

Clear criteria for distinguishing between the alienation of state property through privatization and ordinary (non-privatization) alienation should be defined at the legislative level.

Ordinary (non-privatization) alienation of state property has no signs of social importance; it is one of the forms of its disposal based on purely economic or business interests of business entities and state property management, which receive money (i.e., property that is not part of production and does not ensure the fulfillment of statutory tasks, etc.)

It is also necessary to amend the provisions of the Law “On Management of State Property Objects” (Article 11) by excluding the provision that property transferred to the authorized capital of a state joint-stock company is its property. That is, it is necessary to return to the previous version of the article, which existed before April of this year.

Besides, the law “On Privatization of State Property” (Article 4) should remove the provision stating that property of state-owned companies that is not subject to privatization may be privatized if it was leased. According to media reports, the Inka Architectural Workshop tried to take over one of the premises of the War Museum using this scheme. The court is currently hearing a case to terminate the lease agreement with this company.

It is also necessary to harmonize the norms of the government decree on the alienation and lease of property of state joint stock companies with the law and to define the criteria for the possibility of alienation.

Without such changes, there is little chance that state property will not be sold off to the highest bidder by “effective managers.”

As of 2024, the state still owns 3116 enterprises. Of these, only 854 (27%) are operating, 475 (15%) are profitable, 1,736 (56%) are not working, and another 526 (17%) do not report on their activities.

Specially for Hlavkom.