A Shot in Conscience: What's Wrong with Sale of Arcada Office

Remember this story every time you hear “Umerovish” slogans calling for privatization

article by YULIYA SAMAYEVA, ZN.UA Economics Editor

Two months ago, Kyiv undewent the most massive shelling since February 24, with one of the rockets hitting someone’s conscience.

That morning, at 9:55 a.m., to the wailing of the air raid siren, the Individuals Deposit Guarantee Fund began selling the office premises of the bankrupt Arсada bank and surprisingly succeeded. The story of when, to whom and for how much this building was sold is a story of how, right next to Ukrainians fighting for their country’s right to exist, some residents of Ukraine are fighting no less fiercely for their own enrichment.

So what is wrong with the sale of the Arcada bank’s office?

The building on Olhynska Street in the very heart of the capital is well-known and easily recognizable: a real pearl of the commercial real estate market, nestled next to the upper exit of the Khreshchatyk metro station, in close proximity to the government quarter, with 14,000 square meters of office space. Needless to say, such a treasure should be in high demand and, accordingly, cost a lot. But not in Ukraine.

The Arcada bank was declared insolvent in the summer of 2020, and its property, in accordance with the law, ended up in the Deposit Guarantee Fund, authorized to sell it to compensate for the losses. But the building on Olhynska Street, the main asset of the bank (about 30% of its total capital), did not get into the fund’s hands immediately. On the eve of liquidation, it was removed from the bank (as collateral for a loan) by giving ownership rights to Oleh Nelin, who in turn mortgaged the building to Taras Budeinov. Both gentlemen are associated with Mykola Zlochevskyi, a former environment minister during Viktor Yanukovych's presidency and the owner of the gas production company Burisma, who is currently on the wanted list in the United Arab Emirates. Nelin has been associated with Zlochevskyi since the 2000s as an employee, a manager and a co-owner in Zlochevskyi's father’s company. In short, they were close. Budeinyi is one of Burisma’s leaders and a long-time assistant to the fugitive minister during his time as an MP.

However, Zlochevskyi's first attempt to lay his hands on the major asset of the Arcada bank turned out to be too clumsy and, surprisingly, unsuccessful. One could write something about the fund's victorious legal battle to return a valuable asset to the state, if it had not been for subsequent events. So let’s confine ourselves to saying that the fund did return the asset.

Over the course of two years, the building on Olhynska Street was put up for sale almost three dozen times (!), and no one wanted to buy the treasure.

Did the price scare customers? No, it was quite reasonable for the market at that time. It was the prospect of competing for an asset with Zlochevskyi that was more stressful. Usually, when it comes to such unusual objects, there are no dark horses among potential buyers; what is more, especially odious ones deliberately talk about their interest in the asset and most serious intentions at every corner. It bears resemblance to a duel of glances before a boxing bout, except the one who looked away first does not even enter the ring.

The court proceedings related to the return of the asset, which lasted until October of this year, too were discouraging: lawsuits are expensive and burdensome for all potential buyers, except for those who can stop these lawsuits with one phone call.

The fund was certainly aware of this but still stubbornly put the building up for sale, although no one entered the ring. And according to the procedure, if there are no buyers and the object cannot be sold, there is only one way – to do a Dutch auction. Whereas a normal auction involves an increase in the price, at a Dutch auction, the price, on the contrary, decreases.

In theory, Dutch auctions should sell only junk; in practice, it is not uncommon and not accidental that the most attractive assets that someone wishes to buy at the lowest price turn up there. In fact, that is exactly what happened with the building on Olhynska Street, whose value on October 10 started with a billion hryvnias and fell to 350 million in the course of a short-term bidding.

That’s right, the new buyers purchased an office center with an area of 14,000 square meters in the center of Kyiv at a price of $700 per square meter, with a bonus 50-acre plot of land beneath the building.

You might say, there are no market conditions, the country is at war, investors are cautious! True, it is really the worst possible time for investments, so why not wait for a better moment? After all, even now, during the war, a square meter in the panel residential complex that the Arсada bank hasn’t finished on the edge of the Kharkiv neighborhood still costs almost $2,000 due to the absence of demand and the actual developer. Even though there are no market conditions at the moment, commercial real estate in the city center does not come cheaper than $3,500 per square meter.

You might say, it is better that way than putting this asset on the shoulders of taxpayers, since utilities and security of such a large building will cost a pretty penny! Fair as it may be, the asset is quire self-sufficient. The building is not empty and is at least two-thirds full of tenants. It is clear that everyone is having a rough time now, even, perchance, tenants from Olhynska Street; but at the current average rent price in the area, even if only a third of tenants pay it, the building generates UAH 2.5 million per month. It should be enough for maintenance while waiting for better times to come.

You might say that even a pittance in the budget is better than nothing. One is hard put to differ, but the choice from the very beginning was between a kopeck and a hryvnia, and the “nothing” option was deliberately imposed on us. Such an extraordinary object could have been kept, given the location and the income it generates and the ease of obtaining this income, which even an “inefficient state owner” can easily handle. This option, however, was not even taken into account; instead, the option to sell was considered, even for pennies on the dollar.

In total, three companies set their sights on the asset at the last auction. The first one is a company about whose activities Andrii Smirnov, Deputy Head of the President’s Office, could tell a lot about. The second is a no-name enterprise, which was supposed to comfort the loneliness of the first company at the auction. The third is a mysterious System Oil Engineering, whose name directly indicates this company could not be any further away from the real estate market. Since, as we have already mentioned, there are no dark horses in this business, most outside observers bet on the first firm. The good news is that they lost and, despite their best efforts, failed to reverse the results of the auction. The bad news is that they lost not to someone from the market but to Zlochevskyi himself.

Of course, System Oil Engineering does not belong to Zlochevskyi directly; its owner is the Cyprus-based Diloretio Holdings Ltd, which, in turn, also belongs to the Cypriot companies, Serminara Limited and Glasimo Limited (the normal names have probably run out, and the IKEA catalog was at hand). In the end, the ultimate beneficiary of the former is Karina Zlochevska, while the latter’s is Anna Zlochevska. They are hardly just the full namesakes of Zlochevskyi’s daughters.

Yes, the odious gas tycoon and textbook member of the former pro-Russian Party of the Regions, whose people tried to give the biggest bribe in the history of Ukraine, continues to grab everything he likes at the price that suits him. That is, for ridiculous money, because under normal market conditions, the investment in this asset will pay off in less than four years and, most importantly, will bring regular income.

It is hard to imagine the depth of the abyss of idiocy into which the Deposit Guarantee Fund’s divers descended by selling something to Zlochevskyi during Joe Biden’s presidency. But we will not take the liberty to assume that the fund does not know how to use Google and does not check the final beneficiaries of the buyers. The fact that, according to the law and procedures, there is no violation in this story is not comforting, rather the opposite.

The organizers of the auction from the Deposit Guarantee Fund, who fought so hard against Zlochevskyi in courts, did it so that later they would still give him the asset, only in a more legal way and still not to some assistants but his relatives. Moreover, their desire to give him this valuable gift was not precluded even by the largest bombing of the capital since the beginning of the war. While the people of Kyiv were sitting in bomb shelters, they were robbed for a third time, after being abandoned by the Arcada bank and its developer.

Remember this story every time you are told about the magic of privatization, the need to get rid of 80% of all property right now, the need to find a penny in the budget and all other “Umerovish” slogans.

In reality, it is easy to imagine how many really valuable assets will be sold for nothing. You won’t even be able to prove that the price is low, since there is neither a market nor a demand. In reality, it is easy to imagine how many well-known mugs will be among the happy buyers. What is really difficult is to understand the level of cynicism of people who, in wartime, are no worse than the enemy, looting their own country.

Read this article in russian and Ukrainian.