Editor’s Note: The following is Ukrainian State-Owned Enterprises Weekly, Issue 36, covering events from July 10–16, 2021.
Corporate governance in SOEs
Parliament passes draft law on corporate governance in SOEs in the first reading
On July 15, the Verkhovna Rada approved Draft Law No. 5593-d on corporate governance in SOEs in the first reading. The draft law was supported by 251 votes (with 266 votes required to pass a law).
In SOE Weekly (Issue 35), we reported that the Economic Development Committee of the Verkhovna Rada considered four versions of the draft law: Draft Laws No. 5593, No. 5593-1, and No. 5593-2, and No. 5593-d, and recommended Draft Law No. 5593-d for approval by parliament.
[The current wording of Draft Law No. 5593-d is not yet in full compliance with the OECD Guidelines on Corporate Governance of SOEs and requires improving. – SOE Weekly.]
Verkhovna Rada adopts law on Ukroboronprom’s transformation
The Verkhovna Rada adopted Draft Law No. 3822 on reforming state-owned defense enterprises. The draft law lays the groundwork for the transformation of Ukroboronprom.
Later, G7 ambassadors welcomed the adoption of the law and encouraged swift and thorough implementation to minimize corruption risks. They stated that these reforms, properly embedded, would enhance the global competitiveness of Ukraine’s defense industry and further ensure the country’s security.
[The law has improved compared to its version voted in the first reading, which we discussed in SOE Weekly (Issue 31). However, the following provisions may still be risky for the effective implementation of the OECD Guidelines on Corporate Governance of SOEs:
- The Ministry of Strategic Industries will nominate state representatives on the supervisory board of Ukroboronprom. Given the Ministry’s role as policymaker, this may lead to a conflict with the Cabinet of Ministers as Ukroboronprom’s ownership entity.
- The number of independent members on the supervisory board of Ukroboronprom will be at least one-third, but no more than a half of the board. This may not be enough to guarantee the independence of the supervisory board from the owner and policymaker.
- It is unclear why only Ukrainian citizens may be independent members on the supervisory board of Ukroboronprom, while citizens of any other country (except a country recognised as an aggressor – currently, Russia) may serve as state representatives on the board.
MGU gets new independent members on the supervisory board
According to Prime Minister Denys Shmyhal, independent members of MGU’s (Mahistralni Gazoprovody Ukrayiny – Main Gas Pipelines of Ukraine) supervisory board were selected at a meeting of the SOE Nomination Committee. No information on who was selected was available at the time SOE Weekly was prepared for publication.
In SOE Weekly (Issue 32), we reported that the powers of three independent members – Fabrice Noilhan, Jan Chadam, and Karina Luchinkina – expired on June 1, 2021. The powers of another supervisory board member (state representative), Adomas Audickas, had expired on March 1, but were not extended. This meant that MGU was left with a non-quorate supervisory board consisting of a single member (state representative), Viktor Pynzenyk.
Claire Spottiswoode justifies concealing Naftogaz bonuses
On July 9, the Kyiv Post published a letter from Clare Spottiswoode, the chair of Naftogaz’s supervisory board, sent to the newspaper’s chief editor Brian Bonner in response to a story about Naftogaz’s management concealing multimillion-dollar bonuses to top executives.
In SOE Weekly (Issue 35), we reported that according to the Kyiv Post, Naftogaz’s top management received millions of dollars in bonuses for 2020. The company’s 2020 annual report only showed that the management team (17 top officials, including five executive board members) was collectively paid nearly $25 million, without providing a breakdown by the management team member. Management remuneration is set by Naftogaz’s supervisory board.
In her letter, Spottiswoode stated that Naftogaz’s 2020 annual report disclosed the total sum paid to a team composed of the executive board members and all directors of the company. [“Director” is a management position outside the executive board, not to be confused with a position on the supervisory board. – SOE Weekly.]
She said that directors were included in the total because in 2020, they received more compensation than executive board members, on average. According to her, “disclosing executive board members’ compensation only would have constituted a non-compliance with the substance of OECD Corporate Governance Standards.”
Spottiswoode also said that any money earned in 2020 but paid out in 2021 would be reflected in the 2021 financial report, which will come out in 2022. This will include all payments to former CEO Andriy Kobolyev, including the ones that he received after being dismissed by the Cabinet in April 2021.
(Kyiv Post’s note: “However, earlier Spottiswoode told the Kyiv Post that only the aggregated remuneration amount was disclosed because personal payments are ‘politically sensitive’ information.”)
By her words, this “approach is not only consistent with applicable Ukrainian regulatory requirements but addresses Ukrainian reality when state officials may intervene into remuneration matters of management of Ukrainian SOEs by blocking or suspending compensation accrued or due for payment (as was the case with bonuses for Stockholm in 2018-2019).”
[According to the OECD Guidelines on Corporate Governance of SOEs, “[r]egarding disclosure of remuneration of board members and key executives, it is viewed as good practice to carry this out on an individual basis. The information should include termination and retirement provisions, as well as any specific benefits or in kind remuneration provided to board members.” According to the G20/OECD Principles of Corporate Governance, “in the typical two-tier system, … ‘key executives’ refers to the ‘management board’.” According to the remuneration disclosure regulations of the National Securities and Stock Market Commission (NSSMC), “the remuneration report must contain, among other things, information about the size of the remuneration… and the form of payment of the remuneration that was paid or to be paid to each member of the company’s respective governing body [management and supervisory board], the decision on the payment of which was made in the respective reporting year”. – SOE Weekly.]
The chair also said that Naftogaz only reported consolidated data because the company had not received Yuriy Vitrenko’s consent as he was fired in 2020 and received a share of the second part of the Stockholm bonus.
[It is unclear what prevented the supervisory board from disclosing individual remunerations with the data depersonalized for the executives that had not provided their consent to the disclosure. – SOE Weekly.]
Spottiswoode promised that, if Vitrenko gave his consent to such disclosure now, she would suggest that the supervisory board should issue a separate remuneration report that would disclose all payments made by the company in 2020 “to those members of the top management team, who will be willing to grant their individual permissions too.”
[It follows from this statement that the supervisory board did not ask for or did not receive the consent of the whole or part of the management team of Naftogaz, not only Vitrenko, in the first place. – SOE Weekly.]
Vitrenko answers Spottiswoode
Yuriy Vitrenko also sent a letter to the Kyiv Post editor, in response to Spottiswoode’s letter.
He said that his financial declaration, including all Naftogaz remuneration and bonuses, was already publicly available on the Public Declarations Registry of the National Agency for Corruption Prevention (NACP) and accessible to any citizen of Ukraine.
[This may make Vitrenko the only Naftogaz executive whose 2020 remuneration is officially available to the public. – SOE Weekly.]
Vitrenko also said that neither Spottiswoode nor anybody else from the company’s supervisory board had ever asked for his consent to disclose his compensation. Vitrenko said that “although [such] disclosure is not required, neither by Ukrainian law nor by OECD guidelines, [he was] hereby giving that consent. If this is the only obstacle holding up the publication of a proper remuneration report by the supervisory board, then that is no longer the case.
He also said that he had requested for the supervisory board to release the 2020 remuneration report and wondered what the hold-up was.
According to Vitrenko, disclosure of Naftogaz’s executive board members’ remuneration is required by law because they have specific authority granted to them under the law and the company’s charter.
[The NSSMC’s remuneration disclosure regulations are mandatory for private joint-stock companies that have adopted internal documents governing the supervisory and management boards’ remuneration reports. The NSSMC’s regulations are not mandatory for companies that have not adopted such internal documents. We are not aware of such documents adopted by Naftogaz. – SOE Weekly.]
[Taking into account the size and significance of Naftogaz for the Ukrainian economy, we would welcome voluntary disclosure of the remuneration of all top executives regardless of their title, including the achievements rewarded, the sums paid, and the manner in which they were set. – SOE Weekly.]
Naftogaz’s CEO Vitrenko also stated that the payment of the Stockholm bonus was “blocked or suspended” by the supervisory board, chaired by Spottiswoode, with a majority of board members that are supposed to be independent. Vitrenko emphasized that, judging from Spottiswoode’s words, the decision of the supervisory board was a result of the “intervention of state officials.”
However, such intervention had never been made public by Spottiswoode, and it is not clear why she did what these “state officials” demanded, and blocked payment of the remuneration defined in contracts of company employees.
Ex-CEO of Naftogaz Andriy Kobolyev interviewed
This week, ex-CEO of Naftogaz Andriy Kobolyev was interviewed by Liga.net. We have selected key points from the interview:
- “Naftogaz’s management in 2020 fulfilled all the main tasks set before it. Each of the directors and members of the company’s executive board received bonuses within the maximum allowed limit, which is stipulated in the contract of each Naftogaz employee.”
- “Naftogaz has always shown all payments to management for the reporting period. And 2020 is no exception. My salary is there, too. There is simply no detail by name in the report. Why? The Chair of Naftogaz’s supervisory board, Claire Spottiswoode, has already answered this question – the company did not receive consent to publish the data from Yuriy Vitrenko.”
[Vitrenko stated earlier that no one asked his consent to disclose information on Naftogaz’s remuneration for 2020. – SOE Weekly].
As we reported in SOE Weekly (Issue 35), that Kobolyev said he had not received any “real monetary compensation for the period after the extension of [his] contract in March 2020”. Naftogaz denied this and said that Kobolyev did get paid.
In his interview to Liga.net, Kobolyev commented that:
- “My contract was renewed by the Cabinet of Ministers in March 2020. First, I was guaranteed that upon completion of my contract – in March 2024 – I would receive the second part of the Stockholm bonus. This was the reason why in 2020 I did not receive my money together with other employees of Naftogaz. Therefore, I agreed to accept the delay of payment in exchange for a bank guarantee that I will receive this money in March 2024. This guarantee was fulfilled. But there were several conditions. For example, if I leave Naftogaz before the end of the contract of my own free will, I will receive the second part of the bonus in March 2024; and if by the decision of the shareholder, at the time of dismissal. In addition, the contract provided for payment for dismissal at the initiative of the employer, if the reason for dismissal was not a violation of Ukrainian law or a contract.”
- “My contract was structured in such a way that my salary, which I received for each month, was subtracted from the amount of my bonus for Stockholm.”
- “The only amount I received additionally was a six-month [severance] pay – compensation for dismissal initiated by the employer in the amount of, if I remember correctly, six monthly salaries. It will be included in the financial statements of Naftogaz for 2021, because I received the money not in 2020, but in 2021.”.
In addition:
- In one part of the interview, Kobolyev said: “I agreed to postpone the payment [of the bonus] in exchange for the bank guarantee that I get this money in March 2024. This guarantee was fulfilled”.
- In another part, he stated: “Since I never received this [second part of the Stockholm] bonus, you could say that my last year at Naftogaz, I worked for free.”
- He also declined to answer the question if he planned to sue Naftogaz for not paying the bonus.
[It is unclear from the interview whether or not Kobolyev ultimately received the bonus and what the status on this matter is. – SOE Weekly.]
NACP appeals to the court to terminate Vitrenko’s CEO contract with Naftogaz
For an extended background of the Naftogaz case, see SOE Weekly’s Issues 32, 33, 34, and 35.
According to the media, the National Agency for Corruption Prevention (NACP) filed a lawsuit with the Kyiv Shevchenkivskyi District Court to terminate the contract between Naftogaz and Yuriy Vitrenko, the company’s CEO.
The NACP reasoned that signing a contract with the company’s CEO violated the anti-corruption law, since Vitrenko previously worked as Acting Minister of Energy and could influence Naftogaz during that tenure.
[This is the NACP’s third attempt to terminate Vitrenko’s contract. Two previous attempts were NACP’s orders addressed to Prime Minister Denys Shmyhal and Naftogaz’s supervisory board chair Clare Spottiswoode, respectively.
Both orders were suspended by the court until the merits of the case are considered, after which the NACP decided to go to the court.
As we wrote earlier (Issue 34), after the NACP issued its first order (to the Prime Minister), Vitrenko noted that, if the NACP sees a violation in his appointment, it should go to the court rather than issue orders.
It is unclear whether the NACP has agreed with the illegality of its earlier orders. If it has not, it is unclear why the Agency decided not to wait for court decisions on the two orders. – SOE Weekly.]
The largest SOEs earn Hr 25 billion in profit in the first quarter (unaudited)
According to Marlin, the top 15 Ukrainian SOEs received total revenues of about UAH 25 billion in the first three months of 2021.
According to the media, the largest profits were received by: Naftogaz (Hr 12.6 billion), Gas Transmission System Operator of Ukraine (GTSOU) (Hr 4.7 billion), Ukrenergo (Hr 3.7 billion), and Ukrhydroenergo (Hr 2.2 billion). Then goes Energoatom (Hr 1 billion), Ukrainian Sea Port Administration (Hr 521 million), Polygraph Combine “Ukrayina” (Hr 12.1 million), and Agrarian Fund (Hr 5.2 million).
The largest losses were suffered by the railways and the aviation industry. In the first quarter, Ukrzaliznytsia posted a net loss of Hr 1.7 billion; UkSATSE, a loss of Hr 205.8 million; and Boryspil IA, a loss of Hr 196.7 million. The combined first-quarter losses of 7 out of Top 15 SOEs are about Hr 2.4 billion.
[Please note that this reporting is only intermediate and not audited. The annual audited results will provide a more reliable picture, which may differ from that produced by the intermediate results. – SOE Weekly.]
SOE updates
Banks
Oschadbank receives Hr 513 million net profit for the first half of 2021
Oschadbank’s net profit for the first six months of 2021 was UAH 513 million. [In the first six months of 2020, the bank posted a profit that was seven times as high, UAH 3.6 billion. – SOE Weekly.]
The operating profit (without taking into account the trading result) for the six months of 2021 was UAH 3.3 billion. According to Oschadbank, the trading result was negative at UAH 2.8 billion, primarily due to the revaluation of securities in its equity.
In the first six months of 2021, Oschadbank increased the volume of issued loans by UAH 6.2 billion (by 9.9%) to UAH 69.5 billion, as well as reduced the share of non-performing loans in its portfolio from 51% to 42% (almost by UAH 5.6 billion).
Ukreximbank earns more than a billion in the first half of 2021. Ukreximbank’s profit in the first half of 2021 amounted to over Hr 1.1 billion.
Ukreximbank’s CEO Yevhen Metzger said that the improvement in the financial result this year was due to an increase in operating profit to Hr 1.4 billion. Metzger added that the work on non-performing assets remained among the bank’s priorities.
Privatization
SPF sells Karavanske MPD assets at half the price
The winner of the Karavanske MPD assets’ privatization auction refused to purchase the distillery, saying that it had lost economic interest in the property.
As a result, the State Property Fund (SPF) started working with the second-highest bidder. The chief of the SPF’s Kharkiv regional department, Dmytro Bezpalov, said that the new winner was Revites LLC. This company had offered UAH 53 million for Karavanske MPD assets, half of the UAH 101 million offered in the highest bid.
The SPF intends to complete this process in a few weeks. If the second-highest bidder also refuses to buy Karavanske MPD, the asset will be put up for a new auction at the original starting price of UAH 23.1 million.
In SOE Weekly (Issue 31), we reported that Karavanske MPD’s assets in Kharkiv Oblast were sold at privatization auction for UAH 101 million. According to the SPF, three participants were competing for the assets. The facility was founded in 1837 and most recently modernized in 2019.
Amendments to the legislation on the SPF supported in the first reading
The Verkhovna Rada supported Draft Law No. 4572 in the first reading. The draft law is aimed at amending the current law to allow “attracting investments in the process of privatization and lease of state and communal property”.
According to Dmytro Sennychenko, Head of the State Property Fund (SPF), the most important amendments of the draft law are that:
- 10% of [the revenues from] small-scale privatization will be directed for the development of local communities and regions; and
- a state body that transfers a non-core asset for privatization will receive 20% [of the privatization proceeds] for its development fund.
Due to the vacation break, the SOE Weekly team will be back with our next issue on July 31, 2021.
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.
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