July 1, 2024 - On June 26th, the LSTA hosted a webinar, Financing and Investing in Ukrainian Energy and Infrastructure Funds. The presentation was moderated by Jonathan Cardenas, Chair of the Emerging Europe Private Equity & Venture Capital Taskforce, ABA’s Business Law Section, and he was joined by the following panelists: Kaarli Eichhorn of Jones Day, Rear Admiral (Ret.) Michael Hewitt, U.S. Navy, Co-Founder and CEO of IP3 Corporation, Igor Krasovskiy of Integrites, Jon Queen, CEO of Berezan Port Limited, Svitlana Samko of the European Bank for Reconstruction & Development (EBRD), Julius Svoboda of the U.S. Agency for International Development (USAID), Andrii Tsokol of the EBRD, and Sandra J. Vrejan of Morgan Lewis. The webinar was comprised of about eight different presentations given by the presenters. Together they provided an overview of legal and financial considerations that surround international investment in, and related lending to, Ukraine funds in 2024, with a focus on the energy and infrastructure sectors. Energy generation of the region has decreased 68% since the start of the war. Even with imports from Europe, this is an energy crisis causing wide spread outages across the region.
The first presentation was by USAID, and after an overview of the important work they do in Ukraine, the EBRD explained their role. Established in 1991, the EBRD is owned by 72 countries and promotes the development of sustainable, private sector-led economies in central and eastern Europe, Central Asia and the southern and eastern Mediterranean region. The EBRD has deployed €4 billion since the beginning of the war in Ukraine to help keep the country’s businesses and economy functioning. In 2023, 905 of the projects in the Ukraine and 50% of the financing were in the private sector.
The entire territory of the Ukraine has been impacted by the war which Russia started in 2022. Before the war’s outbreak, the Ukrainian transportation sector had been quite developed with an advanced rail system and critical ports which were vital in exporting the growing agricultural products from Ukraine. All of that required logistical facilities for railroads, cars, storage, etc, to transport and store products for export. Other than three small ports on the Danube, Ukraine’s sea ports were blocked from the start of the war until August 2022. When the war started, it became so difficult and expensive to move ships out of the country without fully operational ports, the economy of Ukraine suffered terribly.
IP3 was then analyzed as a case study. On April 21, 2023, IP3 Corporation and the National Security and Defense Council of Ukraine executed a Memorandum of Understanding (“MOU”). The purpose of the MOU is the joint cooperation on development of strategic projects aimed at implementation of different plans of action on postwar recovery and development of Ukraine. IP3 and its partners are developing a number of energy, infrastructure, and agricultural projects in Ukraine. IP3 plans to support the projects by attracting and coordinating project partners and working with the US and Ukraine governments, as well as the EU and other multilateral funding sources. IP3 has a large number of partners and thus a diversity of resources for reconstruction funding, and it was asked to put together two funds – a specialized recovery fund and also a global defense credit fund to invest in the unique technology of the Ukraine defense base.
The Berezan Port project was then highlighted. The port is located on the Black Sea in the Berezan River estuary of Ukraine’s Mykolaiv region, and the project will create a privately-owned and operated intermodal hub of sea, air and land logistics, centered around what will be Ukraine’s largest deep seaport and a tax-free industrial zone. This will help restore Ukraine’s industrial production capabilities destroyed by the war. It will be able to service a wide range of cargos including grains, vegetable and other oils, metals and mining commodities, LPG, LNG and general cargo. The Berezan Port project has an estimated cost of $792.5 Million. Ukraine has established the state entity “Berezan Marine Industrial Cluster” to support the project’s development, including legislation and regulations for taxation, permits, import/export issues, and environmental considerations.
The webinar then turned to the legal and regulatory considerations under US law, Ukrainian law, and EU law of lending to and investing in the Ukraine, and the intricacies of obtaining political risk insurance. In the US, PRI is provided by Development Finance Institutions and is backed by the full faith and credit of the US. There are many practical aspects of investing in Ukraine projects. This is a cross border financing so parties must consider those issues. For example, what type of entity is the investor? That decision will have an impact on the transaction under Ukrainian law, and it is helpful to work through those types of issues upfront. In addition to cross border financing issues to consider, you will also need to take into account sovereign issues because the Ukrainian government will likely also be involved; thus, you will need to think about negotiating sovereignty waivers.
Before the 2022 invasion, Ukraine struggled to attract foreign direct investment, including impact investments, due to numerous systemic challenges including corruption and the lack of a credible judicial system (see The Untapped Market for Impact Investing in Ukraine, June 2024, The Center for Strategic and International Studies). The Ukraine continues to fight corruption, and this is key especially if it is to become a member of the EU. Ukraine applied for EU membership in February 2022, EU candidate status was granted in June 2022, and in December 2023, EU leaders decided that accession negotiations can be opened. The EU Commission confirmed on June 7th that Ukraine meets all the criteria needed formally to start negotiations on EU membership, and on June 25th, EU ambassadors agreed formally to start accession negotiations with Ukraine. Equal to the size of Texas, Ukraine will be a sizeable new EU Member State, and it will enlarge the EU Single Market and bring important capabilities.
Click here for the very detailed slides and replay.
