Editor’s Note: This is Ukrainian State-Owned Enterprise Weekly, Issue 43, covering events from Sept. 11-17, 2021.
Ministry of Finance estimates fiscal risks for Ukrzaliznytsia, Ukrenergo, Naftogaz, Energoatom, and PrivatBank
Ekonomichna Pravda published the ministry’s analysis of fiscal risks associated with state-owned companies according to both baseline and pessimistic scenarios (the baseline is taken to calculate the state budget for the next year).
According to Ukrzaliznytsia’s baseline scenario, the company may lose Hr 725 million ($27 million) in 2021, Hr 967 million ($36 million) in 2022, Hr 2.62 billion ($98 million) in 2023, and Hr 724 million ($27 million) in 2024.
The pessimistic scenario implies even greater losses of the state railway monopoly: Hr 852 million ($32 million) in 2021, Hr 1.45 billion ($54 million) in 2022, Hr 2.84 billion ($106 million) in 2023, and Hr 2.95 billion ($110 million) in 2024.
According to the Finance Ministry’s analysis, Ukrzaliznytsia remains highly dependent on borrowing. This dependence will only increase in the coming years in both scenarios. The government expects the company’s liquidity to worsen in 2024, which may lead to the need to attract additional funding for the company to meet its current obligations.
According to the baseline scenario for Ukrenergo, the company will receive a profit of Hr 178 million ($6.7 million) in 2021. In the following years, the company’s profitability will increase significantly: Hr 6.7 billion ($251 million) is expected in 2022, Hr 6.52 billion ($243 million) in 2023, and Hr 9.37 billion ($351 million) in 2024.
The pessimistic scenario assumes that the prices for the company’s services will not increase, and the hryvnia depreciates more than the government forecasts in the state budget. In this case, the company will incur losses of Hr 4.22 billion ($158 million) in 2022, Hr 7.47 ($288 million) billion in 2023, and Hr 10.74 billion ($402 million) in 2024. These losses will result from the growing dependence of Ukrenergo on borrowings and its reduced ability to finance its activities internally.
The two versions of Naftogaz’s future are also very different: The company may make or lose many billions of hryvnias.
According to the baseline scenario, Naftogaz’s profits will gradually grow. In 2022, the company will earn Hr 15.8 billion ($592 million) and the same amount in 2023. By 2024, the government expects a profit of Hr 20.2 billion ($757 million).
In this scenario, the Ministry of Finance assumes the implementation of the company’s sales plan, income from participation in the equity of Naftogaz Group’s enterprises, as well as transit income under a five-year contract with Gazprom.
Also, according to the Ministry, the company expects its sales of natural gas to drop this year compared to 2020 from 17.6 to 15.2 billion cubic meters (by 13.7%). Sales of natural gas in 2022-2024 are expected at about 15.5 billion cubic meters.
In the pessimistic scenario, Naftogaz will lose Hr 72 million ($2.7 million) in 2021. Further losses will increase from Hr 3 billion ($112 million) to Hr 7 billion ($262 million). This scenario is based on the possible inflation growth, an increase in the hryvnia’s exchange rate by 5% annually (compared with the baseline scenario), and the lack of income from equity participation.
As for Energoatom’s baseline scenario, the ministry of Finance forecasts an increase in the company’s profits: from Hr 788 million ($29.5 million) in 2021 to Hr 10.05 billion ($375 million) in 2024.
Even in the pessimistic scenario, Energoatom will gradually return to profitability by 2024. In 2021 and 2022, the company will receive Hr 1.1 billion ($41 million) and Hr 542 million ($20 million) in losses, respectively. In 2023, the company will make a profit of Hr 1.35 billion ($51 million), and in 2024, Hr 3.33 billion ($123 million).
The pessimistic scenario assumes that Energoatom’s electricity production will grow more slowly, in line with expectations of a slower recovery in Ukraine’s economy.
For PrivatBank, the ministry’s estimate suggests that in case the courts make unfavorable decisions for the state (challenging the nationalization of PrivatBank), the losses to the state budget may amount to more than Hr 50 billion ($1.9 billion).
Based on the National Bank’s data and estimates, the Ministry of Finance assesses the risks of negative court decisions regarding PrivatBank as moderate, despite the progress in mitigating these risks after the so-called “anti-Kolomoisky” law was adopted.
The laws were adopted to prevent previous owners of failed banks bailed out by taxpayers, such as PrivatBank, from re-acquiring the assets. The law is named after billionaire oligarch Ihor Kolomoisky, who cost taxpayers $5.5 billion in losses from PrivatBank when he was owner. It was nationalized in 2016.
The ministry also noted that in 2022, there is a high probability that state-owned banks may reduce dividend payout to the state budget due to the National Bank raising its ratio requirements.
Vitrenko comments on Naftogaz’s supervisory board resignation
Naftogaz’s CEO Yuriy Vitrenko believes that a transparent competitive selection of independent supervisory board candidates is needed for the company to function effectively and choose the next CEO.
Vitrenko wrote on his Facebook page that the Organization for Economic Cooperation and Development Guidelines [on Corporate Governance of State-Owned Enterprises – SOE Weekly] should be followed, and an open, competitive and merit-based procedure for selecting independent board members should be ensured.
He noted that in 2017, there was no open competitive selection. According to Vitrenko, independent candidates were simply proposed by foreign embassies and international financial institutions. One independent member was also appointed without a competitive selection by the government of former Prime Minister Volodymyr Groysman. After that, the independent members were reappointed several times.
According to Vitrenko, none of the independent members had education or production experience in the oil and gas sector, none had a degree or experience in the legal field. No did the independent members include a good, certified expert in International Financial Reporting Standards or even an expert with experience of working in Ukraine.
Vitrenko said it was necessary to have a genuine competitive selection as soon as possible. He said that the new supervisory board, elected in accordance with the OECD Guidelines, would be able to decide on the CEO candidate – also via an open, competitive, and merit-based process.
In SOE Weekly (Issue 42), we reported that according to Ekonomichna Pravda (EP), three independent members of Naftogaz’s supervisory board (Bruno Lescoeur, Ludo Van der Heyden, and Clare Spottiswoode, the board’s chair) filed their two-week resignation notices on Sept. 7. A day earlier, Prime Minister Denys Shmyhal said a competitive selection for the supervisory board would be held soon.
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 25, 26, 27, 28, 29, 30, 32, 33, 34, 35, 36.
World Bank on corporate governance in Ukraine
The World Bank’s Vice President for Europe and Central Asia, Anna Bjerde, told Interfax-Ukraine, that corporate governance in Ukraine has run into delays and setbacks.
She stressed that, in recent years, significant progress has been made in adopting legislation and strengthening the systems that regulate the activities of SOEs. However, only nine SOEs had supervisory boards established according to the new regulations.
Bjerde stressed that the ownership function over SOEs remains scattered among 96 ministries and agencies. As a result, SOEs are vulnerable to political meddling, uncompetitive selection of key executives, opaque remuneration of senior management, and inefficient control and accountability mechanisms.
Bjerde also stressed the importance of preventing interference in the work of SOEs and their supervisory boards. She said that Ukraine needed a new law on corporate governance at SOEs.
/As we wrote earlier in SOE Weekly (Issue 36), on July 15, the Verkhovna Rada approved Draft Law No. 5593-d on corporate governance in SOEs in the first reading. Although its current wording proposes several improvements, the draft law is still not in full compliance with the OECD Guidelines and should be further improved. – SOE Weekly./
Ukrzaliznytsia looks for a new CEO
Ukrzaliznytsia announced a competitive selection of a permanent CEO. Applicants must submit documents by Oct. 6. They will be collected by the executive search company Amrop.
/The last time Ukrzaliznytsia had a permanent CEO was in August 2020 when Volodymyr Zhmak was appointed. Zhmak only served as CEO for seven months and was dismissed in March 2021. Since that time, the company saw its acting CEO change twice. The current acting CEO is Oleksandr Kamyshin, appointed as recently as 11 August 2021. – SOE Weekly./
PrivatBank’s CEO interview
PrivatBank’s CEO, Gerhard Bösch, was interviewed by Novoye Vremya.
We selected some key points from this interview:
“The priority task set by the strategy is to ensure the bank’s stability and strengthen its position for years to come. What does it mean? The bank must maintain its strong market position in the main segments of the customer base, primarily retail banking and SMEs. At the same time, we would like to maintain a fairly high level of profitability for many years and pay significant dividends to the owner. And, of course, a very important task is to prepare the bank for privatisation. We need to create all the conditions for successful privatisation. And the decision on when to hold it is up to the shareholder.”
On “good” and “bad” bank:
“There are two aspects here: the first is the scope of tasks involved in managing ‘toxic’ assets inherited from the former owners; there is much more legal work here than in any other bank. Therefore, it is advisable to create a separate unit in the bank, where all this work will be concentrated. And everyone else will do the usual banking, work with customers and so on. This is what we call organisational division. The second aspect is the task of preparing the bank for privatisation in the future, increasing the price of the bank and the value it creates for the shareholder. For this to happen, we need to minimise all areas of uncertainty, cover all risks, so that this offer is attractive to future private shareholders. Especially those risks that are simply impossible to assess, such risks are simply unacceptable to an international investor. If we bring all these toxic legal risks into a separate unit, the bank will be much more transparent and understandable to the investor, and the investor will be willing to pay more for a “clean” bank, without this ballast. This is what we call the legal division. Our task today is to offer the shareholder the maximum number of options for the division of the bank, from which he could choose.”
On PrivatBank’s possible privatization:
“Ultimately, these decisions are not made by the bank, but by the shareholder. At this point, I would not give up any options… Privatization is not necessarily the sale of 100% of the bank in one transaction. You can conduct a partial IPO, and other combinations and other options are possible.”
On the possible cancellation of PrivatBank’s nationalisation:
“I do not rate these risks as high. Yes, we have a lot of lawsuits, such as the case of non-resident companies related to the Surkis family, which will soon be heard by the Supreme Court. We are confident that we will win. We believe that the justice system will behave professionally, fairly. Unfortunately, the court has determined that the case will be heard without summoning the parties. We, in turn, expect to change this approach so that the bank can present its legal position in court and defend $350 million. Also, of concern are attempts by companies associated with the bank’s former beneficiaries to use Ukraine’s judicial system to influence a bank-initiated lawsuit in the United States.”
Government approves new candidates for Centrenergo’s supervisory board
At a meeting on Sept. 15, the government approved the candidacies of Valeriy Bezlepkin, Oleksandr Muzhel, and Valeriy Shchekaturov as independent members, and Denys Kudin and Andriy Gotha as state representatives.
According to Liga.net, Gotha is the chief of staff of the head of the President’s Office [Andriy Yermak – SOE Weekly], while Bezlepkin is unemployed.
Shchekaturov is an entrepreneur [“FOP” – SOE Weekly], and Muzhel is CEO of an investment company named Renedes Advisory Services LTD. Kudin is the First Deputy Head of the State Property Fund.
/It is unclear what expertise in the energy sector or other relevant competences the newly appointed members of the supervisiory board have to prepare it for privatisation. – SOE Weekly./
SFGC’s new acting CEO
The former acting CEO of the State Food and Grain Corporation (SFGC), Andriy Vlasenko, who is suspected of embezzling Hr 71 million ($2.7 million) and placed under house arrest, was “relieved of his duties as acting CEO” by order of the Ministry of Economy dated Sept. 15, SFGC said on its Facebook page.
/It is unclear what the term “relieved of his duties as acting CEO” refers to – whether Vlasenko was dismissed, fired, temporarily suspended as CEO, or moved to another position within the company. The original ministerial order is not publicly available. – SOE Weekly./
According to SFGC’s Facebook post, Vasyl Kovalenko, was appointed as SFGC’s acting CEO. Kovalenko has been the Deputy CEO of SFGC since 2018, including being the corporation’s acting CEO in May-November 2020.
In SOE Weekly (Issue 39), we reported that the National Police established that management of SFGC had squandered the corporation’s property by selling grain to offshore companies at reduced prices, without prepayment. On Aug. 13, the National Police detained Vlasenko at Kyiv’s Zhulyany airport as he tried to flee Ukraine. His accomplice was detained along with him.
In SOE Weekly (Issue 40), we reported that Vlasenko was placed under house arrest and made to wear an electronic bracelet by Kyiv’s Pechersk District Court on Aug. 16.
In SOE Weekly (Issue 41), we reported that there was no publicly available information on whether the SFGC or Ministry of the Economy took any action to suspend Vlasenko after his house arrest.
SOE updates
Banks
State-owned banks make a profit of Hr 10.8 billion ($404 million) in the second quarter of 2021
State-owned banks earned 10.8 billion in profit in the second quarter of 2021, three times as much as in the first quarter. 85% of the state-owned banks’ second-quarter profits was generated by PrivatBank.
According to the Ministry of Finance, state-owned banks reduced their profit for the first half of the year by 13.5% (year on year).
PrivatBank earned Hr 9.2 billion ($344 million) in the second quarter. In the first six months of the year, it received a profit of Hr 11.6 billion ($433 million), which is 17.2% less than in the first six months of 2020.
Ukrgasbank made Hr 482 million ($18 million) in the second quarter. In six months, the bank earned Hr 726 million, or $27 million. (+66.1% year on year).
Ukreximbank earned Hr 798 million ($29.8 million) in the first quarter and Hr 1.1 billion ($41 million) in the first six months of 2021. The bank lost Hr 1.92 billion ($72 million) in the first six months of 2020.
Oschadbank made Hr 260 million ($9.7 million) in the second quarter and Hr 512 million ($19 million) in the first half of 2021. For comparison, the bank made Hr 3.6 billion ($135 million) in the first half of 2020.
Energy sector
DTEK loses a lawsuit trying to avoid paying for using the state-owned electricity grid
On Sept. 8, 2021, the Supreme Court upheld the cassation appeals of the National Energy and Utilities Regulatory Commission (NEURC) and Ukrenergo against Zahidenergo, one of DTEK’s energy generating companies, which tried to avoid paying for using the state grid when it exported electricity.
The Supreme Court ruled that Ukrainian exporters of electricity must pay transmission and dispatch management fees to the grid operator Ukrenergo.
From now on, electricity exporters will pay the transmission tariff like everyone else.
In February 2020, DTEK Zahidenergo went to the Kyiv District Administrative Court to try to get out of the mandatory fee, which NEURC introduced on Fb. 7, 2020.
Infrastructure
Anti-crisis headquarters set up for Ukrzaliznytsia
The Cabinet of Ministers approved the establishment of the anti-crisis headquarters for Ukrzaliznytsia.
The headquarters was set up to implement the decision of the National Security and Defense Council (NSDC). Its task is to restore financial stability and minimise corruption risks.
The headquarters is headed by Infrastructure Minister Oleksandr Kubrakov. Its members include acting CEO Oleksandr Kamyshin, Deputy Minister of Economy Kristina Golubytska, Deputy Minister of Finance Oleksandr Kava, as well as law enforcement officials, the Anti-Monopoly Committee, the European Business Association, the American Chamber of Commerce, and others.
The first meeting, held on Sept. 16, focused on the procurement of critically important materials.
/It is unclear what the status of the anti-crisis headquarters is and what effect its decisions will have, if any. It is also unclear how the actions and decisions of the headquarters will be squared with those of Ukrzaliznytsia’s supervisory board. – SOE Weekly./
In SOE Weekly (Issue 38), we reported that in late July, the NSDC instructed the Cabinet of Ministers to give the duties of Ukrzaliznytsia’s CEO to Infrastructure Minister Oleksandr Kubrakov.
We also reported that such NSDC decision was at odds with the OECD Guidelines on Corporate Governance of SOEs because making a policymaker and regulator the CEO creates a major conflict of interest. The appointment would also be against the anti-corruption law.
Kubrakov did not end up being appointed as CEO.
As we reported SOE Weekly (Issue 39), the Cabinet of Ministers appointed Oleksandr Kamyshin as Ukrzaliznytsia’s new acting CEO in early August 2021.
In SOE Weekly (Issue 41), we reported that on Sept. 9, at parliamentary session, the Verkhovna Rada’s Temporary Commission of Inquiry presented its “audit report” on Ukrzaliznytsia, stating that the railway operator’s executive and supervisory boards failed to do their job and should be dismissed.
Ukrzaliznytsia reports Hr 1.4 billion ($52 million) in net losses in the first half of 2021. According to Ukrzaliznytsia’s financial report published by Marlin, the company lost Hr 1.4 billion in the first half of 2021. It lost Hr 8.8 billion ($328 million) in the same period last year.
Ukrzaliznytsia attempts to write off Hr 399 million
Sergii Leshchenko, a member of Ukrzaliznytsia’s supervisory board, wrote on his Facebook page that a financial company named Tilmark is trying to collect a Hr 399 million ($14.9 million) debt of the Donetsk railway (located in the occupied parts of Donetsk and Luhansk regions) from Ukrzaliznytsia.
There is currently a moratorium on asset recovery for debts owed by the railways in Kremlin-occupied areas. Leshchenko wrote that Ukrzaliznytsia’s inquiries to the Ministry of Justice and the Prosecutor General’s Office got no response.
VR Capital will challenge the invalidity of the right of claim against Ukrzaliznytsia in Supreme Court
The Northern Commercial Court of Appeal upheld Ukrzaliznytsia’s appeal, declaring invalid the contract for the assignment of Ukrzaliznytsia debt between Prominvestbank and the New York-based investment fund, VR Global Partners (VRGP).
VRGP said in a press release that it strongly disagreed with the decision of the court, which the company said was clouded by evidence of political interference and violations of due process. The fund said it would challenge the court decision in the Supreme Court.
Defense
Ukroboronprom will cooperate with the British Babcock on warships
On Sept. 15, Ukroboronprom signed a cooperation agreement with Babcock International on naval projects, in particular, shipbuilding.
Privatization
Odesavinprom sold at privatization auction for Hr 235 million
Dmytro Sennychenko, head of the State Property Fund (SPF), wrote on his Facebook page that the wine-making plant Odesavinprom was auctioned off for Hr 235 million ($8.8 million). Twelve participants bid on the assets.
The starting price increased from Hr 65 million to Hr 235 million.
According to Sennychenko, the buyer also has to fulfill two conditions:
– preserve the company’s business activity (production of wines) and social guarantees for employees for three years; and
– preserve the architectural monument – one the buildings of the plant.
The government excluded five regional electricity distributors from the privatisation list
The Cabinet of Ministers excluded five regional power distribution companies from the large-scale privatization list. These are Ternopiloblenergo, Zaporizhzhyaoblenergo, Kharkivoblenergo, Mykolaivoblenergo, and Khmelnytskoblenergo.
The State Property Fund (SPF) was also instructed to take measures to stop the privatization of state-owned stakes in Cherkasyoblenergo (46%), Sumyoblenergo (25%), and DTEK Odessa Electric Networks (25%).
/Note also that most of the electricity distribution system operators are already private, mostly owned by Ukrainian oligarchs. – SOE Weekly./
Events
Conference: Reform of state-owned companies as an impetus for the development of competitive markets
On Sept. 21, Kyiv School of Economics (KSE) invites you to join the conference, where the Japanese economist Motoshige Itoh will share Japan’s unique and successful experience of reforming SOEs. In particular, Dr Itoh will address the impact of deregulation on privatisation and competitive markets, such as the railways and the energy sector.
The presentation will be followed by a panel discussion including:
Kristina Golubytska, Deputy Minister of Economy of Ukraine;
Oleksandr Kamyshin, acting CEO of Ukrzaliznytsia;
Maksym Yurkov, member of the Ukrenergo’s management board; and
Dmytro Yablonovskyi, Deputy Lead of KSE Corporate Governance Stream.
The registration is available here and is free of charge.
Ukrainian SOE WeeklyTM is an independent weekly digest based on a compilation of the most important news related to state-owned enterprises (SOEs) and state-owned banks in Ukraine. Editorial team: Andriy Boytsun, Mariia Kramar, Dmytro Yablonovskyi, and Oleksandr Lysenko. The SOE Weekly is produced and financed by Andriy Boytsun. Communications support is provided and financed by CFC Big Ideas. The SOE Weekly is not financed or influenced by any external party. © 2020–2021 Andriy Boytsun, all rights reserved. Spaces – Maidan Plaza || Maidan Nezalezhnosti 2, Kyiv 01012, Ukraine Email: [email protected] || Telephone: +380 44 247-7829
