US firms raise corruption concerns in legal battle over Ukraine grain deal

American investors allege Ukrainian company defaulted on loans and that parts of Kyiv government are blocking efforts to recover $200m in assets.

The bulk carrier vessel 'Initiator D' sits during loading in the Illichivsk Grain Terminal CJSC, operated by Glencore PLC, at Illichivsk port in Odessa, Ukraine, in 2017. Picture: Bloomberg News.

A dispute over missing grain assets has pitted American investors against a Ukrainian firm and comes amid longstanding questions about Kyiv’s commitment to battling corruption.

US firms representing some of Ukraine’s largest private foreign creditors say their efforts to recover $US130m ($200m) in assets have been hampered by parts of the Kyiv government. The Ukrainian company involved in the dispute in turn alleges the American firms are using the continuing war in Ukraine as pretext for taking over their grain-trading business and its subsidiaries.

The dispute, though still working its way through courts in Ukraine, the U.K. and Switzerland, highlights the challenges facing a government dependent on Western support, including private investment, but long plagued by allegations of corruption.

Ukrainian President Volodymyr Zelensky has won praise for his efforts to stamp out government graft but continues to face questions about his efforts to fight corruption. With the US and its Western allies pouring billions of dollars of financial and military aid into Ukraine, some US politicians say there is an even greater need to ensure that the government operates transparently.

In 2022, Ukraine ranked 116th out of 180 countries on Transparency International’s corruption perceptions index, with the No. 1 spot going to the least corrupt country – a one-place improvement on Ukraine’s prior year ranking.

The current dispute centres around $US95m that US investors Argentem Creek Partners and Innovatus lent to GNT Group, a Ukrainian trading firm. The debt was secured by the Ukrainian company’s equity, including one of the country’s largest grain terminals located in Odessa. GNT failed to make payments to the US companies last year, however, and then liquidated $US130m of its assets, according to court records that included details of a pre-trial investigation by Ukraine’s national police.

Some parts of the Ukrainian legal system have supported the investors’ efforts to recoup the funds, according to court rulings. But the US companies allege that efforts to get rulings enforced have been blocked by various parts of the Ukrainian bureaucracy, including officials in the ministries of infrastructure and justice.

“We’ve seen parts of the Ukrainian system act superbly in this case, but others continue to play by old rules,” said Daniel Chapman, chief executive of New York-based Argentem Creek Partners.

State Department officials said the US government was aware of the case and had discussed it with Ukrainian authorities, but they declined to comment on the specifics, citing the continuing litigation.

Zelensky’s office, as well as the ministries of infrastructure, justice and interior, didn’t respond to a request for comment.

William Taylor, a former US ambassador to Ukraine, said corruption has been an ongoing issue for the government in Kyiv. “They still have work to do,” said Taylor, who added he wasn’t familiar with this case. “And they know they have a perception problem.

The legal dispute dates back to last year, when the American investors said they had been in talks to restructure GNT’s debt and were open to granting waivers in consideration of the war, as they had with other borrowers. But they said they grew concerned after the company’s shareholders and chief financial officer, Dusan Denic, failed to disclose last year heavy balance-sheet losses caused by an unexplained liquidation of grain and sunflower seed inventory.

The owners of GNT – Sergiy Groza and Volodymyr Naumenko – and Denic have since provided conflicting explanations for the liquidation, refused to provide documentation for the losses and worked to block the investors’ access to the business offices, terminals and other assets, the American investors said.

Groza, in a statement provided to The Wall Street Journal by Denic, said the company got rid of inventory that spoiled when the war temporarily shut down terminal operations. “GNT denied and continues to deny the misappropriation of grain and has provided creditors with many documents that confirm the damage to the grain,” he said.

Under the terms of GNT’s loans, the US firms said, a contract breach such as default gave the creditors authority to establish operational control of the Ukrainian business. After filing criminal complaints with Ukraine’s national police, the US firms in January secured a ruling in the U.K., where the parties had agreed to settle contractual disagreements, freezing GNT’s assets, according to court records.

GNT’s owners have rejected the accusations and said they are prepared to discuss restructuring the debt with their lenders.

“Argentem has been spreading false allegations about GNT and/or providing misleading information to the media prior to any conclusive adjudication of any of the matters in dispute,” Denic wrote in response to questions from the Journal, speaking on behalf of Groza and Naumenko. He said GNT has offered to provide audited details of the inventory, but the creditors have refused to engage – a claim the creditors deny.

The US firms say one of the main barriers to enforcement of the contract has been the deputy minister of infrastructure, Yury Vaskov, who oversees ports, including grain terminals. Vaskov is also involved in international talks to secure Ukraine grain exports critical to global food supplies.

In January, the Administration of Seaports of Ukraine rejected the creditors’ request for access to the main GNT grain terminal to help trace the missing assets. Vaskov said he and his colleagues determined it was a private dispute, but that the US firms have been provided information on the procedure for entering the port under martial law, which has been in effect since Russia invaded in February 2022. The US firms say they have followed the proper process but are still unable to access GNT’s main grain terminal.

The investors say Vaskov’s ties to GNT’s subsidiaries and its major subcontractor should have led him to recuse himself from the case.

Vaskov’s wife, Tatiana Titarenko, is the managing partner and shareholder in the Legrant law firm that is representing GNT subsidiaries in the legal battle against the US investors, according to court records. And Vaskov’s uncle owns Odemara, the company that offloads grain for GNT, and Vaskov was formerly the manager of Odemara, according to corporate records reviewed by the Journal.

Titarenko, Legrant and Odemara didn’t respond to requests for comment. Vaskov told the Journal that there was no conflict of interest because there is no legal relationship between the ministry of infrastructure and GNT or the US creditors.

Andy Hunder, president of the American Chamber of Commerce in Ukraine, said investors are watching the case closely. “We’re hoping to hear some positive news from law enforcement and from the Ukrainian government soon,” said Hunder, whose group represents member companies in talks with government officials, including about this case.

Ukraine’s national police launched a criminal investigation based on the US firms’ allegations, and a district court ordered a temporary seizure of the grain terminal to allow authorities to preserve potential evidence, according to the court records reviewed by the Journal.

As of now, however, only GNT has been allowed access to the terminal, according to the US firms.

The national police didn’t respond to a request for comment. The country’s Anti-Raider Commission, which was established to safeguard investors’ rights, has supported the US firms’ efforts to appoint new directors at GNT to take control of the assets, according to public records.

The commission didn’t respond to a request for comment.

The Wall Street Journal