In February, Ukraine’s state-owned monopoly producer of potable ethanol alcohol, Ukrspyrt, took an unexpected step. The company received a license to trade natural gas. For its temporary acting director, Yuri Luchechko, the certification represented an opportunity to better fuel his company’s factories.
But to much of the public, it looked absurd. “There was a wave of critics: ‘They can’t handle alcohol, and now they’re wading into gas!’” Luchechko says, paraphrasing Ukrspyrt’s detractors.
That reaction was unpleasant, but not unexpected. Luchechko is one of the few to admit that Ukrspyrt has a bad reputation. Since being appointed acting director in September, he is working to bring transparency and efficiency to the state company and prepare it for privatization.
But he faces an uphill battle and a skeptical alcohol industry. Vodka industry representatives say they’ve seen this story before.
Reputation for corruption
Skepticism is not unwarranted. Ukrspyrt has been slated for privatization longer than almost anyone can remember. During that time, it has faced frequent allegations of inefficiency.
In December 2016, Yevhen Chernyak, the CEO of Ukraine’s Global Spirits company, accused Ukrspyrt of flooding the country with dangerous illegal alcohol — hardly a revelation in Ukraine, where over half the market is “shadow alcohol.” The company also buys grain and corn at a 5–10 percent higher cost than it should and purchases gas for a whopping 10–20 percent higher than the market price, the CEO wrote in a Facebook post.
Last year, one of Ukrspyrt’s former acting directors was assassinated in Kyiv. This year, his predecessor was detained in Romania and accused of involvement in the killing. The company is widely viewed as a quagmire of embezzlement and inefficiency.
There are also more banal issues. Most of Ukrspyrt’s factories were built after World War II and run on outdated equipment. And Ukrspyrt’s longstanding monopoly has other negative effects. “The price of Ukrainian pure alcohol is the highest in the world,” says Yuri Sorochynsky, CEO of Ukraine’s Nemiroff Vodka Company.
When the Kyiv Post interviewed Ukrspyrt’s reformist temporary acting director Roman Ivaniuk in October 2015, he said he was running the firm as if it was on the government’s privatization list, even though it wasn’t.
Less than three years later, Ivaniuk is gone and the company has seen over five directors since he left. But the Verkhovna Rada is now discussing privatizing Ukrspyrt — although vodka producers are skeptical that anything will come of it.
Since 2014, state-owned ethanol monopoly Ukrspyrt has seen over five temporary directors and management teams. Many other government enterprises have witnessed a simillar change of administration.
Luchechko — a former advisor to Ivaniuk — is taking a similar approach to his colleague. He is currently in the running to be appointed permanent director, but has no clue when (or if) the government will make a decision. So he is ignoring that uncertainty.
“From our first minutes [on the job], regardless of title, we rolled up our sleeves and brought a young team in here,” Luchechko told the Kyiv Post at Ukrspyrt’s headquarters. Many of the employees had no previous experience with the alcohol industry, but came from the broader business community.
They began what Luchechko terms a “total reset” of the bloated, inefficient firm. He says the company now carries out all its purchases through the transparent Prozorro procurement system. They are also cutting expenses. Luchechko decided to enter the energy market in order to decrease gas expenditures, which make up a large component of Ukrspyrt’s prime cost. The new gas trader license allows the company to purchase gas in the summer, when prices are lower, and store it until the winter season.
According to Luchechko, Ukrspyrt now also buys its grain at the best possible prices — sometimes even 200–300 hryvnia (roughly $7.50 to $11.50) less than what agro-traders typically pay. The reason, he says, is that the firm’s factories are located in rural areas and don’t need to pay transport costs for the grain. As with gas, Ukrspyrt buys grain in the fall period, when prices are low, and lays it aside for the future.
But larger problems persist. “When we started making sense of the company’s operations, we understood that everything is backwards. Literally everything!” Luchechko says. Specifically, 90–95 percent of Ukrspyrt’s production is potable alcohol. In the rest of the world, 80–90 percent tends to be technical alcohol and bioethanol.
Privatization in three stages
Luchechko emphasizes that he and his team are absolute supporters of efforts to de-nationalize Ukrspyrt and end its monopoly on alcohol production. But that privatization must be prudent.
He is particularly concerned about preserving the company’s infrastructure. Ukrspyrt’s factories are largely located in rural areas, where the socio-economic situation is quite sensitive. Trade unions play a significant role in running Ukrspyrt enterprises — something that is not the case in private enterprises.
“The human capital we have in our enterprises, the production platforms we have — if we give them up [hastily] they will be closed and destroyed,” Luchechko says.
Instead, he envisions privatization in three stages. The first stage is identifying production platforms that are no longer useful for producing alcohol and handing them over to the local communities where they are located so that they can be repurposed.
The second stage is redirecting the work of enterprises that can still produce alcohol, but are no longer competitive. Ukrspyrt has many factories that produce molasses alcohol, which is currently “falling from the potable alcohol niche,” Luchechko says. But he believes these enterprises can be competitive producing bioethanol and technical alcohol.
Currently, Ukraine imports $4.2 billion in oil products, each of which contains bioethanol. Ukrspyrt proposes replacing some of this oil with domestically produced biofuels. If Ukraine can create a normative foundation to do this, it will be attractive to investors, Luchechko believes.
Finally, the third step would be to privatize the 15 factories that make up Ukrspyrt’s flagship facilities. These enterprises could enter the stock market or sell shares. And the previous two steps would allow the company to see what went wrong during privatization and to avoid chaos.
Vodka companies are the main buyers of Ukrspyrt’s potable ethanol alcohol, the raw material for their product. (Courtesy)
Outside view
But meaningful change is limited, say vodka industry representatives interviewed by the Kyiv Post. They believe that, if the government were serious about reforming Ukrspyrt, they would have already seen more action on it.
“As long as there is no political will, there won’t be anything,” says Alina Sholokhman, executive director of UkrVodka, an association of vodka producers.
Beyond that, however, there have been some improvements. Dialogue has increased between Ukrspyrt and vodka producers, who are the top buyers of the state company’s raw materials, says UkrVodka general director Volodymyr Ostapiuk. Thanks to these consultations, Ukrspyrt cancelled a planned increase of the price of ethanol.
“They hear us — not always, but it’s a normal process,” he says. “We want to buy cheaper, they want to sell higher. We tried to find a balance of interests, and we likely found one.”
Luchechko says his team’s efforts are beginning to pay dividends and Ukrspyrt is “starting to see a wave of commercial proposals.” He isn’t worried about whether he will be selected as Ukrspyrt’s permanent director.
“My task as [temporary] director is to launch a permanent process of improving the company,” he says. “I am convinced that the things we are changing…will become the foundation for any person who becomes director.”
