Will Ukrainians Get Salt from Zakarpattia? The State Geological Service Caught in a Scandal

Will Ukrainians get salt from Zakarpattia? The State Geological Service caught in a scandal

The State Service held an auction to sell a license for the development of the Tereblianske salt deposit, but decided not to sign an agreement with the auction winner without explaining the reasons, Ukrrudprom writes. The case is now in court. What will happen to officials’ promises to “deliver” the first “Zakarpattia” salt to Ukrainians by the end of this year?

The halt of “Artymsol” and the “Zakarpattia” alternative

Zakarpattia will supply the whole of Ukraine with salt instead of Donetsk region, which found itself at the epicenter of hostilities. Such statements were made by Ukrainian officials in August last year, when it became clear that the full-scale war with Russia was dragging on. Earlier this year, the facilities of the state enterprise Artymsol, located in the tragically notorious town of Soledar in Donetsk region, were occupied by Russian forces. Before Russia’s full-scale invasion, this enterprise — one of the largest in the world — covered 100% of Ukrainians’ needs for food and industrial salt. Late in May of 2022, Artymsol suspended production due to constant shelling and the forced evacuation of a large portion of its workers. That news triggered a panic-buying surge and within days the indispensable seasoning rose in stores by 8–9 times. The situation was managed by releasing export-bound reserves for domestic sale and by starting imports of salt from Poland, Turkey, and Romania.

There is no doubt that establishing domestic salt production is one of Ukraine’s top priorities for food security.

Fortunately, there are large deposits of the “white gold” in the subsoil, even despite the temporary occupation of the country’s east. Several deposits are located in Zakarpattia, where rock salt reserves are estimated at 349 million tons. That would be enough to supply Ukrainians with the mineral for hundreds of years.

State and regional leaders launched an urgent search for salt deposits suitable for rapid development — and for entrepreneurs willing to take on the work. It seemed there should be plenty of takers: after Artymsol’s shutdown, its market niche became vacant — a “startup” like that would be a dream. In August 2022 it was announced that Ukraine would get the first salt mined in Zakarpattia within six months. Initially it would be industrial salt, then food-grade. At that time, Zakarpattia Regional Military Administration head Viktor Mykyta and Deputy Head of the Presidential Office (now former) Kyrylo Tymoshenko reported the start of work at the Bushtyn salt deposit in Zakarpattia.

Time has shown that officials’ forecasts were overly optimistic. In March 2023 it became known that engineering work to outfit the mine was still underway in Bushtyn. The timetable for when the deposit is expected to produce its first salt also shifted: OVA now says it will happen by the end of the year. As for other deposits — Tereblianske in Zakarpattia and Dolynske in Ivano-Frankivsk region — companies holding licenses to develop and, prospectively, extract salt are currently being sought. The situation around the Tereblianske deposit is taking on scandalous proportions: a third consecutive auction to sell a special permit to develop the plot is scheduled for 21 April. Meanwhile, the winner of the first auction says it was illegally denied the contract — the matter has gone to court. It seems that the Ukrainian bureaucratic apparatus, even on such an important national issue, shows an inability to operate without opaque schemes. Can this approach achieve the stated goal and supply Ukrainian consumers with domestically produced salt? To learn more details, we spoke with Oleh Melnychenko — head of Olimp Finance Group LLC — a Ukrainian company ready to produce the needed product for Ukrainians but facing unclear obstacles from the executive branch.

Tereblianske deposit: the auction winner “did not please” the State Geological Service

Olimp Finance Group won the auction held on 12 December 2022 by the State Service of Geology and Subsoil of Ukraine. The company offered 25 million hryvnias for a special permit for geological study, including pilot-industrial development of salt on the West Tereblianske plot (the starting price was 550 thousand hryvnias). Among Olimp Finance Group’s competitors were companies of well-known Ukrainian oligarchs — Yuriy Kosiuk and Oleksandr Yaroslavskyi — who ultimately did not place any bids during the auction. According to Oleh Melnychenko, the lot’s price skyrocketed almost 50 times because of bad-faith behavior by some participants who likely wanted to disrupt the auction. The businessman said the final license price was significantly inflated. It turns out the deposit has not yet been explored, so there is no certainty that salt is present there at all.

“Normal global practice is to sell licenses for already explored deposits with confirmed mineral reserves. But because no funds are allocated in the state budget or the budget of the State Geological Service for geological exploration work, the latter puts permits on auction that give the right precisely to exploration work,” the head of Olimp Finance Group said. “And given that this lot includes a special permit in fact for exploration of the deposit, not for extraction, this creates additional risks in implementing the project, since it is unclear whether there is any salt there at all and in what volume. Therefore, in our view, the final cost of the lot turned out to be significantly inflated.”

Despite this, the company says it intended to fulfill the auction conditions and pay the license in full. However, for unclear reasons the winner was denied that right: the State Geological Service ignored Olimp Finance Group and on 7 February 2023 held a repeat auction to sell the special permit for the same plot. The company asserts that it met all legal requirements.

“We have paid all required fees necessary to conclude the contract (except for the guarantee payment of 500 000 hryvnias; we paid the operator’s fee, through which the winner obtained the right to participate in the auction, in the amount of 125 005 UAH; we paid in full the cost of the auction documentation package) in the amount of 17 105,40 UAH. A purchase-sale agreement for the special permit to use the subsoil, signed on behalf of Olimp Finance Group LLC, was sent to the electronic and postal addresses of the State Service of Geology and Subsoil of Ukraine,” — stated company head Oleh Melnychenko.

The entrepreneur said that although his company specializes in providing financial services, mineral extraction activity is not foreign to him.

“By training I am a mining engineer. The company has already worked on developing mineral deposits in Khmelnytskyi region; we previously had experience extracting quarry stone, producing crushed stone and screenings, and we financed projects to purchase equipment for mineral extraction. So we are in a way returning to a familiar line of business, which is why we decided to participate in this auction.”

Olimp Finance Group. Scandalous auctions: procedural violations and surprises for the winner

Olimp Finance Group filed a lawsuit against the State Geological Service with the Kyiv District Administrative Court, demanding that the service be required to sign the purchase-sale agreement for the special permit. The court moved the case to written proceedings, so a decision could be made soon. Nevertheless, the State Geological Service decided to disregard the court process and, as noted above, plans to hold a third auction in 21 April. No agreement was signed with the winner of the second auction either. At the same time, the starting price of the lot this time was raised to 15 million hryvnias. This contradicts the law: according to Cabinet of Ministers resolution No. 993, the amount of the guarantee payment in the case of repeat auctions increases twofold, and in the case of a third auction — fivefold. Thus, by law the deposit should be less — 5 million.

Such numerous violations and disregard for the law give auction participants legal grounds to challenge them. Thus the license to develop the Tereblianske salt deposit may end up belonging to no one at all: it could be buried in endless court proceedings. And the state will be forced to compensate entrepreneurs’ legal costs from its budget. As for Olimp Finance Group, the company is not participating in the repeat auctions. It insists: they already won the auction and will now lawfully prove their right to purchase the license.

Olimp Finance Group also reported that after participating in the auction they learned about pitfalls concerning the development of the Tereblianske deposit. It turned out that the plot put up for auction is “parcelled out” and is in the ownership of private citizens and enterprises. That means the auction winner will not be able to fully carry out economic activity. For example, it will not be able to allocate land to place production facilities, warehouses, or administrative buildings. In addition, the company found that a permit to use part of the plot had already been issued to another licensee.

As we were informed, as far back as 2017 permission to use the subsoil for the extraction of rock salt was granted within the West Tereblianske plot, due to which local self-government bodies and the local united territorial community are considering creating an industrial park on the land plot, including within the territory covered by the special permit put up for auction, to ensure the operation of the deposit whose extraction permit was issued back in 2017, which creates additional obstacles to exercising land-use rights within the territory of the special permit,” said Oleh Melnychenko.

In view of this, Olimp Finance Group will demand guarantees from the State Geological Service. In particular, if no salt deposits are found on the plot, or if the salt is of worse quality than stated, the company wants a refund of the funds paid for the special permit. Such a demand is entirely lawful.

As we can see, the question we posed above — will Ukrainians wait to see domestic salt on store shelves? — remains unanswered for now. This question, like many others in our country, rests on the problem of corruption. Even during a full-scale war, when Ukrainian small and medium businesses should expect maximum support from the state, we see that certain officials or whole government bodies create artificial obstacles for “outsiders” and preferences for “insiders.” If nothing changes, this phenomenon will slow down the recovery of the Ukrainian economy, without which neither victory in the war nor a dignified future for Ukraine is possible.