In a surprisingly swift move, the government installed acting energy minister Yuriy Vitrenko as the new CEO of state-owned oil and gas company Naftogaz on April 28, according to Ukraine’s Cabinet of Ministers.
Vitrenko’s appointment came as a surprise for Naftogaz head Andriy Kobolyev, who learned about his firing from the media. Kobolyev criticized the government’s decision, claiming it ignores all corporate governance reforms in Ukraine.
“In 2014, Ukraine firmly decided that it’s the state and Ukrainians who would benefit from state ownership — not politicians close to the cash flows. Yesterday’s government decision has sent all this in the trash,” Kobolyev said.
Kobolyev said he would appeal his dismissal in a farewell message to his team on Facebook.
“We are still ready to fight against all this,” Kobolyev said.
But others, including corporate governance expert Andriy Boytsun, said that the government led by Prime Minister Denys Shmyhal followed the law.
“The Cabinet of Ministers played by the rules, but the rules are bad. They’re not consistent with good corporate governance,” said Boytsun, who has served as a consultant on corporate governance to state-owned enterprises, including Ukraine.
Since 2015, Boytsun said he’s advised the government to change the law and give exclusive powers of hiring and firing CEOs to the supervisory boards of state-owned enterprises, but successive governments have refused to give up these powers.
At the same time, Boytsun said, he can understand the government’s frustration.
At the end of 2020, Naftogaz told the government it will have a net profit of nearly $400 million but ended up losing $684 million — a swing of more than $1 billion.
The company had total revenue of $7 billion in 2020.
“The debate today is an indication of progress” in improving corporate governance of state enterprises, Boytsun said.
“But we’re still not there yet.”
The government fired Andriy Kobolyev as CEO of state-owned Naftogaz on April 28, 2021, and hired Yuriy Vitrenko as interim CEO for at least one year. Kobolyev and Vitrenko worked together for years before a falling out in 2020. Just a day earlier, the oil and gas company reported losses of $685 million for 2020. (Andriy Kobolyev/Volodymyr Petrov)
Big losses
Kobolyev was ousted the day after Naftogaz reported the financial losses of $684 million in 2020, its first since 2015.
Naftogaz’s net income in 2020 dropped massively compared to 2019 when the company made $93 million in net profit.
However, the company still managed to pay $5 billion in taxes in 2020, making it far and away the country’s biggest taxpayer, supplying 17% of state revenue.
The cabinet justified its decision by calling the work of Kobolyev and his team “unsatisfactory,” adding it would search for new members for the Naftogaz supervisory board.
Kobolyev, in turn, blamed the COVID-19 pandemic for the losses.
He said the COVID-19 crisis hurt gas consumption and consumers’ ability to pay for it, reducing demand. Kobolyev also blamed the government for enforcing gas prices of $0.25 per kilowatt, about 30% below the market rate.
Aliona Osmolovska, Naftogaz’s director for relations with government regulatory bodies, blamed the company’s debtors for the losses, in a comment for Ukrainian media outlet Kosatka.
Heating companies and gas suppliers owe Naftogaz an astounding $3.6 billion.
“Naftogaz has already paid the state all taxes for gas — rent, VAT, income tax. We also pay interest on loans we borrowed to extract or import this fuel. However, Naftogaz has not yet received payment for it from the heating companies and gas suppliers. Most of these debts have not been paid for over a year, they cannot be explained by a pandemic,” she wrote in April 2020.
Veteran Vitrenko
But those complaints didn’t stop the government from installing Vitrenko as CEO under a one-year contract.
Vitrenko was a top executive of Naftogaz from 2014-2020 and is credited with helping Kobolyev remove corrupt schemes that, under previous presidents, cost taxpayers up to a half-billion dollars monthly to cover.
Vitrenko told the Kyiv Post that he and Kobolyev developed conflicting visions of the future of Naftogaz.
He said the dispute came to a head when Kobolyev let Ihor Kolomoisky’s favored candidate become CEO of Ukrnafta, the Naftogaz subsidiary in which the billionaire oligarch has a minority stake.
Head to head
In remarks to Interfax-Ukraine news agency, Vitrenko defended his appointment, saying that as a shareholder, the government can and must put an end to ineffectual management.
“The government should be an active owner. Respectively, the Cabinet of Ministers has the right and responsibility to respond to problems in the company,” Vitrenko said.
“The profit of Naftogaz is dividends, which the state receives, and the budget counted on them. But it won’t get it.”
According to Vitrenko, operating results were also unsatisfactory.
UkrGasVydobuvannya, Ukraine’s largest gas producer which belongs to Naftogaz, sold and produced less natural gas and fuel in 2020, while private companies managed to increase production.
He also said that the decision to fire Kobolyev fully complies with the law because, as the shareholder, the government has the right to decide the future of the company.
“The Cabinet of Ministers had all the legal grounds, rights, and opportunities to make decisions and, accordingly, to dismiss the head of the board,” Vitrenko said.
After their falling out, leading Kobolyev to dismiss his former partner, Vitrenko lashed out at Kobolyev, accusing him of being “a parasite on the achievements of others.”
Vitrenko said he was dismissed because he “told Kobolyev to his face that his shortcomings as a leader undermined the achievements of our team at Naftogaz and discredited reforms.”
The column went on to say “the facts prove that Naftogaz’s successes do not have to be connected to Kobolyev at all. But the main failures of Naftogaz, as I have already shown, are directly linked to Kobolyev.”
“Kobolyev’s image is the garb from the tale about the naked emperor,” Vitrenko added in his op-ed.
Vitrenko is credited for taking a lead role in successful litigation against Russia’s Gazprom that ended in a more than $3 billion payment last year to Ukraine for violation of gas contract terms.
He also negotiated an agreement through 2024 that guarantees Russia will transport no less than 40 billion cubic meters of gas through Ukraine’s transit pipelines, even if the Russian-German bypass Nord Stream 2 pipeline under construction is completed.
That means revenue of at least $7 billion in transit fees, he said.
Timothy Ash, a London-based analyst who has followed Ukraine’s economy closely for years, said that Vitrenko’s elevation to acting energy minister in December 2020, meant that Kobolyev’s days were numbered in Naftogaz.
Yuriy Vitrenko, the new CEO of state-owned oil and gas company Naftogaz, participates in a briefing held to announce his appointment on April 29, 2021. Vitrenko’s appointment came a surprise for Naftogaz head Andriy Kobolyev, who learned about his firing from the media. Kobolyev said he would appeal his dismissal. (Naftogaz/Facebook)
Corporate governance
The government’s decision, however, provoked an outcry from Kobolyev loyalists.
Before Vitrenko took charge on April 29, the management of Naftogaz called the move “legal manipulation,” according to a statement published on Facebook on April 28.
The Cabinet of Ministers dismissed the supervisory board for two days to be able to fire Kobolyev directly without the consent of the board members.
This move is “an insult to the basic principles of corporate governance of state enterprises,” Naftogaz said.
“It is a clear signal to investors… that the state-owned enterprises in Ukraine are unpredictable and that their operations may change depending on the political situation.”
On April 29, U. S. State Department spokesman Ned Price wrote on Twitter that the Ukrainian government’s “respect for corporate governance, transparency and integrity in the appointment of personnel in the energy sector — whether government or state-owned enterprises — is key to maintaining confidence in Ukraine’s commitment to reform.”
His view was shared by the ambassadors of the G7 countries, including Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
The diplomats issued a joint statement on Twitter, saying that “effective management of state-owned enterprises, free from political interference, is crucial for Ukraine’s competitiveness, prosperity and fulfillment of its international obligations.”
Hlib Vyshlinsky, head of the Center for Economic Strategy, told the Kyiv Post on April 28 that Vitrenko’s appointment threatens corporate governance reform.
“The government wants to bring key state enterprises back under political control,” Vyshlinsky said.
For him, it could mean further problems with the International Monetary Fund and setbacks with the European Bank for Reconstruction and Development, which financed corporate governance reform at Naftogaz.
The IMF and Ukraine agreed in June 2020 to a conditional $5 billion loan agreement, but Ukraine hasn’t received any money since an initial $2.1 billion installment because the government has not met its commitments to the fund, including an effective fight against corruption, independence of the National Bank of Ukraine and other issues.
In August 2020, the EBRD provided a 52 million euro loan to UkrGasVydobuvannya to increase domestic natural gas production, but production dropped.
