Ukraine’s law firms pave the way to EU alignment

Last November, the operator of Ukraine’s vast network of gas pipelines walked out of court victorious. After more than two years of legal battles, which showed the fading power of the country’s market-controlling gas tycoons, Ukraine’s Supreme Court ruled in favour of the pipeline operator’s claim that gas networks had evaded payments.

The decision prevented the Gas Transmission System Operator of Ukraine (GTSOU) from going bankrupt as it meant the company would be able to recover more than €1bn in debts from the gas networks — allegedly controlled by Ukrainian oligarch Dmytro Firtash — and continue sending gas to Europe from Russia. This was a lifeline to the region as fuel from Russia through other routes had been stopped or sanctioned.

GTSOU started collecting debt repayments, although this has since been stalled to ensure the financial stability of the gas market during the continuing war in Ukraine.

It was also the first judgment in Ukraine’s highest court that incorporated a thorough consideration of EU legislation.

“Though the European rules are not directly applicable in Ukraine, the contents of [them were] extensively discussed by the court because they interpreted Ukrainian rules through those European rules,” explains Oleksiy Filatov, senior partner at Ukrainian law firm Aequo, who led work on the case.

For lawyers working to harmonise Ukraine’s laws with EU regulations, to prepare the country for joining the bloc, this was a major step. “We have already seen a number of cases that follow the same path,” Filatov says.

Kyiv applied for EU membership just four days after Russian troops entered Ukraine on February 24 2022. It took more than a year for EU member states to agree to open accession negotiations and another six months for them to start, in June this year. But work had already begun on bringing Ukraine’s legal system into line with its European neighbours.

“Harmonisation to EU standards and EU laws started in 2015 or 2016,” says Mykola Stetsenko, managing partner at Ukrainian law firm Avellum and president of the Ukrainian Bar Association.

Following Ukraine’s 2014 association agreement with the EU, which laid the foundations for a closer relationship, early work focused largely on financial markets — for example, covering shareholder agreements, securitisation regulation, and land.

The work on land law involved the government’s contentious decision to lift a long-standing ban on the sale of agricultural land. Now — following two phases of reforms, the second of which finished this year — individuals and legal entities may buy plots of up to 10,000 hectares.

“Ukraine cannot keep this ban and join the EU”, where free capital flow is fundamental, says Yulia Kyrpa, executive partner at Aequo.

Law firms, supported by inter­national donors — such as the US Agency for International Development, the European Bank of Reconstruction and Development and the EU — are engaged with regulators and ministries in Kyiv to overhaul the country’s legal system as fast as wartime conditions will allow, and to improve transparency.

They are also driven by a desire to attract the external investment Ukraine will need for reconstruction.

“Standards of transparency, accountability, especially when it comes to the use of donor funds, [are] something that is relevant for the success of the recovery, but also for donors to be able to argue [for] continuation of support, which is vital for Ukraine,” says Milica Delevic, director of governance and political affairs at the EBRD, which has deployed €4.5bn in Ukraine since the invasion.

“It’s important for investors to have the understanding that the framework here in Ukraine is consistent with international best practices, in particular EU standards, and also to have the instruments in which they can invest,” says Olexander Olshansky, counsel at law firm Sayenko Kharenko. He works on updating Ukrainian rules on securitisation and covered bonds — a type of debt secured against a pool of loans — to align them with EU norms.

But he says the problem is that, for many of the new rules Ukraine is introducing to align with the EU, there is “no context of them developing in the local market. We don’t know how these rules will be implemented in practice.”

The quest to join the EU is partly a security guarantee but also a wish of Ukraine to live in an accountable society

A major part of Ukrainian lawyers’ work, therefore, has been ensuring that businesses understand the impact of reforms. In the case of Aequo’s work on land laws, this meant establishing the documents required for sale-purchase agreements, and advising the banks on how to finance these acquisitions, explains Kyrpa.

Adopting EU laws, such as GDPR on data protection, adds “another level of difficulty, more scrutiny, more bur­eaucratic processes”, notes Stetsenko.

Lawyers also need to keep track of changes being enacted in Brussels. “The EU rules keep changing and the local legislators need to keep updating those rules,” says Olshansky.

However, Ukrainian businesses that have already expanded into neighbouring EU countries such as Poland have proved that “Ukrainian business, and the economy in general, is able to adapt”, Stetsenko says.

In a country that has historically been dominated by oligarchic interests “the quest to join the EU is partly a security guarantee but also a wish of Ukraine to live in an accountable society where citizens have a voice”, argues Delevic. Legal reform therefore has a psychological element, she says. Victory against Russia is “winning on the frontline and . . . having a model that is different”.