When the russian invasion started, the Ukrainian agrarians found themselves in an extremely complicated situation. All grain export channels had been shut off. The damage caused by missile strikes, infrastructure destruction, seaport blockade, and other events remains to be determined. According to March data by experts of the KSE Institute (affiliated with the Kyiv School of Economics), the overall losses suffered by the agroindustrial sector and land resources totaled USD 8.7 billion.
However, the U. S. company Argentem Creek Partners (ACP) declared in December 2022 that it would enforce a loan of USD 75 million (plus interest) owed by GNT Group, an international holding company founded by Ukrainians). ACP attempted to take control of the entire business of the holding company. ACP owns and manages two lender funds, ACP I Trading LLC and Pathfinder Strategic Credit II LP (both incorporated in the Cayman Islands).
One more creditor (USD 20 million plus interest), Innovatus Capital Partners, initiated criminal proceedings against GNT Group’s Ukrainian companies in Ukraine.
GNT Group holding company owns a huge grain terminal in Odesa Commercial Sea Port (known to the market as the Olimpex Terminal) and trades in agricultural products.
The key accusation by foreign creditors underlying the entire case for such an aggressive approach is that GNT Group has allegedly recycled 400,000 tonnes of grain and sunflower seeds worth USD 130 million.
“It appears that they (GNT Group) could have used the war in Ukraine as an opportunity to write off inventories (grain and sunflower seeds) to the tune of more than USD 130 million,” Argentem claimed in the media. That grain was also referred to as the “collateral grain.”
The analysis of media publications, official statements by creditors and the GNT Group failed to explain where the alleged amount of 400,000 tonnes of grain worth USD 130 million came from and what creditors have to do with all this grain. The question arises because GNT Group’s corporate rights rather than grain were pledged to ACP. In addition to corporate rights, slightly over 100,000 tonnes were pledged to Innovatus, but this pledge also fails to explain the volumes referred to by the ACP.
Moreover, this “using the war as an opportunity” expression sounds quite cynical because Ukrainian businesses suffered immense losses because of the war.
Since the loud scandal around GNT Group and accusations by ACP and Innovatus of the disappearance of astronomical amounts of grain caused quite a stir among the public, our publisher requested the Ukrainian holding company to provide clarifications. We interviewed GNT Group in detail about their grain inventories and how the company dealt with them before the grain corridor opened in August 2022.
According to the company, the disappearance of 400,000 tonnes of grain worth USD 130 million is pure manipulation. Furthermore, GNT Group’s owners accused Argentem Creek Partners of the attempted hostile takeover that caused significant damage to the company. They are going to recover this damage by litigation.
The GNT Group’s story is interesting as a case study; it illustrates the difficulties the Ukrainian agrarian companies faced and their approaches toward rescuing their businesses with the start of the russian invasion.
Chaos and Missile Attacks
The foe started shelling Odesa and its surroundings immediately on February 24, 2022. The russian invaders identified Odesa as a strategic axis that would close off the occupation of the entire south of Ukraine and provide a land bridge to the self-proclaimed Transnistrian Moldovan Republic. russia’s Black Sea Fleet sealed off the Black Sea. Numerous foreign vessels loaded with the exported grain were stuck in the roadstead near the Ukrainian shores.
As GNT Group’s owners reminisced, the loaded vessels of the counterparties had to lie idle in the Odesa Port until the grain corridor opened in August 2022.
“Traders incurred losses because they had to operate the chartered vessels. We helped our partners as much as it was possible. We supplied the crew with everything needed. Later, we evacuated a foreign crew and provided a replacement Ukrainian crew to enable the vessel to sail once the grain corridor opened up,” Valentyna Mekh, GNT Group’s top manager, explains.
Odesa’s residents have mostly grown accustomed to the enemy attacks after more than a year of the second phase of the war. However, the first months were extremely difficult: With incessant air rad alerts, economic activity in many sectors froze.
“Fear and panic froze many people. The streets were empty. Some people went into hiding, while others left the city,” GNT Group’s shareholder Volodymyr Naumenko reminisces; he stayed in Odesa at that time because he had to address a number of business issues.
On February 25, 2022, the media reported, “Residents of downtown Odesa and the seaport reported about shooting and cries.” There was a major russian missile attack on Odesa on April 23; they targeted infrastructure, including the seaport, and killed 8 people. There have been lots of reports like this till now. Unfortunately, the Ruscists keep attacking Odesa and all other regions of Ukraine.
According to Naumenko, who referred to a specialized statistics website, there had been 216 air raid alerts of 55 minutes on average between February 24 and late April 2022, equivalent to about 200 hours over two months. A standard 40-hour working week means more than a month’s worth of working hours were lost due to air raid alerts.
GNT Group, like other stevedoring companies, had to operate under extremely stressful conditions. Modern grain elevators are high-tech industrial facilities that require a specific operating mode to be maintained. Otherwise, the grain will spoil. Unlike inland grain elevators, the grain elevators in ports are not designed to store grain long-term. It is their purpose to transship grain onto ships as soon as possible. The average grain turnover in a port comes to one month.
By early April, about 80 percent of the grain terminal’s personnel were not working. “Some of them evacuated to the West or abroad. Some joined the Armed Forces. It was not easy to reach many people by phone. Some staff members came back after several months. Some of them left the company. These events took place after two years of the COVID-19 pandemic, due to which the terminal was not staffed with enough personnel anyway,” Valentyna Mekh explains.
Due to hostilities and bombing raids, the power supply to the seaport was often disrupted; it was not permitted to turn lights on during the night; the access to terminals was substantially restricted (at a level equivalent to military facilities), with a curfew in place from 7.00 PM till 7.00 AM.
The German DW wrote in May 2022 with reference to a staff member of one of Odesa Seaport’s terminals that “there are no people in the seaports, with most staff members on a forced leave due to idle time because the ports have become not only dangerous but also subject to strengthened protection procedures. The access control is so strict that they even prevented one of our shareholders from visiting the facility without a clear explanation of reasons for the visit.”
These factors affected the grain storage quality. “We had limited opportunities to comply with process regulations for operating grain storage elevators. It was difficult to get access to the terminal,” GNT said.
Complex processes, such as ventilation, temperature control, etc., are required to store grain regardless of its initial quality (humidity, etc.). If these processes fail for some time, grain can spoil.
As a rule, the seaport grain terminals look like huge metal cylinder silos. AgroElita, an agrarian magazine, explained in an article, “Practice shows that sharp changes in atmospheric temperatures give rise to significant temperature gradients leading to the phenomenon of the grain mass hygrothermal conductivity and moisture condensation.” In other words, the moisture evaporating when the sun heats the metal surface condensates within the mass on cold nights. It activates the microflora, rotting, and gives rise to mold. To address this issue, the grain must be ventilated actively, and the active ventilation requires a power supply and personnel.
With the beginning of hostilities in Odesa Oblast, Olimpex Coupe International (a GNT Group member company managing the port terminal) warned Innovatus about all the grain storage difficulties. ACP was also aware of these issues, for instance, through a notice to the Board of Directors established by the creditor in 2020, with Bohdan Khomiak and Oleksii Pavlenko as the creditor’s representatives.
By May 2022, GNT Group managed to partly resume the work processes, gather personnel, and survey the condition of the grain that had been stored in the seaport under conditions that prevented the company from meeting all the process requirements. Grain was likely to have started spoiling.
According to Volodymyr Naumenko, a case in point is the grain held in the port elevators, with some grain, about 116,000 tonnes, pledged to Innovatus (65,000 tonnes of barley, 39,000 tonnes of wheat, and 12,000 tonnes of corn).
Bureau Veritas, a renowned international inspection and certification company, was involved in the survey; quite predictably, it documented grain spoilage due to moisture (see photo below).
Bureau Veritas documented grain spoilage in GNT Group’s grain terminal in Odesa Seaport in 2022
According to the GNT Group’s management, keeping spoiled grain in the storage facilities would have been hazardous and economically pointless.
Firstly, there was a risk of fire or explosion (especially if a missile hit a silo with spoiled grain). Sergiy Groza, an owner of GNT Group, explained that chemical and biological processes drive temperature to high-risk self-ignition values that make the elevator silo unusable.
As Alla Stoianova, Director of the Agrarian Policy Department of the Odesa Oblast Military Administration, mentioned in the media in the summer, the agrarians of the region reduced the amount of grain delivered to Black Sea port elevators due to the risk of their being hit by missiles.
Secondly, negotiations on lifting the blockade of the Ukrainian ports and opening up a corridor for grain exports started in April.
In May, GNT Group decided to remove spoiled grain from the storage. By doing so, the company was able to preserve the silos as its main asset and prepare the terminal for transshipping export grain (the company would have been unable to do so with the spoiled grain inside). It gave the company a chance to restore its business and avoid bankruptcy.
Also, mold covered silo walls due to grain germination, and it had to be removed (see photo below).
Mold on silo walls in GNT Group’s grain terminal in Odesa Seaport in 2022
Silos of the Olimpex terminal sustained additional damage in June 2022 due to being hit by debris of a missile shot down by the Ukrainian air defense forces. Fragments punctured the metal structures of the terminal (see photo below). Puncturing a metal shell results in the ingress of moisture into the silo. Thus, the silos had to be repaired. This event offered another incentive to remove the previously spoiled grain from the silos.
In June 2022, the Olimpex terminal’s silos sustained additional damage by fragments of russian missiles.
Unsound grain was disposed of, and elevator silos were repaired from May to August. The elevator was filled with new produce while being brought to working condition.
The GNT Group’s management considers the comments by John Patton, Argentem regional director, who was informed about all incidents with the spoiled grain, difficulties related to its storage and attacks on Odesa.
According to Dusan Denic, the holding company’s Director of Finance, when informed about damage caused to the terminal by debris, John Patton said he had seen a photo with a couple of holes and that it was hard for him to believe that grain had to be disposed of because of that.
GNT Group, however, emphasizes that they have never claimed that the damage from the debris was the main reason for disposing of the grain in the seaport. They kept constantly informing creditors about grain storage problems from March-August 2022.
Innovatus admitted it in their interview with Latifundist: “Yes, we saw the report by Bureau Veritas. It indicated that wheat and barley had an unpleasant smell and that grain had sprouted.”
“It is strange to hear from ACP that GNT Group allegedly used the war as a pretext for machinations we did not commit. Or to hear Patton’s statements about “a couple of holes” after a year of constant missile attacks that kill Ukrainians and destroy infrastructure and businesses. As I understand, John Patton, an American, has not been to Odesa after the full-scale invasion and has not been able to see what is going on with his own eyes. Some people cannot dare to do this. But why did he feel compelled to comment on the tragedy of war in Ukraine in this style? Perhaps, Mr. Patton deliberately downplayed the effect of hostilities to deflect accusations of driving Ukrainian companies to bankruptcy during the war,” Volodymyr Naumenko suggests.
Where did 400,000 tonnes worth USD 130 million come from?
In fact, GNT Group was forced to rescue its business by removing spoiled grain from elevators in the port. Doing so allowed the company to repair the silos and prepare them for transshipping export grain under the forthcoming grain deal.
However, it did not prevent Innovatus from initiating criminal proceedings in Ukraine in December regarding the disposal of the pledged grain, although the Ukrainian company kept reiterating its obligations under the loan and its willingness to settle accounts. For instance, at a meeting of the Board of Directors, Sergiy Groza stated that the holding company would meet the loan agreement requirements regardless of the spoiled produce situation.
It would appear that filing a criminal complaint pursued some other goal than the recovery of loan funds, supposedly the main goal of the creditors.
However, the pledge only covered 116,000 tonnes of grain. So why do creditors allege that a further 285,000 tonnes of grain disappeared? Are there any grounds for allegations about the losses of USD 130 million?
According to GNT Group’s clarifications, the creditors deliberately mixed up two different “grain situations” to achieve a PR effect and improve their stance before the court: the storage of the pledged grain and the GNT Group’s trade in grain not covered by any obligations before the creditors. The holding company trades in agricultural products in addition to its stevedoring business.
The blockade of exports, the occupation of territories, and the destruction of infrastructure resulted in extremely difficult conditions for the Ukrainian agrarian companies.
In 2021, Ukrainian agricultural producers gathered a record-setting crop of grain and oil crops amounting to 106 million tonnes. Of course, the war made it difficult to find the capacity to store all this grain. In late June 2022, a new harvesting campaign started. The agrarian companies that could not sell grain for export had to keep grain in local elevators in proper conditions.
As reported by Elevatorist, there were 158 elevators with a storage capacity totaling 5.9 million tonnes in Ukraine’s temporarily occupied territories as of April 2022. There were also about 192 elevators with a total storage capacity of 8.25 million tonnes in the area of active hostilities. Port terminals were mostly blocked and a target of missile attacks.
As estimated by Mykola Horbachov, Chair of the Ukrainian Grain Association, in June 2022, elevators with a capacity of 13 million tonnes out of 60 to 67 million tonnes of certified grain storage facilities were under occupation.
Agricom Group commented in the media that many companies and farmers still had the old grain stock in their warehouses and elevators at the start of the new harvesting campaign.
Volodymyr Varbanets, Chair of the Odesa Oblast Association of Farmers and Private Land Owners, stated that they considered storing grain in special sleeves in the fields. “In Odesa Oblast, the elevators are almost full; almost 50% of the previous year’s crop are still in the warehouses of Odesa Oblast farmers. The procurement prices went down from UAH 9,000 per tonne of grain last year to about UAH 6,000 now, but no one buys anything due to the lack of storage capacity,” he said.
Epicenter Agro company told journalists in April 2022 about the operation of their elevators: “In March, we collected 134,000 tonnes of grain from silo bags and placed it in elevators. Geographically, the elevators are relatively safe. In parallel, they also accept grain from other holding companies to help save grain from the endangered areas.”
GNT Group also had to keep their 2021 grain in inland elevators due to the export blockade by russians. The company kept about 170–175,000 tonnes of corn, 10,000 tonnes of wheat, and 65,000 tonnes of sunflower seeds in the storage facilities in Vinnytsia and Kirovohrad Oblasts.
To diversify risks related to the duration of grain corridor negotiations, some corn (a bit more than 90,000 tonnes out of 170–175,000 tonnes) was exchanged on the domestic market for sunflower oil. The oil is not as perishable as grain; it is also more liquid and could be sold profitably via the Izmail port on the Danube. It was done partially before the grain corridor was opened.
The remaining more than 80,000 tonnes of corn were exported according to the earlier plans via the Odesa Seaport once the grain corridor opened up. The company also sold about 10,000 tonnes of its own wheat also stored in the inland elevators.
Also, sunflower seeds were exchanged for sunflower oil, like in the case of corn. By the start of the second phase of the war against russia, GNT Group stored about 65,000 tonnes of sunflower seeds in the inland elevators. Sunflower seeds are very perishable; by that time, their price on the global market was several times as low as earlier.
First, the company attempted to sell the seeds via Bulgaria, delivering them by trucks. This way, the company managed to export several thousand tonnes of sunflower seeds but did so at a loss due to complicated logistics. Because of that, the company undertook a barter exchange of more than 60,000 tonnes for oil with Sunolta Group, which processed sunflower seeds into oil and kept some of those seeds in its elevator.
“ACP spreads nonsense in the media about our connection to Sunolta Group only because we have stored sunflower seeds in their elevator and later exchanged them for oil. We could just as well accuse John Patton of supporting putin based on his over 28 years of experience (as indicated on the ACP’s website) in investing in illiquid loans and special situations, mainly in russia,” Sergiy Groza notes.
Later, once the sea route opened up, most oil obtained from barter transactions (in exchange for corn and sunflower seeds) was sold. Before that, some oil was sold via the ports on the Danube.
In any case, the holding company earned on transshipping grain or oil at the port terminal once the opportunity to export opened up, regardless of whether the prices on the global market were good or not for particular agricultural products. The port elevators prepared for this in advance enabled the company to profit in these extremely difficult conditions and avoid bankruptcy.
“The company carried out some trade transactions with agricultural products that turned out to be profitable. They were planned in an extremely difficult situation of uncertainty and other war-related issues. I am proud of some of our business decisions. I am talking about the transactions involving about 250,000 tonnes of grain and sunflower seeds. If we add the grain stored in the port, the total will be close to 400,000 tonnes. However, only 116,000 tonnes were pledged, and even that grain was pledged to Innovatus, rather than ACP,” Volodymyr Naumenko explains.
According to GNT Group, John Patton uses this figure of about 400,000 tonnes to speculate in the media to justify his debt enforcement by taking over all of GNT Group’s assets. For some reason, ACP claims that all the grain worth USD 130 million was written off and that the actions by the Ukrainian company were non-transparent, thus proving machinations. However, financial and business documents tell a different story.
Dusan Denic explains that Ziff Ivin, an ACP-appointed audit firm, audited GNT Group’s operations in the first half of the year. However, the company sold most products (corn, wheat, and sunflower oil) in the second half of 2022. Ziff Ivin failed to include some sales that had occurred in the first half of the year and barter transactions in their report.
According to him, the holding company had the full right to trade its grain and only had to report on the pledged products. And the company did so.
Harmful Consequences
Why did the audit cover the company’s operations in the first half of 2022 only if the active trade in agricultural products was evidently re-established after the grain corridor had been opened up? GNT Group believes ACP deliberately filtered out the information beneficial to them to prepare for a hostile takeover of the Group’s business.
Business Censor reported that Ukrainian politicians might be involved in the business takeover on the side of Argentem. For instance, Davyd Arakhamia, a member of the Verkhovna Rada, had a meeting with ACP in Vienna one month and a half before the start of the hostile takeover. According to information available to journalists, Arakhamia did discuss the potential placement of the GNT Group’s stevedoring asset by the Argentem under the control of Dmytro Firtash’s port business (his group owns the Nika-Terra port in Mykolaiv). However, no information on the market shows that DF Group accepted this offer.
In addition, as reported by UNN news agency, the administrative leverage in this conflict was openly demonstrated by the Minister of Justice Denys Maliuska.
These attempts to take over someone else’s business can be explained by the improvement of the company’s affairs after the grain deal came into being. Within six months before January 2023, the holding company loaded about 1.5 million tonnes of grain (almost 10% of the agricultural exports by sea at that time), including its own trade business, at its port terminal.
When this corporate raiding attack started, GNT Group assumed that ACP would focus on reducing the value of assets to sell them to a third party in a non-transparent manner. That is how it turned out later. However, there were some nuances.
Firstly, Innovatus filed a criminal claim without submitting any documents for debt collection. GNT Group is unaware of any inspection protocol or report documenting any unlawful loss of the pledged grain.
Innovatus, as a creditor, was offered debt repayment in November–December. They accepted the offer. However, ACP blocked the deal, demanding that the debt be repaid on pari passu terms. In their interview with BusinessCensor, GNT Group owners suggested that “ACP, having been planning a hostile takeover of our business at least since November, has not left any other option for Innovatus.”
Secondly, ACP undermined GNT Group’s agreement with a strategic investor willing to invest in the Ukrainian company and repay its debt.
Thirdly, ACP initiated bankruptcy of the holding company’s subsidiaries operating successfully under the grain deal.
According to Volodymyr Naumenko, these developments resulted in losing some long-term contracts with international traders in January-February 2023. For instance, they terminated port terminal transshipment contracts and trading transactions with GNT Group, estimated to cover at least 0.5 million tonnes of grain.
Moreover, other creditors – banks Vostok and Pivdennyi – repossessed some port assets of the company used as collateral for commercial loans in February 2023.
It can be assumed that these hostile measures taken by banks can be related to the scandal in connection with Argentem Creek Partners’ hostile takeover and its stated intent to drive Ukrainian companies into bankruptcy. Possibly, the banks had no other way out of the situation created by these so-called investors.
Based on all these factors, GNT Group’s owners stated that they would claim compensation for the damage caused by the hostile takeover steps taken by Argentem Creek Partners before the arbitral tribunal in the UK.