What Were the Consequences of the Forced Shutdown of Extraction Companies on the State?

01.11.2024

For nearly a year and a half, the production assets of Smart Holding’s investment&industrial group have been forced to remain idle. This was due to the suspension of special permits for resource use, following an unlawful order fr om the Ministry of Justice to re-register the group’s ultimate beneficiary in the state registry, which resulted in sanctions and imposed economic restrictions.

While recent government actions have allowed the business to gradually resume, including the restart of Smart Energy’s wells in the Kharkiv region, the prolonged shutdown has had significant consequences—not only for the company but also for the state and the Ukrainian people.

Energy Impact: the state has lost vital gas supplies, especially critical ahead of winter. Uninterrupted hydrocarbon extraction is essential for Ukraine’s energy security and its goal to reduce dependence on imported fuels. The shutdown of Smart Energy’s wells alone has led to a loss of nearly 195 million cubic meters of gas, an invaluable resource as we prepare for the heating season.

Economic Impact: the suspension of extraction activities automatically halted tax payments, including rent for resource use. Due to Smart Energy’s prolonged downtime, the state has irretrievably lost around UAH 1.65 billion in tax revenues that could have supported defence and social initiatives.

Geological Impact: extended shutdowns can cause irreversible changes in reservoir conditions, reducing extraction rates over time. Smart Energy had warned that prolonged inactivity could lead to hydro-dynamic changes that damage reservoir filtration properties. This concern became reality, as production levels at the Vasyschevske field in Kharkiv dropped by half when compared to pre-shutdown volumes.

Social Impact: employees, their families, and entire communities wh ere extraction sites operate lose valuable resources, particularly during wartime. Extraction sites often play a significant role in supporting local economies, and in Smart Energy’s case, the frontline Kharkiv region needs extra revenue for rebuilding and supporting its communities affected by Russian aggression.

Investment Risks: the lack of consistent, economically justified government policies deters foreign investment. Smart Holding’s forced shutdown highlights the risks for investors, as sudden government actions demonstrate a lack of protection for private businesses—sending a discouraging signal to potential future partners essential for Ukraine’s recovery and growth.

“Sanctions should target the aggressor state, Russia, depriving it of resources—not harm Ukraine and its people. The forced shutdown of Smart Holding’s assets has shown the scale of harm these poorly thought-out decisions have caused at various levels, with some consequences now beyond repair. We hoped that these mistakes would be acknowledged, and that the relevant institutions would uphold their duty to support the country’s real interests, ensuring resilience during this critical period. However, specific government officials continue actions that risk further licence restrictions, which could worsen the situation for Ukraine”emphasised Ivan Gerasymovych, CEO of Smart Holding.