Mohammad Zahoor: How corruption deters investors

Editor’s Note: Mohammad Zahoor owned the Kyiv Post from July 28, 2009, until March 21, 2018.

More than a decade ago, Mohammad Zahoor was a metals maker in rough-and-tumble Donetsk, where he first studied metallurgy as a student from Pakistan, coming to Ukraine in 1974. He became $1 billion richer in 2008 when he sold one of the most efficient steel plants in the former Soviet Union in a perfectly timed sale right before the 2008 global financial crisis.

Zahoor kept his money circulating.

Over the next 10 years, he built an investment portfolio in markets and industries where he had little to no experience. They included commercial and residential real estate, plastics, media, and filmmaking.

But many of those investments were unprofitable and his net worth plunged.

Today, the multi-millionaire British citizen’s sole profitable asset in the country is a plastics manufacturer in Obukhiv, a city of 33,000 people located 40 kilometers south of Kyiv. It boasts more than 300 clients such as, Samsung Electronics, Coca-Cola Beverages, and SUN InBev, in addition to making its own branded products that are used for furniture, gardening, household goods, kitchenware, and packaging.

Always dressed in sharp, tasteful suits with hues that have components of his favorite color of purple, Zahoor, 63, has been struggling to resurrect a landmark hotel project that has already cost him $90 million since 2009.

Construction idled in 2012; the building has been empty since 1997.

His idea is to break into the hospitality business and start a branded chain, he told the Kyiv Post in an interview in his Kyiv office on Sept. 27.

Zahoor wants to lift the “curse,” he said, at the czarist-era, maroon-colored Leipzig Hotel on the corner of Prorizna and Volodymyrska streets — “the most beautiful building in Kyiv” — near the Golden Gate.

He purchased the storied architectural gem for $36 million in 2009 and won’t give up on restoring the neo-Renaissance style building to its original splendor, dating to 1902, when it was built.

“I’m in love with this building,” the founder and chairman of ISTIL Group said. “We want to keep it and run it.”

Zahoor said he needs $10 million in financing and one more year to finish renovating five stories in the proud building that stands at 42.5 meters in height with 12,000 square meters of space.

His vision is of a posh boutique hotel with distinct features for guests who don’t want to stay in cookie-cutter branded designs like Hilton.

“We have done all the audits of what needs to be done,” he said.

Citing figures provided by leading hospitality market researcher STR, Zahoor said, “this is the right time to start the hotel…even the most conservative numbers show that we will pay back the money in six to seven years.”

Indeed, Kyiv is expected to see a record of 2 million visitors in 2018, or 25 percent more than last year, according to Anton Taranenko, head of the city’s tourism and promotion department.

In hotel occupancy, higher-income guests, Zahoor’s target, stayed in a record 47 percent of the segment’s rooms during the peak months of May-August — nearly 2 percentage points more over the same period last year, Chicago-based Jones Lang LaSalle, a service and investment management company that specializes in real estate, said in a news release on Sept. 27.

‘We’re in a trap’

One big problem for Zahoor is how to end a 30-year contract with global giant Marriott and get financing, hopefully from the European Bank for Reconstruction and Development with whom Zahoor has a long working relationship.

Otherwise, “we have everything in place,” Zahoor said. “We have a contractor, Ukrainian labor is cheaper, building materials are also not expensive, we’ve located local manufacturers…and the painters, the artists, there’s plenty of talent here.”

The EBRD would not discuss the project.

Zahoor says he has a potential operator based in Switzerland lined up whom he wouldn’t name, but who may be ready to provide financing as well.

The doors to the Marriott-branded Renaissance were supposed to open long ago, but construction and financing stopped several years ago because the worldwide hospitality chain informed him that his Turkish subcontractor wasn’t compliant with quality standards.

That led to litigation with the Turkish company in numerous jurisdictions. With the EBRD having only lent about €4 million for the project, Zahoor is still paying off the outstanding amount at a 10 percent yearly interest rate. Legal disputes with the subcontractor have largely been resolved.

Zahoor said the Marriott deal is unfair, preventing him from moving forward and getting financing. “We are still negotiating with Marriott because we have a one-sided contract in which they have the right to terminate the contract. We don’t have the right,” Zahoor said.

Marriott did not respond to requests for comment.

But Zahoor admitted that he is to blame for entering into such a bad agreement. “It was my mistake. I personally didn’t look into that. Our people…you know, for the Ukrainian people, Marriott for them is like God. So they went all in,” he added.

Zahoor wouldn’t disclose much of the terms of the 30-year deal and how much it would cost to walk away from it. He did say that about $100,000 would be owed for due diligence, hotel management software, and other expenses.
Recently, he approached Marriott again and asked whether it is willing to invest in the hotel’s completion.

“They said no,” Zahoor said. “They said, ‘we can terminate the contract with the condition that whenever you find the funding you will reinstate it.’ So how can you terminate the contract…they’re not bringing skin into the game and not letting us find an investor who will come, and the operator…why would they come and bring money for Marriott?”

He continued: “We’re in a trap.”

Contracts with global hotel chains are usually ironclad and are customarily one-sided. Chains usually provide development services for furniture, fixtures, and equipment. Next comes a franchise agreement to use an operator’s reservation system and logo.

A Renaissance sign still hangs atop the uncompleted hotel. A separate contract usually involves marketing and sales on a daily basis. Another operator would avoid doing business with Zahoor because of his entanglements.

Zahoor said that the United Kingdom is the jurisdiction for any legal disputes and said he is willing to go to court to invalidate the agreement if “Marriott doesn’t want to amicably.”

Still, the contract may include “liquidated damages” that takes into account how much Marriott could make over 30 years, which is about 12–15 percent of total revenues, easily millions of or tens of millions of dollars.

Leipzig’s storied history

The site of the failed Marriott hotel has seen trouble from its inception, according to a Nov. 7, 2013 Kyiv Post article that was partially based on interviews with Kyiv historians.

Its first builder, hunting weapons trader Pytor Grigorovich-Barsky, ran out of money at the turn of the 20th century. One of his creditors then bought the building at an auction and completed it.

Numerous statues and stucco ornaments adorned its façade upon completion. “Historians note it also has some elements of baroque while its expansive windows are considered to be done in the modern style,” the Kyiv Post wrote.

It housed the Markiza pastry shop on the first floor in the czarist era, which was mentioned in Mikhail Bulgakov’s novel “The White Guard.” The Palermo Hotel also operated there under Alexander Sirotkin.

During the Soviet era, the confectionary was converted to the Chaika (seagull) restaurant before turning into the two-story “Leipzig restaurant that served German cuisine with which so many older Kyiv residents associate the building,” the Kyiv Post reported. The remaining space was converted to cramped “communal” apartments to adhere to the Communist ideology of the time.

In the mid‑1980s, the building received landmark status.

“The building would have cost around half as less if it wasn’t for this status,” Zahoor noted.

Its remaining residents were evicted after a fire erupted in 1997, after which Lviv-born millionaire Genadiy Genshaft leased the building from the Kyiv City Council. Ownership then transferred to Continuum Group that was controlled by partners Stepan Ivakhiv and Ihor Yeremeev before they sold it to Zahoor in 2009.

“I always loved that building and always felt bad about it standing still with no progress whatsoever,” Zahoor said in November 2013.

Core assets remain

Zahoor lost valuable assets in the Donbas to Russia’s war, which has put the Kremlin in control of parts of Donetsk and Luhansk oblasts since April 2014. He lost a Donetsk hotel and a highly profitable, state-of-the-art coal enrichment plant in Luhansk Oblast.

During this period, Zahoor also sold a television production studio to billionaire oligarch Ihor Kolomoisky and a pre-pay television service to the nation’s richest billionaire Rinat Akhmetov. On March 21, 2018, Zahoor sold Ukraine’s oldest and largest English-language newspaper, the Kyiv Post, for more than $3.5 million to Odesa businessman Adnan Kivan, a native of Syria. (Neither will disclose the actual sales price.)

Like the Leipzig structure, Zahoor has a soft heart for the Kyiv Post.

“In Ukraine, you always have fun,” he said. “The first fun was buying the Kyiv Post. The other one was selling it.” He wanted it to be taken care of properly and thinks the newspaper is in good hands with Kivan. “It’s like raising your child. You cannot just give it to some drug dealer.”

Zahoor, who subsidized the newspaper during his entire nine years, continues to support it by financing a yearly $18,000 fellowship for university graduates to work there while they receive on-the-job training, coaching and mentorship.

He retains ownership also of the Rialto Business Center in an industrial area in the Podil neighborhood.

As of Oct. 1, he closed down the 500-seat Kinopanoroma theater, built in 1958, the city’s favorite destination for arthouse films. He wants to demolish it and build a three-star hotel, yet house a smaller screening room “out of respect to the history.”

It will also have room for conferences and will keep its Panorama name.

Fighting raider attacks

Zahoor is no stranger to attempts at stealing his assets, known as “raider” attacks.

In the Donbas he had to withstand pressure and sell a steel plant and then endured political pressure after President Leonid Kuchma was elected in 1994 because he made a television appearance as a foreign investor on behalf of incumbent President Leonid Kravchuk, who was seeking re-election.

As the publisher of the Kyiv Post during ex-President Viktor Yanukovych’s corrupt and authoritarian rule, ended by the EuroMaidan Revolution on Feb. 22, 2014, he was told to kill a story on the agricultural minister’s alleged involvement in corrupt schemes to control grain exports. Kyiv Post chief editor Brian Bonner published the story and Zahoor promptly fired him, triggering a five-day labor strike resolved after both sides came to an agreement that allowed Bonner’s reinstatement.

Zahoor also refused offers to sell the newspaper to such oligarchs as Dmytro Firtash, who unsuccessfully sued the Kyiv Post for libel and lost the case in 2011, and Yanukovych’s alleged money frontman Serhiy Kurchenko. Both are now abroad in exile, Firtash fighting U.S. corruption charges that he denies.

Still, illegal takeovers took place.

Zahoor says the Defense Ministry since 2009 has tried to seize property and land from Zahoor on 24 Sichovykh Striltsiv (formerly Artema Street). He won the initial court battles regarding the residential properties he bought there. But after he completed a transaction to buy the land for $3 million from the Kyiv City Council in February 2011, the Defense Ministry again initiated litigation, Zahoor said.

Once the final payment was made in May 2017, the land sale was challenged. An appellate economic court case is scheduled to hear the case on Oct. 22.

As a foreign investor, Zahoor in March approached Daniel Bilak, the head of the state-run UkrainianInvest promotion office and who is the chief investment adviser to the prime minister.

Bilak, reached in London where he is preparing for Ukrainian Week events there, said “it would be inappropriate at this time to interfere or influence ongoing judicial proceedings.”

After getting the complaint, he referred Zahoor to current acting Finance Minister Oksana Markarova. At the time, she was first deputy finance minister and government investment commissioner. “We were told that Oksana also has good relations with the Ministry of Defense and has been instrumental in resolving a number of issues involving the ministry,” Zahoor said.

After their March 22 meeting, she stopped responding to communication from Zahoor.

“While I understand the difficulties some investors face in Ukraine and do everything I can to help out, when it comes to court disputes in no way did I suggest influencing an ongoing court case, as this would be not only inappropriate but also illegal,” Markarova told the Kyiv Post.

“I believe that no amount of investment, no matter how significant, gives anyone the right to circumvent the due process by appealing to high-ranking government officials or dropping their names in their public communication.”

Zahoor said the illegal land grab is continuing.

“I’m going to write a blog about it and send it to the newspapers, the diplomatic community — I mean, with all of Ukraine’s roadshows…the upcoming Ukrainian Week in London on Oct. 8–14 — they’re not taking care of the investors who’ve invested over $400 million in their economy.”

He has some advice, however, for the man who bought the Kyiv Post from him.

“Since we’ve sold the newspaper, and this is a message to Adnan Kivan: He should keep the newspaper close to his chest because we’ve faced raider problems.”

YUNA expansion

Zahoor is expanding the YUNA music awards — his pet project — to include four more technical prizes this year. His wife, Kamaliya, is the actress and pop singer who has made charts across Europe. The Hilton hotel, easy walking distance from his ISTIL Group office on Shevchenko Boulevard, is a sponsor and 1+1 channel is a media partner.

More time with kids

He spends more time with his 5-year-old twin daughters than he did with his now-adult daughter and son from a previous marriage.

“I missed their upbringing from working a lot. Now I don’t want to miss this one. This is God’s blessing in this age. I want to spend so much more time,” Zahoor said, even attending parent-teacher meetings in school.

He spends about 40 percent of his time in Kyiv — “because this is my nest and my daughters live here” — and the rest of time either in London, his native Pakistan, where he runs a government relations consultancy firm that services foreign companies, or in Dubai, where he runs a cement factory.