Editor’s Note: This is the 46th issue of Ukrainian State-Owned Enterprises Weekly, covering events from Oct. 2-8, 2021.
Corporate governance in SOEs
A sober analysis of the Ukreximbank incident
The supervisory of Ukreximbank suspended the duties of Yevhen Metzger, the bank’s CEO, while his attack on journalists is being investigated by the bank.
The incident. On Oct. 4, journalists of the investigative TV program Skhemy [the Ukrainian for “schemes” – SOE Weekly] were attacked in the state-owned Ukreximbank while filming an interview with Metzger in his office. The journalists said that Metzger did not like one of the questions and ordered his guards to seize the cameras, pull out their memory, and delete the recording.
The next day, Ukreximbank accused Skhemy journalists of trying to obtain classified information (referring to bank secrecy), saying it would report them to the police.
Journalists reported that bank employees used force against the camera operator and confiscated two cameras and recording cards. Later, Skhemy managed to restore and publish the deleted recordings.
The police opened a criminal investigation and handed notices of suspicion to Metzger and Volodymyr Pikalov, Ukreximbank’s director of the information policy department, on Oct. 7.
Supervisory Board’s response
Metzger announced that he was temporarily stepping down and apologized to the journalists. At its extraordinary meeting, the supervisory board decided to remove him from office for the time of the investigation. Serhiy Yermakov was appointed as an acting CEO.
Later, Ukreximbank’s supervisory board chair Olyana Gordiyenko convened an urgent press conference to comment on the situation and actions being taken by the bank. Gordiyenko stressed that the supervisory board suspended Metzger on the board’s own initiative, without pay and without waiting for requests from law enforcement agencies.
She said that the bank launched an internal investigation into the incident. In particular, an ethics commission was looking into the matter, and its conclusions were expected by Oct. 8.
The bank’s investigation can end up recommending that Metzger should be fired. In theory, he could file a resignation notice on his own initiative. Gordiyenko said that Metzger has not filed such a notice.
Gordiyenko added that if the supervisory board is not able “to cope with this scandal,” she will consider her own resignation as supervisory board chair. She also apologized for the moral and other damage to the journalists and promised an open media policy on the part of Ukreximbank.
Gordiyenko said that if Metzger is fired now [without documented proof, such as conclusions of the internal investigation or a court ruling – SOE Weekly], he would be entitled to severance pay of no less than six months’ average salary.
[From the corporate governance perspective, this incident should be dealt with within the bank’s risk management system. In this case, Ukreximbank has incurred damage to its business reputation due to the CEO’s violation of corporate ethics, as well as a possible criminal violation (which must be established by a court ruling]. This falls under the concept of compliance risk.In best corporate governance practice, as well as according to Ukrainian banking law, rules of ethics and conduct by bank officers should be overseen by the bank’s supervisory board. For this purpose, the supervisory board has an ethics committee, the bank’s compliance officer, and other tools to investigate such cases.
The primary purpose of the risk management system is to prevent the risk and to minimize its negative consequences rather than to (only) punish a person whose actions led to the risk.
Therefore, after receiving the results of the internal investigation, in addition to establishing the obvious fact of the CEO’s violation of the ethics rules, Ukreximbank’s supervisory board will have to:
• Establish a list of all negative consequences of the incident for the bank.
• Approve the actions that the bank needs to take to minimize these consequences. In particular, such actions may include: (a) explanatory work with the public on the loan investigated by Skhemy, (b) commissioning an independent audit of that loan, and (c) if the bank continues to incur significant reputational damage resulting from the CEO’s incident, the supervisory board should consider dismissing the CEO.
• Approve a list of actions that should be taken to prevent such risks in the future.
Please note that merely dismissing the CEO does not address the risks above and should not be the only focus of the supervisory board.
On a separate note, the incident goes well beyond the corporate governance domain and must be evaluated by law enforcement agencies. If the court rules that the incident was a criminal violation, the NBU as the regulator should consider demanding that Ukreximbank should replace the CEO due to him losing an impeccable business reputation. – SOE Weekly.]
Statements by parliament members. Iryna Gerashchenko (MP, European Solidarity) said on her Facebook page that members of parliament from three factions demanded that the Cabinet of Ministers should immediately dismiss Metzger as Ukreximbank’s CEO and the entire supervisory board. Deputies from the Holos and Batkivshchyna factions joined the initiative, she wrote.
In his several public statements, Metzger repeatedly apologized to the journalists. He admitted that he had been overly emotional and that his unrestrained behavior could not be justified.
[According to the law, the Cabinet of Ministers does not have the power to dismiss the CEO of a state-owned bank – this power belongs to the supervisory board. Moreover, the Cabinet may only dismiss supervisory board members of a state-owned bank on grounds stated in an exhaustive list.These rules are in conformity with better corporate governance practices and are meant to insulate state-owned banks from political meddling and graft, including from parliament. Based on these grounds, the incident in question does not qualify as a reason for the dismissal of the supervisory board.
In this context, the parliament members’ appeals to the Cabinet of Ministers have no practical use for resolving the corporate situation and appear to have no value besides the value of populist statements.
Ukreximbank’s supervisory board must first investigate the incident and then take the necessary steps to protect the bank from the damage resulting from Metzger’s actions. In that respect, the supervisory board’s decision to suspend Metzger’s duties as CEO for the time of the investigation is adequate. – SOE Weekly.]
The loan over which the Metzger incident occurred
Skhemy journalists published the details of their investigation into Ukreximbank. They found that the bank had given a $60 million loan to the firms of a businessman who, according to the copies of documents published by the media, is a co-founder of a company operating and paying taxes in the Russian-occupied part Donetsk Oblast.
Supervisory board chair Olyana Gordiyenko told the media that this information was not correct.
[According to the financial monitoring law, terrorism-related assets and their financing must be verified by banks. Compliance with the financial monitoring requirements is overseen by the National Bank of Ukraine (NBU) as the regulator. In this respect, the National Bank of Ukraine can inspect this loan on its compliance with the financial monitoring requirements and confirm or deny Skhemy’s information. – SOE Weekly.]Journalists explained that the borrowers used the Sky Mall shopping center in Kyiv as collateral in order to get a multimillion-dollar loan from Ukreximbank. Although Sky Mall was collateral technically, the business purpose was to purchase the shopping center.
[It is unclear how the provision of a large loan for the purchase of a shopping mall corresponds to Ukreximbank’s main directions of activity (approved by the Cabinet of Ministers as the bank’s shareholder).Specifically, according to the main directions, Ukreximbank must focus on export and import operations, with a limited presence in banking retail. A loan for the purchase of а shopping mall is a standard banking product available from private banks. It does not create any unique value for society, suggesting that there is no rationale for the state to own banks focused on offering such products. Besides being state-owned, Ukreximbank’s funds are partly composed of taxpayers’ money used to recapitalize the bank.
We are unaware if the borrower in question had approached private banks for the same loan, and what the results of these negotiations were. Skhemy did not publish the terms and conditions of the loan – hence, it is not yet possible to conclude whether Ukreximbank gave the loan on market-consistent terms.
Two members of the SOE Weekly team, Andriy Boytsun and Dmytro Yablonovskyi, published a policy paper titled “What Should the State Do with its Banks” in 2017. They concluded that the risks of state ownership of banks in Ukraine outweighed the benefits, suggesting that all state-owned banks should be privatized. The state can obtain the same services from private banks or international development finance institutions. – SOE Weekly.]
Ukreximbank’s recent performance
As we reported in SOE Weekly (Issue 29), Ukreximbank was the only state-owned bank that suffered a loss in 2020. Then, the bank’s loss was Hr 5.59 billion, making it the biggest loss-maker among all Ukrainian banks. However, the bank broke this negative trend in 2021. As we reported in SOE Weekly (Issue 39), Ukreximbank made a profit of Hr 1.12 billion in the first half of 2021.
MGU’s supervisory board appointed
The Ministry of Energy appointed a new supervisory board of the Main Gas Pipelines of Ukraine – Mahistralni Gazoprovody Ukrayiny (MGU).
According to the Ministry, the independent members (Jan Chadam, Huberte Bettonville, and Iryna Marushko) and two state representatives (Tetyana Fedorova and Viktor Pynzenyk) were appointed for a term of three years, starting on Oct. 5.
In SOE Weekly (Issue 37), we reported that after being selected by the SOE Nomination Committee, these candidates were approved by the Cabinet of Ministers as far back as 21 July 2021. The profiles of the candidates were also reported in SOE Weekly’s Issue 37.
SOE updates
Energy sector
Naftogaz to receive Hr 51 billion for giving up control of GTSOU
According to Ekonomichna Pravda (EP), Naftogaz will receive Hr 51 billion in compensation for giving up control over the gas transmission system in 2019 as a result of unbundling. Hr 48 billion will be paid by the Gas Transmission System Operator of Ukraine (GTSOU). The Cabinet of Ministers approved this resolution earlier.
It had been planned for GTSOU to pay this amount in equal installments of Hr 9.6 billion, over five years. Now it might pay the whole amount this year. GTSOU has only Hr 30 billion in its accounts from its net profit in the past 18 months. The company will probably borrow the rest.
EP said that GTSOU confirmed this information. GTSOU’s representatives reportedly said that the company would “execute the decision of the shareholder”, but the main task is to ensure accident-free operations of GTSOU, namely, to have enough funds for the maintenance and repairs of the gas pipelines and the required capital investment.
[Note that GTSOU’s shareholder is Main Gas Pipelines of Ukraine – Mahistralni Gazoprovody Ukrayiny which, in turn, is held by the Ministry of Energy. – SOE Weekly.]According to EP, Ukraine needs about 19 billion cubic meters of gas for the heating season, while it only has 15 billion cubic meters – meaning that the country [Naftogaz – SOE Weekly] needs to buy another 4 billion cubic meters.
Last week, the spot price for gas exceeded $1,100 (Hr 30,000) per 1,000 cubic meters. This suggests that the value of the additional 4 billion cubic meters needed would be more than Hr 120 billion.
According to EP, the actual spending is likely to be lower, as Hr 30,000 per 1,000 cubic meters is a speculative price caused by low gas reserves in Europe at this moment. However, even if the prices decrease, Naftogaz will need to spend tens of billions of hryvnias to procure the 4 billion cubic meters of gas.
Infrastructure
Ukrzaliznytsia announces a Hr 31 billion tender for the purchase of new trains
According to Ukrzaliznytsia, the company plans to purchase 80 new suburban and regional trains by 2026. The total amount of the procurement is over Hr 31.4 billion.
Ukrzaliznytsia is beginning the largest renewal of its fleet of suburban and regional trains. As part of the tender, the company plans to buy 30 AC electric trains and 30 DC electric trains for suburban transportation. Ukrzaliznytsia added that these 60 trains would be involved in the City Express project.
Another 20 electric trains are to be launched on new and existing regional routes.
The world’s leading manufacturers have been invited to participate in the tender, with requests for proposals sent to Siemens, Stadler, Alstom, Pesa, Skoda, and the Ukrainian Kryukivka Carriage Building Plant.
Ukrzaliznytsia will accept applications via ProZorro until Nov. 1, and the auction will take place on 7 December 2021. All trains must be delivered by 2026.
Ukrzaliznytsia signs a billion-hryvnia contract for the construction of the Darnytsia bridge
According to the Ministry of Infrastructure, Ukrzaliznytsia signed an Hr 1.15 billion contract with Avtostrada to complete the construction of the Darnytsia bridge in Kyiv.
The ministry said that the bridge is on Ukrzaliznytsia’s balance sheet, and its construction has remained unfinished for more than 10 years.
Other sectors
Agrarian Fund loses assets worth over Hr 2 billion in 2018-2019
An audit of the Agrarian Fund, conducted by the State Audit Office (SAS) for 2018-2019 and published by Marlin, revealed financial violations and loss of assets at the company totaling Hr 2.17 billion.
The audit established that almost all of this amount (Hr 2.15 billion) is due to the Agrarian Fund depositing its funds in the accounts of Brokbusinessbank in 2014. This bank is currently liquidated.
[There is no rationale for the state to own the Agrarian Fund. This also contradicts the government-declared Basic principles of state ownership policy. Since the services that the company provides are readily available from private providers in the competitive market, the Agrarian Fund should be privatized or liquidated. – SOE Weekly.]In SOE Weekly (Issue 30), we reported that the Agrarian Fund reported losses in the amount of UAH 200 million in 2020.
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
