Editor’s Note: This is Ukrainian State-Owned Enterprises Weekly, issue 32, covering events from June 12-18, 2021.
Corporate governance in SOEs
NACP orders the Cabinet of Ministers to cancel Vitrenko’s appointment to Naftogaz as illegal
The National Agency on Corruption Prevention (NACP) ordered the Cabinet of Ministers to cancel Yuriy Vitrenko’s appointment as the CEO of Naftogaz. The agency said that the appointment broke Ukraine’s anti-corruption law. Specifically, the order calls for:
- canceling items 8 and 9 of the Cabinet of Ministers Order No. 370-r (appointing Vitrenko and instructing the Minister of the Economy to sign contracts with Vitrenko and the supervisory board members of Naftogaz);
- to terminate Vitrenko’s contract, which the NACP deemed illegal.
According to the NACP, under the law, a person who leaves public service cannot then work at a company over which he or she had authorities of control, oversight, or developing/making decisions when working for the state. The cooling down period is one year. A violation of this rule can serve as a ground for termination of the employment contract.
The NACP said that it had monitored whether Vitrenko complied with this requirement when he was appointed as CEO. The agency says that it has established that, while he performed duties as acting minister of energy from Dec. 21, 2020, to April 28, 2021, Vitrenko systematically participated in preparing decisions concerning Naftogaz.
Later, Ukrayinska Pravda reported that NAPC Chairman Oleksandr Novikov has recently returned from the United States. In particular, Novikov met with the deputy assistant attorney general and deputy assistant secretary of state. According to Ukrayinska Pravda, from the first day of Vitrenko’s appointment, the US has taken a rather tough stance on Naftogaz and corporate governance reform in its communication with Ukraine.
This issue was also raised at a meeting between President Volodymyr Zelensky and US Secretary of State Antony Blinken. The media suggested that the NAPC’s decision was made under influence of the US. Novikov denied the allegation in his interview with Ukrayinska Pravda.
In the same interview, Novikov commented on the NAPC order as follows: “We have not established any conflict of interest in Yuriy Vitrenko’s activities. However, unfortunately, the law forbids the person who made decisions regarding the company [Naftogaz] to manage it within a year after stepping down [as acting energy minister].”
Naftogaz says NACP’s order is illegal and will be challenged in court. Naftogaz stated on its website that its CEO Yuriy Vitrenko said that the NACP’s order is unlawful, while the agency’s conclusion is a textbook example of “selective justice” and bias.
Vitrenko explained that the limitations envisaged in the Law of Ukraine “On the Prevention of Corruption” can only be applied to a government official having the authority to decide on or participate in decisions concerning the relevant entity. According to Vitrenko, as acting energy minister, he did not have such authority over Naftogaz.
Moreover, the Ministry of Energy was not the company’s governing body; the Cabinet of Ministers was. As an acting minister, he was not part of the Cabinet of Ministers. Therefore, he could not vote when the government made decisions with respect to Naftogaz. In addition, Vitrenko was neither the chair nor a member of the regulator, the National Energy and Utilities Regulatory Commission (NEURC).
[As we wrote in SOE Weekly earlier (Issue 15), the Cabinet of Ministers is the ownership entity of Naftogaz. In this capacity, it has the power to make key decisions regarding the company. The Ministry of Energy has no role in these matters and its recommendations on these issues have no legal power. Prior to 2015, the Ministry of Energy had been involved in the exercise of the ownership function over Naftogaz, but this was changed as a result of the corporate governance reform of Naftogaz. The ministry is tasked with policymaking in the gas sector. – SOE Weekly.]
In its release, Naftogaz noted that the NACP conclusion conflicts with both the letter and the spirit of the law. The purpose of the limitations envisaged in the Law of Ukraine “On the Prevention of Corruption” is to prevent officials from giving preferences to entities regulated by private law in exchange for future employment or other unlawful benefits from those entities.
Vitrenko said that he was appointed by the Cabinet of Ministers, a collegiate body, so it is absurd to say that he had been pursuing the interests of an entity, which later employed him as a “reward.”
Naftogaz said that the NACP’s actions are a typical example of selective justice, as they contradict both the law and common legal practices.
One such example, named by the company, is the NACP’s inaction when Yevhen Kravtsov, the former first deputy minister of infrastructure, was appointed Ukrzaliznytsia’s CEO. Naftogaz noted that this central executive body – unlike the Ministry of Energy – directly governed the company in which Kravtsov was appointed.
Naftogaz also supported the legality of Vitrenko’s appointment with a legal opinion from the Koretsky Institute of the State and Law, which states that the employment contract with Vitrenko as Naftogaz’s CEO is not subject to anti-corruption limitations set in the Law of Ukraine “On the Prevention of Corruption.”
In a later Naftogaz statement, the legal department of Naftogaz said that the NACP’s order is unfounded and does not conform to the law. This is the official position of the company.
Spottiswoode attempts to suspend Vitrenko.
According to a statement by Naftogaz’s supervisory board chair, Clare Spottiswoode, as reported by Ekonomichna Pravda, the company’s supervisory board will initiate Yuriy Vitrenko’s suspension from the office due to the NACP’s order.
In her letter, Spottiswoode said that Naftogaz’s decision to appeal the NACP’s order was initiated by Vitrenko personally, without consultation with the management or supervisory boards.
She added that she immediately discussed the situation with the government as Naftogaz’s shareholder, represented by Prime Minister Denys Shmyhal and Minister of Justice Denys Malyuska.
According to Spottiswoode, the prime minister promised to make a final decision within 10 working days, starting from June 15, 2021. She added that Vitrenko refused to voluntarily suspend his powers for this period. Spottiswoode called an extraordinary meeting of the company’s supervisory board to discuss his suspension.
At the same time, Naftogaz’s CEO Yuriy Vitrenko emphasized that the supervisory board did not discuss the information on the NAPC’s order with him.
[Based on the above, it is unclear whether Spottiswoode’s statement is her own or a statement of Naftogaz’s supervisory board. There is no evidence that other supervisory board members subscribe to or oppose this statement. There has been no further news on the extraordinary meeting of the supervisory board that Spottiswoode mentioned or any supervisory board decisions made in this respect. In addition, Spottiswoode’s statement conflicts with the official position of the company, as cited on the Naftogaz website. According to Naftogaz’s Code of Ethics, the company’s officers “shall avoid making any statements and expressing their opinions that could be interpreted as the official position of the Company and affect its reputation.” The Code of Ethics is overseen by Naftogaz’s supervisory board. If Spottiswoode’s statement is not a statement of the supervisory board or contradicts the official position of the company, then the board’s ethics committee must take action to evaluate such behavior. – SOE Weekly.]
As we wrote in SOE Weekly (Issue 30), the recent re-appointment of Naftogaz’s supervisory board is likely to contradict the current law and can create risks for Naftogaz. Specifically, from a legal perspective, on May 19, the CMU likely had no grounds to select Naftogaz’s candidate supervisory board members for their further appointment, since the exemption for Naftogaz board appointment without a competitive selection only came into effect on May 22.
[By the same logic, the supervisory board of Naftogaz could be suspended before the issue with its appointment is resolved. – SOE Weekly.]
On June 17, the Kyiv District Administrative Court’s press service said that the prime minister of Ukraine, Denys Shmyhal, sued the NACP, asking the court to cancel the NACP’s order regarding the appointment of Vitrenko as Naftogaz’s CEO.
On June 18, the court suspended the NACP order until it considers the merits of the case and the court decision on the prime minister’s claim enters into force.
The court noted that taking measures to secure the claim is not a decision on the merits. Currently, the court considers measures to secure the claim to be necessary – otherwise, failure to take such measures would lead to negative consequences, the remedying of which would require significant efforts and costs.
The court hearing is scheduled as soon as June 29, 2021.
MGU left without a supervisory board
According to the information on the website of MGU (Mahistralni Gazoprovody Ukrayiny – Main Gas Pipelines of Ukraine), the terms of three independent members of the company’s supervisory board – Fabrice Noilhan, Jan Chadam, and Karina Luchinkina – expired on June 1, 2021.
Their three-year terms ran out on March 1 and were extended until June 1 by the Ministry of Finance as the ownership entity of MGU, although the grounds for such extension are not clearly spelled out in the existing law.
The powers of another supervisory board member (state representative), Adomas Audickas, had expired on March 1, but were not extended. MGU failed to disclose this information on time, only releasing it on March 18.
This means that MGU has been left with a non-quorate supervisory board consisting of a single member (state representative), Viktor Pynzenyk.
The government had earlier announced a competitive selection for the supervisory board of MGU, which has not been completed.
As we reported in the SOE Weekly earlier (Issue 29), the independent members of the SOE Nomination Committee – which would complete the competitive selection for MGU – suspended their work in late April after the Cabinet of Ministers changed management at Naftogaz.
The committee had said that they would be able to resume their work after the government offers clarity on the corporate governance action plan and clearly commits to respecting corporate governance institutions.
MGU is the company that owns the Gas Transmission System Operator of Ukraine (GTSOU), with MGU’s supervisory board performing the function of the general meeting of GTSOU. A non-functional supervisory board at MGU means that certain key decisions cannot be made at GTSOU.
GTSOU is Ukraine’s most profitable SOE.
As we reported in the SOE Weekly (Issue 30), GTSOU made a profit of Hr 20.4 billion in 2020, while most of the top 15 Ukrainian SOEs lost money in 2020.
Olena Malynska disqualified from Oschadbank’s management board
Media reported that the Qualification Commission of the National Bank of Ukraine (NBU) refused to approve Olena Malynska as a member of Oschadbank’s management board responsible for managing changes in the bank.
The NBU reported that, during the interview, Malynska demonstrated a low level of understanding of the key issues and responsibilities facing the management board.
The commission also drew attention to the fact that, while answering questions about previous experience of successfully implementing transformation projects, Malynska demonstrated a misunderstanding of problematic issues at the Kredyt Dnipro bank, and the negative consequences for the bank caused by her activities as CEO.
Oschadbank’s supervisory board has already dismissed Malynska.
Malynska was first appointed to the management board on March 3. She was responsible for the preparation of partial or full privatization of the Oschadbank.
Ukrposhta’s CEO will be appointed by the company’s supervisory board, without competitive selection
The Cabinet of Ministers, at its meeting on June 16, adopted amendments to Resolution No. 777, which allows the supervisory board to appoint Ukrposhta’s CEO directly, with no competitive selection.
[The OECD Guidelines on Corporate Governance of SOEs recommend that CEO appointments in SOEs should follow a transparent and competitive nomination process. – SOE Weekly.]
The resolution justifies the change, saying that a competitive search can take more than six months and jeopardise the €100 million strategic investment program.
SOE update
Banks
Oschadbank being prepared for a convertible loan agreement with the EBRD
According to the Ministry of Finance, on June 15, Finance Minister Serhiy Marchenko met with Francis Malige, the Managing Director for Financial Institutions of the European Bank for Reconstruction and Development (EBRD).
Marchenko and Malige discussed the reform of Ukrainian state-owned banks, corporate governance reform, Oschadbank’s privatization, and an updated approach to selecting independent members of state-owned banks’ supervisory boards.
Oschadbank, the Ministry of Finance, and the EBRD are preparing to sign a letter of mandate on the terms of future cooperation and the EBRD’s long-term subordinated loan, convertible into shares of Oschadbank.
Ukrgasbank will receive a €5 million loan from the EBRD
The European Bank for Reconstruction and Development (EBRD) will provide a € 25 million loan to the state-owned Ukrgasbank to support micro, small, and medium-sized businesses.
According to Ukrgasbank, the funds will be used to provide loans to local companies for the modernisation of technological processes and equipment, as well as the introduction of proper health and safety practices. At least 70% of the loan will be used to finance investments in green technologies.
In addition, borrowers who successfully implement the relevant investment projects will be able to receive grants in the form of cashback of up to 15% of the loan amount, as well as technical and advisory assistance funded by the EU under the EU4Business initiative.
PrivatBank pays Hr 19.4 billion in dividends for 2020 to the state budget
On June 18, PrivatBank completed the transfer of dividends of UAH 19.4 billion to the state budget.
According to the chair of the bank’s supervisory board Sharon Easky, in the last three years after nationalization, PrivatBank’s efficient operations have generated UAH 55.4 billion in dividends for the state budget.
As we reported in SOE Weekly earlier (Issue 28), PrivatBank transferred the first tranche of its 2020 dividends of H 10 billion to the state budget on May 14, 2021.
As we wrote then, according to the bank’s annual report, its net profit for 2020 was Hr 24.3 billion. The state collected 80% of that net profit in dividends (Hr 19.4 billion).
According to the media, PrivatBank had earlier reported a preliminary profit of Hr 25.3 billion in 2020 and was the most profitable bank in Ukraine.
[As we reported in SOE Weekly (Issue 24), this implied that the dividends to be paid by PrivatBank would be Hr 20.24 billion. This would be roughly 91% of all the dividends of Hr 24.4 billion to be collected by the state. – SOE Weekly.]
Energy sector
Ministry of Energy will ask the Ministry of Finance for Hr 100 million for SkhidGZK employees’ wages
The Ministry of Energy will ask the Ministry of Finance to speed up the allocation of UAH 100 million, part of the funds to solve urgent problems with the payment of wages to employees of the Eastern Mining and Processing Plant (SkhidGZK).
In May 2021, the Ministry of Energy proposed that the Ministry of Finance and the Cabinet of Ministers should partially cover, from the state budget, the costs of uranium concentrate production of Hr 600 million.
Earlier, we reported in SOE Weekly (Issue 29), that 38 state-owned enterprises overseen by the Ministry of Energy made a total net loss of Hr 1.6 billion in the first quarter of 2021. SkhidGZK was the biggest loss-maker, having reported Hr 341.1 million in losses.
Infrastructure
Ukrzaliznytsia conducts direct negotiations with a supplier rather than using the competitive procedure for an Hr 3 billion purchase. On June 14, Ukrzaliznytsia announced negotiations to buy 100 passenger cars for Hr 3 billion from just one company, Kryukiv Carriage Plant.
According to the media, initially, Ukrzaliznytsia held a competitive tender, but it was accused of manipulating technical requirements to screen out all but a single manufacturer – the Kryukiv Carriage Plant.
At the time, tender participants asked to review the technical requirements for passenger cars so that European companies could compete in the tender. The Chinese company CRRC also submitted its proposal for the tender. However, Ukrzaliznytsia rejected all bids, referring to the lack of competition. Then, the company announced a direct purchase.
Privatization
Government approves the terms of UMCC privatization
The Cabinet of Ministers approved the terms of privatization of the United Mining and Chemical Company (UMCC), one of the world’s largest producers of titanium and zircon ores.
According to Prime Minister Denys Shmyhal, the starting price should be at least Hr 3.7 billion [about $ 137 million – SOE Weekly].
UMCC will be the first asset offered for sale in the framework of the recently unblocked large-scale privatization.
In SOE Weekly (Issue 21), we reported that the Verkhovna Rada adopted Draft Law No. 4543 in the second reading, lifting the ban on large-scale privatization that the parliament had introduced a year earlier alluding to the coronavirus pandemic. The law was signed by the President and became effective on April 29, 2021.
Bilshovyk privatization price starts at $52 million
According to Serhiy Tsivkach, executive director of UkraineInvest, the starting price of the Bilshovуk plant at the privatization auction is set at Hr 1.4 billion [about $52 million – SOE Weekly]
Events
OECD Review of Corporate Governance of Ukrainian SOEs – Launch Event
On June 24, OECD will hold a high-caliber roundtable discussion of the key findings and assessment arising from the recent OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine.
Prime Minister Denys Shmyhal, OECD’s Deputy Secretary-General Masamichi Kono, and Ambassador of Norway Erik Svedahl will open the event with keynote addresses.
The findings of the review will be presented and deliberated among a panel of distinguished discussants. The aim will be to identify steps in advancing Ukraine’s reform efforts in line with international standards. A member of the SOE Weekly team, Andriy Boytsun, will join the panel discussion.
Participants will include:
- the Ukrainian government, including key officials (Cabinet of Ministers, Ministry of the Economy, Ministry of Energy, Ministry of Finance, President’s Office, NEURC, Anti-Monopoly Committee, NSSMC, NACP, and NABU, among others);
- members of parliament;
- CEOs and supervisory board members of SOEs;
- the international community (OECD, EU, and EBRD, among others), and
- non-governmental organisations, including business associations.
The registration is available no later than 23 June. Please register here.
The OECD conducted the Review of the Corporate Governance of State-Owned Enterprises in Ukraine in the context of the project “Supporting Energy Sector Reform in Ukraine”, under the OECD-Ukraine Memorandum of Understanding. This work has been done with the financial support of the Government of Norway.
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
