• Corporate governance of SOEs

• SOE updates

  • Energy sector

  • Infrastructure

• Privatisation

• Confiscation of the aggressor state’s assets, nationalisation, and asset seizure

• Procurement notices – powered by Prozorro

Corporate governance of SOEs

CEO of GTSOU still not appointed. The government has yet to appoint a new CEO for the Gas Transmission System Operator of Ukraine (GTSOU), more than five months after the dismissal of the previous CEO, Serhiy Makogon, in September 2022.

The supervisory board of the Main Gas Pipelines of Ukraine – Mahistralni Gazoprovody Ukrainy (MGU) announced a competitive selection on 25 November 2022. No further information has been released publicly, including how many candidates applied or when the selection would be completed.

[MGU is the owner of GTSOU, and MGU’s supervisory board acts as the general meeting of GTSOU. It is in that role that the MGU’s supervisory board was running the competitive selection for GTSOU’s CEO. – SOE Weekly.]

In SOE Weekly (Issue 67), we reported that the candidate list leaked to the media. According to Ekonomichna Pravda’s (EP) sources, 19 candidates were longlisted. The submission deadline was 12 December 2022, suggesting that all applicants were screened, and the longlist was drawn up in less than a week.

In SOE Weekly (Issue 67), we reported that the previous CEO, Makogon, was dismissed by MGU’s supervisory board on 16 September 2022. Makogon was succeeded by acting CEO Paweł Józef Stańczak. Prior to that, Stańczak worked as GTSOU’s Deputy CEO for Development and Transformation.

Makogon criticised the new competitive selection, noting that the longlist included no foreign candidates. He said that the selection procedure was for show, and he had no doubt as to who would be shortlisted. Makogon said that many reputable candidates, who were contacted by the executive search company supporting the selection [Odgers Berndtson – SOE Weekly], flatly refused to apply.

Earlier, Makogon said that before his dismissal, MGU wanted to establish an executive board [allegedly aiming at diluting Makogon’s powers without dismissing him – SOE Weekly]. However, now that he has been dismissed, MGU no longer requires any executive board and merely wants to appoint a loyal CEO, Makogon claimed.

According to media reports, in June 2022, MGU’s supervisory board formally proposed Serhiy Oleksiyenko and Andriy Khomenko as CEO candidates without a competitive selection, but the Cabinet did not approve either.

Ukrainian security issuers now required to disclose information about their ties with Russia and its satellites. On 21 February 2023, the National Securities and Stock Market Commission (NSSMC) established a procedure for security issuers to disclose information on their ties with risk-zone countries, namely Russia, Belarus, Iran, and North Korea.

The NSSMC’s new Decision mandates that security issuers (which include SOEs and state-owned banks registered as joint-stock companies) should submit this information to the NSSMC by 30 April 2023.

The disclosure must include any material information on the company’s engagements with or in Russia and its satellites. Specifically, the disclosure should state whether:

• the company’s owners include risk-zone countries’ citizens, residents, or legal entities;
• the company’s governing bodies include risk-zone countries’ citizens or residents;
• the company has any commercial relations with risk-zone countries’ counterparties, including legal entities controlled by risk-zone countries;
• the company has any subsidiaries, branches, representative offices, or other units operating in risk-zone countries;
• the company has any joint ventures with risk-zone countries’ citizens, residents, or legal entities;
• the company has any equity stakes (shares) in a legal entity domiciled in or controlled by risk-zone countries; and
• the company holds any securities other than shares of a legal entity domiciled in or controlled by risk-zone countries.

In addition, the same requirement is included in the new Draft of the NSSMC Regulation on Disclosure.

The initiative to establish disclosure rules for business ties with the aggressor state and its satellites evolved from the International Working Group on Russian Sanctions, driven by its members Oleksandr Lysenko and Andriy Boytsun. Later, Oleksandr Lysenko developed specific disclosures rules together with NSSMC.

These rules aim at increasing awareness of companies and banks’ investors, creditors, clients, and other stakeholders of ties with aggressor states. Exposing such business ties can significantly increase the reputational risks for these organisations and make their reputational costs prohibitive, causing them to sever their links with Russia and its satellites.

Note that NSSMC’s Decision and Draft Regulation on Disclosure only cover NSSMC’s supervisees, that is, security issues. In other words, it does not cover uncorporatised SOEs (such as state unitary enterprises) or private companies that do not issue securities. A similar legal framework for these entities needs to be developed and adopted.

SOE updates

Energy sector

Naftogaz takes over another part of Firtash’s gas distribution companies. On 17 February, the Cabinet of Ministers approved the transfer of shares in several gas distribution companies to Chornomornaftogaz, a Naftogaz subsidiary, to prevent the risk of an emergency in the energy sector.

The said shares of these companies are part of fugitive oligarch Dmytro Firtash’s Regional Gas Company (RGC) Group, and they were seized in criminal proceedings earlier. According to media, they include:

• 61% of shares in Ternopilgaz;
• 81.36% of shares in Korostyshivgaz;
• 32.9% of shares in Kirovohradgaz;
• 14.68% of shares in Khmelnytskgaz;
• 65.77% of shares in Melitopolgaz; and
• one share in each of a number of other gas distribution companies.

[The media did not specify the names of the “other gas distribution companies”. It is also unclear why exactly one share in each of them had to be seized. – SOE Weekly.]

The controlling stake (51% of shares) in Kirovohradgaz is already owned by Naftogaz.

In SOE Weekly (Issue 71), we reported that Naftogaz changed the management of regional gas distribution companies Kharkivgaz and Dniprogaz on 16 January 2023. Both were also part of Firtash’s RGC Group.

RGC accused Naftogaz of an “attempted raid”. In response, Naftogaz referred to the Cabinet of Ministers’ Decision No. 429-r dated 28 May 2022, which transferred the corporate rights of about 20 regional gas distribution companies to its subsidiary Chornomornaftogaz.

Earlier in May 2022, Kyiv’s Pechersk Court seized shares of Firtash’s regional gas companies because they evaded payment for the use of gas networks. (After that, the Cabinet transferred these rights to Chornomornaftogaz.) RGC then filed lawsuits to overturn the Pechersk Court’s decision. This delayed the process of changing management significantly.

In September, Naftogaz established a new subsidiary named the Gas Distribution Networks of Ukraine LLC to consolidate the regional gas distribution companies.

[It does not appear logical that the seized shares in the above gas distribution companies are transferred to Chornomornaftogaz rather than the Gas Distribution Networks of Ukraine, both of which are Naftogaz subsidiaries. Ekonomichna Pravda suggested earlier that Naftogaz is doing this in order to clear itself of the Firtash companies’ debt and impose that debt on the Gas Transmission System Operator of Ukraine (GTSOU). – SOE Weekly.]

Infrastructure

Former Infrastructure Minister Pyvovarsky charged with causing more than $30 million in damage to the state. On 22 February 2023, the National Anti-Corruption Bureau of Ukraine (NABU) and the Specialised Anti-Corruption Prosecutor’s Office (SAPO) charged Andriy Pyvovarsky, the former Minister of Infrastructure, with abuse of power, which allegedly caused more than $30 million in damage in 2015. Pyvovarsky served as the Minister of Infrastructure in the Arseniy Yatsenyuk government from December 2014 to April 2016.

His First Deputy, Volodymyr Shulmeister, who was the First Deputy Minister of Infrastructure, as well as chaired the Ministry’s Tariff Council at the time, was also charged in absentia.

According to NABU, in 2015, Pyvovarsky and Shulmeister issued an order allowing private companies to charge half the harbour dues at Pivdenny seaport. The water area of this port is state property in the use of Ukrainian Sea Ports Authority (USPA). Only a state enterprise has the right to charge harbour dues, NABU said.

Due to Pyvovarsky’s order, the state received only part of the funds it was owed; the rest was collected by private companies. As a result, the state suffered $30 million in damages, which experts confirmed, NABU claimed.

According to NABU, the order was adopted without proper economic justification and contrary to the comments of the Department of Economics and Finance of the Ministry of Infrastructure and USPA.

Pyvovarsky responded on Facebook that according to the Law “On Sea Ports of Ukraine,” proceeds from tonnage tax are distributed between the user of the port’s harbour (the USPA in this case) and the owner of the operational harbour (in this case, private company TIS). He argued that the Ministry’s order was therefore not a crime.

Pyvovarsky added that the order, which changed the procedure for distributing ship dues, was previously approved by a number of ministries and agencies, including a Cabinet of Ministers meeting and discussion at the Tariff Council.

The order was also cleared by the Ministry of Justice, “and therefore checked for compliance with the current legislation of Ukraine,” Pyvovarsky said.

[Note that Ministry of infrastructure effectively fulfils three roles for USPA: (i) owner, (ii) policymaker, and (iii) regulator. According to the OECD Guidelines on the Corporate Governance of SOEs, the state’s roles as owner, policymaker, and regulator should be separated.

In particular, tariffs should instead be set by an independent regulatory body, with no influence from the Minister of Infrastructure. No such regulator has been established for the transport sector in Ukraine to date, despite calls to do so by experts since at least 2016 and intentions of the Ministry of Infrastructure since 2017.

Note also that such regulator should be independent and must ensure a level playing field for both SOEs and private companies. This implies that if a private player is legally entitled to collect certain payments, it should not face discrimination relative to SOEs.

If such an independent regulator with proper governance had been installed, there would be fewer reasons for the law enforcement agencies to be involved in cases related to establishing tariffs. – SOE Weekly.]

Ukrzaliznytsia to receive a $25 million grant from the World Bank. On 21 February 2023, Ukrzaliznytsia’s CEO Oleksandr Kamyshin reported that the company would receive a $25 million grant from the World Bank to buy and build container platforms.

According to Kamyshin, Ukrzaliznytsia has not yet received these funds.

The grant is part of a $50 million pledged by the World Bank for the repair and restoration of Ukraine’s transportation network. This is in addition to the World Bank’s $535 million loan approved earlier, Kamyshin said.

In SOE Weekly (Issue 72), we reported that Ukrzaliznytsia took losses of UAH 10.8 billion in 2022. The loss from passenger transportation was UAH 13.3 billion [suggesting that the company’s other segments, such as cargo transportation, made a profit of 2.5 billion. – SOE Weekly.]

Ukrzaliznytsia also expected to lose UAH 20.2 billion in 2023 due to the large social burden and restrictions on cargo transportation.

In SOE Weekly (Issue 68), we reported that after Russia’s invasion, the Ukrainian government effectively gave Ukrzaliznytsia new tasks. We also provided details of the financial support that the government, Ukrgasbank, and international partners provided to Ukrzaliznytsia throughout 2022.

Ukrzaliznytsia may set up a cargo carrier to operate in Europe. On 21 February 2023, Ukrzaliznytsia’s CEO Oleksandr Kamyshin reported that Ukrazaliznytsia may establish a company to transport cargo in Europe by the end of 2023.

The need for such a company outside Ukraine has been driven by Ukrainian cargo carriers’ difficulties in working with European carriers, Kamyshin said.

He added that it is necessary not only to purchase rolling stock, but also to obtain a license, registration, and recruit a team, in order to establish a cargo carrier.

“There is hope, and we are doing everything to make it come true [by the end of 2023], but… we would like [the speed of approvals in Europe] to be faster,” Ukrzaliznytsia’s CEO said.

In SOE Weekly (Issue 10), we reported that according to then Director of Ukrzaliznytsia Cargo Business Unit Irakli Ezugbaia, the rail operator would establish a separate entity for its cargo business called UZ Cargo during the company’s reform. Ezugbaia said back then that cargo transportation remained the only profitable segment for Ukrzaliznytsia. The immediate task was to ensure a transparent, efficient structure for UZ Cargo.

[Based on publicly available information, the plans to unbundle the cargo business in a new entity have never been implemented. In establishing a separate cargo transportation entity outside Ukraine, it may be useful to get back to the idea of unbundling all Ukrzaliznytsia’s cargo operations in a separate entity. – SOE Weekly.]

Privatisation

Large-scale privatisation to be launched through online auctions. On 21 February 2023, the Cabinet of Ministers approved an electronic auction procedure for the sale of large-scale privatisation objects – defined as having assets worth more than UAH 250 million.

Previously, large-scale privatisation objects were sold at offline auctions, unlike small-scale ones.

According to the State Property Fund of Ukraine (SPFU), in order to fully launch large-scale privatisation, the Verkhovna Rada needs to pass a decision allowing the SPFU to set requirements for potential investors.

[It is unclear what the SPFU meant by this. The Fund did not specify what obstacles prevented it from setting requirements for potential investors, if any. The SPFU also did not say what type of “decision” it wanted the Verkhovna Rada needs to pass, and whether the Fund drafted such a “decision”.

Note that the “large privatisation” procedure was introduced by the Law on Privatisation adopted in 2018. Since that time, only one auction was completed, when First Kyiv Machine-Building Plant (commonly known as the Bilshovyk) was sold for UAH 1.429 billion in October 2021.

As we wrote in SOE Weekly’s Issue 49, various media have suggested that the formal auction participants may have colluded in the bidding (see articles by Kyiv Post, NV Business, and Ekonomichna Pravda).

In SOE Weekly (Issue 50), in November 2021, we reported that the Anti-monopoly Committee of Ukraine (AMCU) announced an enquiry into possible collusion in response to these media reports. Based on publicly available information, in almost one and half years, the enquiry has never been completed.

In SOE Weekly (Issue 55), we reported that the auction winner, General Commerce LLC, paid the UAH 1.4 billion that it had bid at the privatisation auction. The money went into the state budget on 7 December 2021, Dmytro Sennychenko, then Head of the State Property Fund said on Facebook.

In SOE Weekly (Issue 65), we reported that, based on a motion from State Bureau of Investigation (DBR), the court seized 44 real estate objects of the Bilshovyk in January 2022, since they were recognised as material evidence in the criminal proceedings.

Note also that according to a 2018 analysis by two SOE Weekly team members, Andriy Boytsun and Dmytro Yablonovskyi, the second sale of Kryvorizhstal in 2005 was the last and probably the only example of a successful large-scale privatisation in the history of Ukraine.

Since the adoption of the new Privatisation Law in 2018, many large SOEs were put up for sale or prepared for privatisation – such as UMCC, Centrenergo, President Hotel, OPZ, Indar, Krasnolymanksa Coal Mine, and many others – but all these attempts have failed at various stages. – SOE Weekly.]

SPFU prepares for privatisation of ZTMK, ZALK, and Kremniypolimer. On 22 February 2023, the SPFU announced preparations for privatisation of three large enterprises comprising the mining and steel complex in Zaporizhzhia. These include:

• Zaporizhzhia Titanium-Magnesium Plant (ZTMK), the only producer of spongy titanium in Europe;
• Zaporizhzhia Industrial Aluminium Plant (ZALK), the only producer of primary aluminium in Ukraine; and
• Kremniypolimer, the only producer of organosilicon products in Ukraine.

[According to SPFU, electricity in ZTMK has not been paid for years, and as a result, the company owed more than UAH 1.2 billion in 2020. In 2018 and 2019, the company’s losses were UAH 787 million and UAH 656 million, respectively. According to Ekonomichna Pravda’s sources, ZTMK was deliberately dragged into debt. These facts indicate that ZTMK will be difficult to privatise. – SOE Weekly.]

In SOE Weekly (Issue 38), we reported SAPO saying that ZTMK was returned to state ownership. ZTMK previously belonged to the sanctioned oligarch Dmytro Firtash.

According to SAPO, the Commercial Court of Zaporizhzhia Oblast made the ruling, to satisfy SAPO’s claim against Firtash’s Tolexis Trading Limited and ZTMK.

The SAPO said that the court had already made a similar decision in July 2018, which was upheld on appeal. However, the Supreme Court remanded the case for retrial. So far, the court of first instance fully satisfied SAPO’s claim and returned the plant to state ownership.

Later, Tolexis Trading Limited’s lawyer Roman Chyshinsky said that the decision to return ZTMK to state ownership would be challenged in the court of appeal. According to him, the decision was “biased and unfair”.

On 23 May 2022, the Commercial Court of Cassation within the Supreme Court definitively upheld the rulings in favour of the state.

In turn, ZALK was nationalised in 2015, when the state acquired a majority stake in the company. The former owner, Russian oligarch Oleg Deripaska, tried to challenge Ukraine’s decision in international arbitration, but he lost his last shares in the company in February 2023, when the HACC confiscated all of its Ukrainian assets, as we reported in SOE Weekly (Issue 75).

Confiscation of the aggressor state’s assets, nationalisation, and asset seizure

Head of the Sluha Narodu faction proposes to dissolve ARMA and transfer seized assets to SPFU for public sale. On 22 February 2023, David Arakhamia, head of the Sluha Narodu parliamentary faction, suggested that the Asset Recovery and Management Agency (ARMA) should be dissolved, and the seized assets under ARMA should be transferred to the SPFU, where it would be listed in a transparent registry.

According to Arakhamia, ARMA was established to meet one of the conditions for a visa-free regime with the EU, but “in the end, it turned into a closed cabal, where there are a lot of seized assets, and everything is opaque”.

SOE Weekly has reported on ARMA’s dismal performance in early 2021. In Issue 18, we wrote that in 2020, ARMA obtained a meagre profit of UAH 15.7 million (transferred to the state budget). This implied an almost zero return (namely, 0.5%) on the assets under ARMA’s management, which ARMA said were more than UAH 3 billion at the time. ARMA’s own budget for 2020 was UAH 190.45 million, implying that the above profit only covered as little as 8% of the agency own operational budget.

According to Ekonomichna Pravda (EP), the SPFU wants to transform itself into a sovereign fund to manage the largest SOEs and confiscated Russian assets.

Procurement notices – powered by Prozorro

Together with Prozorro, we selected procurement notices announced by top 15 Ukrainian SOEs and four state-owned banks from 16 to 23 February with an expected value of more than UAH 1,000,000. Note that the State Food and Grain Corporation has not used Prozorro since 2017; PrivatBank, since 2018; and Automobile Roads of Ukraine, since 2021.