60 Ferrexpo plc Annual Report & Accounts 2022
STRATEGIC REPORT
Principal Risks continued
1. Country risk (continued)
The considerations outlined here are separate to
the risks relating to the ongoing war in Ukraine,
but some or all of them may be exacerbated by
the current conict (see page 59 for risks relating
specically to the conict in Ukraine).
Ferrexpo’s main operations are in Ukraine,
which is considered to be a developing
economy under the classications provided by
the World Bank
1
. Ukraine is a country that
placed 77th in the United Nations’ Development
Programme’s (“UNDP”) Human Development
Index
2
, and is therefore classied as having a
“high” level of human development (based on
factors such as life expectancy and levels of
education). This ranking places it in a similar
bracket to China (79th) and Sri Lanka (73rd),
other countries considered to be developing
economies. As a result of operating in a
developing economy, the Group is subject to
anumber of elevated risks, such as the scal
and political stability of Ukraine, independence
of the judiciary, access to key inputs and capital,
exposure to monopolies and other inuential
businesses (particularly those that are related
parties to the government of Ukraine), in addition
to a range of other factors. As a result of being a
business in a developing economy, the Group is
exposed to heightened risks around corruption,
with Ukraine placing 122nd
in Transparency
International’s Corruption Perception Index
(“CPI”)
3
. Whilst Ukraine’s score in the CPI has
improved from a low of 25 in 2013 to 33 in 2022,
and its global position has improved by 28
places (including an improvement of six places
in 2022 alone), the country continues to remain
below the global average.
Through the Group’s exposure to an operating
environment in a developing economy, Ferrexpo
has been subject to a number of risk areas that
are heightened relative to those expected of a
developed economy. Risks associated with the
war in Ukraine are covered on page 59 of this
report, but there are indirect risks associated
with the war, such as the increasing political
unity within Ukraine and determination to drive
political, scal or economic change, the latter
ofwhich is often associated with nancial and
military agreements struck with western
governments and/or western organisations.
This change can be exhibited in a number of
practical applications, which can include, but
are not limited to, changes to the regulatory
environment, potential increases to tax and/or
royalty rates, increased disclosure requirements
or operational restrictions. Changes may be
made as a result of government decision
making, a third party international partner and/
or lender, or another party within Ukraine, and
therefore the rationale for changes may not
correlate with the ofcial agenda of the
government of Ukraine. As a result of this local
instability, which is amplied by the war in
Ukraine (see page 59), sources of capital for
businesses deriving their revenues from Ukraine
are limited at the present time, which in turn
reduces the operational exibility of the Group.
The independence of the judiciary in Ukraine has
been frequently referenced in the Principal Risks
section of the Group’s Annual Report and
Accounts, and this is a consideration that
remains particularly relevant for the Group today.
As described in Note 30 (Commitments,
contingencies and legal disputes) to the
Consolidated Financial Statements, the Group is
currently subject to several legal proceedings in
Ukraine that are similar in part to previously
heard legal proceedings, and it cannot be
guaranteed that the Ukrainian legal system will
always provide a ruling in line with the laws of
Ukraine or international law. As disclosed in the
2021 Annual Report and Accounts, the Group is
currently subject to a claim pursuant to which the
claimants are seeking to invalidate a share sale
and purchase agreement dated 2002 relating to
the acquisition of 40.19% of Ferrexpo Poltava
Mining, the Group’s main operating subsidiary
inUkraine (the “Claim”). Following a rst hearing
of the Claim in 2021, a court in Ukraine found
infavour of the Group. An appeal was heard in
September 2022, with the appeal court ruling in
favour of the claimants and ordering that 40.19%
of Ferrexpo Poltava Mining be transferred to the
claimants (as announced by the Group on
20 September 2022). Subsequent to this
ruling,the Group has moved to commence
proceedings at the Supreme Court of Ukraine,
with a preliminary hearing held on 1 December
2022 whereby it was agreed for the case to be
transferred to the Grand Chamber of the
Supreme Court, with the next hearing scheduled
to take place on 15 March 2023. As at the date
of this report the claimants have not sought to
enforce the appeal court ruling, but it remains
possible that they could seek to do so
notwithstanding the on-going proceedings
before the Grand Chamber of the Supreme
Court. If the Group is unsuccessful at the hearing
before the Grand Chamber of the Supreme
Court, and the original 2002 share sale and
purchase agreement is held to be invalid, this
would have a material adverse impact on the
Group, including through the loss of a signicant
proportion of the Group’s main operating asset
in Ukraine.
As referenced in the Group’s previous public
reporting, including in the Group’s Interim
Results published in August 2022, there are
outstanding allegations relating to the Group’s
controlling shareholder, Kostyantin Zhevago,
that remain unresolved, and there is a risk that
assets owned or controlled (or alleged to be
owned or controlled) by the Group’s controlling
shareholder may be subject to restrictions, in
Ukraine or elsewhere, or that the Group may be
impacted by, or become involved in, legal
proceedings relating to these matters, in
Ukraine or elsewhere.
On 27 December 2022, it was announced that
Mr Zhevago had been detained whilst in France,
and subsequently released on bail, at the
request of the authorities in Ukraine, who are
reportedly seeking his extradition to Ukraine in
connection with allegations relating to a former
Ukrainian bank owned by Mr Zhevago (Bank
Finance & Credit). Following this event,
Mr Zhevago resigned his position as Non-
executive Director on the Board of Directors. The
legal case relates to the potential extradition of
Mr Zhevago, and associated legal claims being
made in Ukraine, and remains outstanding as of
the date of this report. The risks relating to the
Group as a result of this legal action, and
potential further legal action, cannot be
accurately estimated at the present time, nor can
the potential timeline for resolving any matters.
As a consequence of recent events relating to
the Group’s controlling shareholder, as outlined
above, the Group may experience adverse
effects, such as negative media attention for
theGroup, a reduced ability to operate within
Ukraine and/or overseas due to negative
perceptions of the Group, and a restricted
operating environment for aspects of the Group’s
business, such as closure (or suspension) of
relationships with stakeholder groups such as
banking services. The Group’s relationships
bothupstream and downstream may also be
negatively impacted by events related to the
Group’s controlling shareholder, such that the
Group is limited and/or impaired in its ability to
do business overseas in a specic country and/
or region. In addition, restrictions imposed on the
Group’s controlling shareholder (and/or negative
perceptions of the Group’s controlling
shareholder) may potentially adversely impact
the Group within Ukraine, with a restriction on
Responsibility
Board of Directors and ChiefExecutiveOfcer
Risk appetite
Low
Link to strategy
1, 2, 3, 4 and 5
1.2. Ukraine country risk (external risk)