Walls Closing In Around Ukrainian Iron Billionaire Zhevago

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(Bloomberg) — If recent trends hold, Kostyantin Zhevago’s run as a billionaire is at risk of coming to an end. And that’s only the start of his troubles.

A deepening investigation into allegations of money laundering and embezzlement has forced the Ukrainian billionaire out of the leadership of his flagship company, Ferrexpo (LON:), and a court issued an arrest warrant for him this month.

As Zhevago fights the charges tied to his role in a defunct bank, the company itself — one of the world’s most important iron ore pellet suppliers — has lost more than $1.1 billion of equity value and now is worth about $1.2 billion. As a result, his own net worth has shrunk to $1.2 billion, down by about a third since the end of June. Zhevago denies all charges.

How his case plays out won’t just impact a key cog in the global supply chain — Zhevago likes to say that Ferrexpo’s “molecules” help make everything from iPhones to Mercedes limousines. It’s also a landmark case for country under the leadership of a new president with little political experience, who built his brand around promises to battle corruption.

Seven months in, Volodymyr Zelenskiy’s presidency has hit turbulent times. He was caught up in Donald Trump’s impeachment proceedings and his honeymoon with voters is over. His popularity took a hit partly as a result of a compromise in talks with Russia, though it rebounded after a new set of agreements this month. The former comedian is also facing questions about his ties to another oligarch, Igor Kolomoisky, and his commitment to fight corruption.

“There were a lot of lenders in Ukraine shut down because of various schemes and so far none of the owners have been punished,” said Konstantin Fastovets, an analyst at Kyiv-based investment firm Adamant Capital. “Zhevago may be the first. If this also happens to other stakeholders of failed lenders, it will signal that the new president was serious in his intentions to fight corruption and curb the power of oligarchs.”

Zelenskiy and Kolomoisky have repeatedly said there’s nothing untoward in their relationship, which started when the tycoon used his broadcasting empire to drive Zelenskiy’s former career as a TV comic.

A top prosecutor last month said the country is stepping up probes of failed lenders, partly as a response to international pressure. Authorities are “examining the embezzlement of funds by owners or management of all bankrupt and nationalized banks, without exception,” First Deputy Prosecutor General Vitaliy Kasko said in an interview.

The indictment and arrest warrant are a turnaround for the man who was once the fastest-rising star in Ukrainian business and, at one point, the country’s youngest billionaire. Zhevago, 45, stood out among Ukrainian oligarchs, partly because he’s younger than most of the cadre of tycoons that first emerged from the rubble of communism, and partly because he was one of the few who opted for a London stock offering and faced the increased scrutiny that entails.

Zhevago and his legal representatives repeatedly declined to comment for this story. Ferrexpo’s communications office stressed that the billionaire has stepped down as chief executive officer, even if he remains the majority shareholder, and the investigations are unrelated to the company.

In public, the billionaire has rejected suggestions that he acted improperly. At a campaign event in July, Zhevago responded when asked by Bloomberg about an audit at Ferrexpo that “this is provocation from your side.”

“Everything you say is just a lie,” he said. At a function in May, Zhevago said that the investigation meant nothing because the authorities were looking into almost all of the country’s charitable foundations.

Ferrexpo is “in a financially strong position and able to grow in a sustainable manner,” the company said in an emailed statement. It “continues to operate successfully and to deliver high-grade iron ore pellets to its world-class customers.“

His unique skill set, a sharp mind and an ability at self marketing have made Zhevago a key part of Ukraine’s corporate landscape, ever since he stepped into the whirlwind of post-Soviet business as a teenager. He quickly found inefficiencies to exploit in an economy ravaged by runaway inflation and market imbalances that left companies constantly short of cash.

“Zhevago is an impressive entrepreneur, with a strong work ethic,” said Vitaliy Lisovenko, a non-executive board member at Ferrexpo. “He is very analytical and strategic in his outlook. At Ferrexpo, his strategy at the outset was to win the world’s best steel producers as clients. Now this target has been reached.”

Zhevago always seemed to have a solution where few others did: he was able to raise financing in dollars from international partners when Ukraine’s currency was becoming worthless, he could navigate the bureaucracy when others got stuck, he was able to find funding when cash flows dried up. By age 22, Zhevago and his partners had bought a bank, Finance & Credit, just in time as the government started to dismantle the communist-era centralized economy.

In the furious dealmaking that followed, there was money to be made for a quick and agile mind like Zhevago. He acted as idea man for one of the richest Ukrainians of the era, gas magnate Ihor Bakai, who fled to Russia after Ukraine’s 2004 Orange Revolution. At times, he was the English-speaking and western-compatible local guide for big-name foreign investors from Merrill Lynch to Credit Suisse (SIX:).

‘Unique Skill’

“He had a unique skill to persuade, to sell ideas,” said Ihor Voronov, who hired Zhevago in early 1990s for an investment wing of his business as a freshman in college.

And he also made deals for himself. Zhevago and his partners bought breweries and cement plants, drugmakers and tobacco factories — some they later sold to foreign investors and some they kept. In 1996, he acquired his crown jewel: an iron ore mine in the Poltava region.

Not that it looked like much of a jewel, at the time. The company was deeply indebted, months behind on wages and utility bills. But with Zhevago’s access to financing, the arrears were quickly cleared and he embarked on his life’s work: creating Ferrexpo.

By 2007, the company had been transformed to a modern iron conglomerate that today is the world’s third-biggest exporter of iron-ore pellets. Zhevago raised $500 million by selling 12% of Ferrexpo’s shares in London which valued the company at $1.67 billion and made him a billionaire at age 33. His current net worth is $1.1 billion, according to Bloomberg estimates.

“The chemical composition of Ferrexpo’s iron ore allows the company to be the supplier of choice for steelmakers which produce high quality steels for value added products,” said Alexander Martynenko, head of corporate research at a Kyiv-based investment firm ICU. Since 2007, Ferrexpo has increased total production volumes by 17% to 10.6 million tons and high-quality pellet output by 167% to 9.8 million tons, Martynenko estimates.

Everything seemed to be going right for Zhevago. He was elected to a seat in parliament, which gave him political influence. Even his soccer team, Vorskla Poltava, became a fixture in European competitions in the following decade, playing host to powerhouses like Benfica and Arsenal.

But as it tends to in Ukraine, the political landscape shifted under Zhevago’s feet. And when it did, it was an earthquake on a global scale. In 2014, anti-government protesters ousted the country’s pro-Russia president, Viktor Yanukovych. Russia annexed the Crimea peninsula and a deadly conflict followed between the central government and separatists in the country’s industrialized east. The economy went into a downward spiral.

By 2015, Finance & Credit was declared insolvent. The central bank found that almost 60% of the lender’s loans were extended to various parts of Zhevago’s business empire. When payments faltered — Vorskla players even complained publicly about missed paychecks — the lender itself was soon to follow.

The damage was extensive and investigations are still ongoing, with several of the bank’s former managers indicted. The charge against them is the embezzlement of about $100 million of mostly client money.

“It was a problem of all Ukrainian oligarchs, who owned banks,” Kateryna Rozhkova, the central bank’s first deputy governor, said in an interview. “They have assets in various industries and used their own lenders as an instrument for financing rather than a separate business.”

With his key financial asset taken off the board, the difficulties multiplied for Zhevago’s businesses and it all had an effect on the centerpiece of his empire, Ferrexpo. Prosecutors announced a money-laundering probe in April, saying they were looking into whether a charity called Blooming Land, Ferrexpo’s charity partner, was actually a vehicle used to evade taxes and hide illicit funds.

That investigation, still underway, doesn’t personally involve Zhevago. His most important asset still got caught up in the proceedings when Ferrexpo’s Poltava plant was searched by investigators in August as part of the probe. The company at the time said was a “routine request for documents on different third parties.”

Zhevago’s decision to leave his post as chief executive was “entirely typical” and intended to “avoid any damage to the business,” according to Lisovenko, the Ferrexpo board member.

The stock went into a tailspin as Ferrexpo’s auditor Deloitte LLP and two directors abruptly resigned because of disagreements over an internal probe into Blooming Land.

Zhevago was dealt another blow in July when he lost his parliamentary seat to an unfavored challenger as Ukraine’s political revolution propelled his 25-year-old opponent affiliated with Zelenskiy to victory.

Ferrexpo fell 39% in two months after the company said at the end of August that an independent review suggested some of its charitable donations may have been misappropriated. The probe also found that the company and its biggest shareholder weren’t connected to any possible wrongdoing. The stock has recovered more than 15% since hitting its lowest value in almost three years in late October.

During the campaign event back in July, Zhevago brushed off a question about the plunge in the share price, which is now down 27% this year, the sixth-worst performance of the 25 companies included in the Basic Materials Index, which has gained 3.8%.

“The shares fell after some representatives from the audit committee made absurd statements saying nonsense,” Zhevago responded.

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