Ukraine state-owned enterprises weekly — Issue 147

Editor's Note: This is issue 147 of Ukrainian State-Owned Enterprises Weekly, covering events from Sept.

8-14, 2024. The Kyiv Independent is reposting it with permission.

Corporate governance of SOEs

Former Ukrenergo's CEO Kudrytskyi interviewed. Volodymyr Kudrytskyi, who was dismissed as Ukrenergo's CEO on Sept.

2, was interviewed by Ekonomichna Pravda (EP) this week. We selected the key issues:

On dismissal:

• "This story did not start last week. It is already three years old. Since the end of 2021, the Energy Ministry has been trying to change the company's management.

  At that time, the powers of the (previous) supervisory board were terminated, and a new one had not yet been elected. The Energy Ministry issued an order to expand Ukrenergo's executive board to include five representatives nominated by the ministry. But this order was cancelled the day after it was issued.

  In April 2022, the deputy minister asked the supervisory board to appoint two people from the Ministry to the executive board, but that also failed."

As we wrote in Issue 55 almost three years ago, there was an attempt to displace or dilute the management of Ukrenergo before the supervisory board was appointed in December 2021 - that is, while the Energy Ministry was still exercising the powers of the supervisory board. Back then, the ministry only managed to terminate the powers of two Ukrenergo's executive board members, Andriy Nemyrovskyi and Maksym Yurkov. As we wrote in Issue 103, on Sept.

20, 2023, Ukrenergo reported that the Prosecutor General's Office searched its head office by order of the Pechersk District Court issued on Aug.

30, 2023. Ukrenergo stated that it would have willingly provided investigators with all the necessary documents without a search, but law enforcers had not requested a voluntary handover.

Ukraine's parliament backs major tax hike in first reading Ukraine's parliament approved on Sept.

17 a bill that proposes a tax increase of Hr 58 billion (£1.4 billion) in 2024 and Hr 137 billion (£3.3 billion) in 2025.

The documents of interest included some contracts that the State Audit Service of Ukraine (SASU) had audited by March 2023. According to liga.net, the search was part of a criminal case opened by the Internal Affairs Ministry on Sept.

16 2023, based on the results of that audit. The said contracts pertained to several companies that supplied goods and services to Ukrenergo in 2019-2023, the media reported.

Ukrenergo said that it was challenging the audit results in court, as it considered them "biased and unprofessional" and "some of them directly contradicting the law."

• "Recently, there have been a lot of negative publications in the media about me and the company. There have been a lot of inspections on our sites, and they have become very intense. There is a certain activity of law enforcement agencies that we see.

  And on Aug.

  30, there were a bunch of reports that allegedly the Supreme Commander-in-Chief's Staff had made some decision regarding my suspension or dismissal. But I was not at that meeting, so, unfortunately, I cannot comment on this information. In this situation, I convened the supervisory board because, obviously, there were events that required a reaction from them.

  It was very important to ensure that any decisions that were made, especially personnel decisions, were made by the supervisory board, and not, for example, in the way they tried to make them in 2021."

As we reported in Issue 146, on Sept.

2, Ukrenergo's supervisory board dismissed Kudrytskyi by a majority vote. On the same day, Daniel Dobbeni (independent member and supervisory board chair) and Peder Andreasen (independent member) announced that they had filed their resignation notices. On the reasons for dismissal:

• "Since Ukrenergo has up to Hr 100 billion (around £2.4 billion) of revenues a year and financial support from Western partners worth 1.5 billion euros, it is certainly a company that is always in the spotlight.

  Given that the Energy Ministry has gained a lot of influence over the regulator, the National Energy and Utilities Regulatory Commission (NEURC), by appointing people who were recently the ministry's employees as NUERC members, it appears that there was only one "naughty" company in the sector."

Germany pledges over £110 million in winter aid for Ukraine Russia is once again planning a "winter war with the aim of making the lives of people in Ukraine as terrible as possible," German Foreign Minister Annalena Baerbock said.

• "I think this (dismissal) is related to the desire to gain more control over everything that happens at Ukrenergo. Perhaps the goal is to bring all these future investments in the reconstruction of the power sector and development of new generation capacities under their control.

  In addition, of course, Ukrenergo has always caused trouble (for them) by the (low) purchase prices for equipment and materials, which we have always published, and which are often lower than those of other companies in the energy sector."

• "We can state that there is now only one center of responsibility in the energy sector. This is the Energy Ministry. It is responsible for everything that happens in SOEs in the (Ukrainian power) industry or energy system."

On the protection of Ukrenergo's substations:

• "The first level of protection is protection from (drone or missile) debris.

  The second is engineering structures that protect the equipment from Shahed drones, and the third is that from missiles. The first one is 100% complete, the second one has been constructed, but only at 60 Ukrenergo substations - it has not been built at any other facilities, such as power plants (which are operated by other SOEs rather than Ukrenergo)."

• "There are 22 substations to be protected by the third level, and that requires about Hr 100 billion (around £2.4 billion). This project is currently on hold because one needs to find money for it.

  The client here is the State Agency for Restoration, which signed contracts with contractors. The main problem in implementing such a project is to find money for it. The Reconstruction Agency must look for the money.

  At the moment, there is no leadership of this agency. When it is appointed, I think this will be their task."

As we wrote in Issue 145, the ostensible reason for Kudrytskyi's dismissal was allegedly insufficient protection of Ukrenergo's facilities and, as a result, problems with electricity that arose after a Russian attack on Aug.

26, 2024. On power rationing:

• "We have already repaired most of the damage after the last massive attack, so there are no problems in Ukrenergo's network.

  We have enough generation because the heat has subsided, and consumption has decreased. Unless the heat increases or another problem occurs at some nuclear power plant, we should have enough electricity. (However, even without new Russian attacks, scheduled power outages should be expected) in December. (In Ukraine's case,) it is cold weather that will trigger electricity rationing."

• "I think that there would be blackouts in cold weather, even if all plans to restore generation are implemented."

EU preparing to raise up to 40 billion euros in loans for Ukraine without US, FT reports The EU is preparing to gather up to 40 billion euros (£44.5 billion) in loans for Ukraine as Budapest keeps disrupting plans on a joint loan with the U.S., the Financial Times reported on Sept.

16, citing sources and a draft proposal.

• "If the attacks are the same as we have seen before, there will be no apocalypse. In winter, there would be power outages from time to time, but the heating and water supply systems, where they are centralized, would work."
• "We have ordered as many transformers as we had before the first attack. You don't have to worry about transformers.

  We have transformers with a total capacity higher than Poland's entire consumption."

As we reported in Issue 145, Ukraine faced the largest Russian missile and drone attack on its energy facilities. Due to the attack, Ukrenergo was forced to introduce power outages. On decentralized generation:

• "The development of decentralized generation is currently entirely the responsibility of the Energy Ministry.

  It determines who gets to build and how much, and it controls the process. According to my information, only 60 megawatts has been built so far. One station was getting connected (to the power system) for a year and a half.

  The second one, as far as I know, was commissioned recently. If the process of building decentralized generation continues to be carried out in a centralized way, then one year from now, we will be talking about how nothing has been built."

On his plans after dismissal:

• "I am going to stay in Ukraine (but) am not prepared to talk about the format in which I am going to do things I like. But it will certainly be about attracting investment from, and promoting decentralized generation by, the private sector.

  At the moment, I am not running for any public office, and I do not intend to."

Ten candidates may have applied for the position of PrivatBank's new CEO, Forbes Ukraine wrote. These supposedly include current top managers of PrivatBank and foreign bankers, the media added. According to Forbes Ukraine, several Ukrainians may have applied for the position:

All of the above candidates either declined to comment on their possible participation in the competitive selection, neither denying nor confirming it, or did not respond, the media added. Note that disclosing the names of potential CEO candidates would be a poor practice that harms competitive selection. Firstly, the potential employer should ensure the confidentiality of candidates, as applicants would rarely want their current employer to know about their application.

Secondly, this information is typically market-sensitive.

Media: Cyprus revokes citizenship of Ukrainian oligarch Kolomoisky Cyrpus has stripped Ihor Kolomoisky's Cyrpus citizenship after concluding that the notorious Ukrainian oligarch had withheld vital information related to criminal charges he faces, Philenews reported.

According to Forbes Ukraine, the following foreign candidates have also applied for the CEO position:

• three current top managers working for European banks -- Swedbank, Intesa Sanpaolo, and Raiffeisen Bank. The media does not name them because they still have employers in other countries;

It is surprising that Forbes Ukraine chose to discriminate between "Ukrainian" and "foreign" candidates.

All the "Ukrainian" candidates listed above also currently have other employers. In addition, one of them, Shevalev, serves as an alternate board director at the European Bank for Reconstruction and Development (EBRD) in London, U.K. "I think, this time, there is a request to elect a Ukrainian rather than a foreign CEO," Forbes Ukraine's source hypothesized.

As we reported in late June 2024, Gerhard Bosch filed his resignation as PrivatBank's CEO. See Issue 138 for more detail. As we wrote in September 2024, Bosch's contract would be terminated on Nov.

1, 2024. See Issue 146 for more detail.

Banks

PrivatBank receives 400 million euros in portfolio guarantees from the EBRD for business lending. On Sept.

11, PrivatBank reported that it signed a risk-sharing agreement with the European Bank for Reconstruction and Development (EBRD), which would enable the issuance of new loans worth 400 million euros. According to the bank, this agreement includes lending support components:

• with grant support from international donors - for loans for investment purposes;
• energy independence projects for business clients;
• for condominiums and individuals;
• for micro, small and medium-sized clients;
• projects supporting women's businesses, veteran businesses, relocated businesses, and businesses affected by the hostilities.

The new financing will increase opportunities for credit support to Ukrainian businesses and expand funding for projects that promote food production, energy efficiency, and energy production, PrivatBank also said.

Ukraine launched production of 155-mm artillery shells, official says

Ukraine already produces its own 155 mm artillery ammunition, said Oleksandr Kamyshin, newly appointed advisor to the President of Ukraine on strategic issues.

Ukrgasbank raises 150 million euos in EBRD's guarantees to finance investments in energy projects. On Sept.

12, Ukrgasbank reported that it joined the EBRD's Energy Security Support Facility (ESSF) program that would provide better access to finance for energy security investments in Ukraine. EBRD extends a 150 million euros portfolio-risk-sharing facility to Ukrgasbank, which will support its lending to small and medium-sized enterprises, households, municipalities, and medium-sized corporate clients for implementing decentralized energy generation and energy efficiency measures, the bank said. Through the ESSF, the EBRD covers part of the risk of the respective partner financial institutions for investment in decentralized energy generation, Ukrgasbank explained.

Energy sector

Ukrnafta earns Hr 10.6 billion (£255 million) in net profit in January-June 2024 (audited). On Sept.

11, Ukrnafta released a statement saying that Crowe Erfolg Ukraine, Crowe Audit & Accounting Ukraine completed its independent audit. Ukrnafta's financial statements were not available at the time of writing. In addition, the above statement suggests that Ukrnafta changed its auditor again.

Before the company's shares were seized by the state in November 2022, its financial statements were audited by a Big Four firm, PwC. As we wrote in April 2024 (Issue 126), the company's results for 2023 were audited by Grant Thornton, who now appears to have audited Ukrnafta only that year. Ukrnafta also said that it paid Hr 20.2 billion (£486 million) to the state budget in taxes, duties, dividends, and customs payments for the first half of 2024.

"Since being managed by the state and run by the new management from the end of 2022, the company has received almost Hr 40 billion (£964 million) in profit," Ukrnafta's CEO Sergii Koretskyi said on his Facebook page. To the best of our knowledge, Ukrnafta has never disclosed its financial statements, either audited or unaudited, or other official reporting for 2022 or 2023. As we wrote in Issue 136, Ukrnafta said that it paid Hr 3.5 billion (£84 million) in dividends to Naftogaz, fully covering its dividend obligations for the previous year.

In accordance with the Cabinet's decision, Ukrnafta must allocate 30% of its net profit for 2023 in dividends, provided that 50% of the profit is used for capital investments approved by the Cabinet in the company's 2024 financial plan. As we reported earlier, on March 1, the Cabinet of Ministers approved Ukrnafta's financial plan for 2024. Ukrnafta's CEO Serhii Koretskyi then said that Ukrnafta earned Hr 24 billion in net profit in 2023 (around £600 million at the time).

See Issue 122 for more detail. As we wrote in Issue 115, Ukrnafta paid over Hr 25 billion (around £600 million) in taxes in 2023.

Russia buys Western aircraft parts via intermediaries despite sanctions, media reports Russia managed to import aircraft tires worth £30 million from Western and other foreign manufacturers last year despite sanctions, The Guardian reported on Sept.

12, citing a report from a Ukrainian agency it had obtained.

As we wrote in SOE Weekly's Issue 90, Ukrnafta's financial plan for 2023, approved by the Cabinet of Ministers, expected Hr 74 billion (£1.8 million) in net income from operations, Hr 12 billion (£289 million) in net profit, and Hr 25 billion (£602 million) in tax payments. As we wrote in Issue 100, in his analysis for Forbes Ukraine, CASE Ukraine's economist Vasyl Povoroznyk contested Koretskyi's statements on the company's quarterly profits, lower costs, higher production, and transparency. He concluded that Ukrnafta's financial performance was driven by two factors: higher market prices for petrol and diesel (45% and 54%, respectively) and Ukrnafta's sale of gas which the company received as repayment of part of Naftogaz's historical debt to Ukrnafta.

Povoroznyk also said that the financial reporting disclosed by Naftogaz -- Ukrnafta's majority shareholder who includes Ukrnafta's reporting in its consolidated reporting -- did not square with numbers named by Koretskyi. In Issue 68, we reported that the shares of Ukrnafta, Ukrtatnafta, Motor Sich, AvtoKrAZ, and Zaporizhzhiatransformator (ZTR) were seized "for the needs of the state" and transferred to the Defense Ministry on Nov.

6, 2022. After the seizure, the state replaced the supervisory boards and executive management at most of these companies.

Former CEO of WOG gas stations chain Serhii Koretskyi became the CEO of both Ukrnafta and Ukrtatnafta on Nov.

8 and 10, respectively. See Issue 68 for detail. No public statements on the performance of the other company, Ukrtatnafta, audited or unaudited financial statements, or other official reporting for 2022, 2023, or the first half of 2024 are available in the public domain.

Privatization

The ninth attempt to sell Bilhorod-Dnistrovskyi port fails.

According to Prozorro.Sale, an auction for the sale of the Bilhorod-Dnistrovskyi trade seaport, scheduled by the State Property Fund of Ukraine (SPFU) for Sept.

6, failed due to the absence of bidders. The starting price was Hr 178 million (£4.2 million). This was the ninth attempt to sell the port.

According to CASE Ukraine, despite the attractiveness of the asset, there are no bidders because the port has debts of Hr 151.3 million (£3.6 million). The winner would also have to pay VAT of 20% of the purchase price. That is, in total, the new owner would have to pay at least Hr 365 million (£8.79 million), CASE Ukraine added.

The SPFU scheduled another privatization auction for Bilhorod-Dnistrovskyi for Sept.

16. The starting price halved to Hr 89 million (£2.14 million). This suggests that, based on CASE Ukraine's information, the winning bidder would have to pay at least Hr 258 million (£6.22 million) in total.

The first privatization auction for Bilhorod-Dnistrovskyi in March 2023 failed as no one registered. At the second auction, the seaport was sold for Hr 220 million (around £5.3 million at the time) to Ukrdoninvest LLC, a company owned by Ukrainian businessman Vitaliy Kropachov. However, Ukrdoninvest did not pay up.

As we reported in April 2023 (Issue 85), the company said that it backed out while hashing out the terms of the purchase agreement with SPFU's regional office in Odesa and Mykolaiv oblasts. In June 2023, SPFU announced that it would put Bilhorod-Dnistrovskyi up for privatization for a third time, another attempt that failed. (See Issue 93.) In Issues 99 and 100, we reported about the following failed attempts to sell the port. As we wrote in August 2024 (Issue 144), former Deputy Minister of Infrastructure Viktor Dovhan posted on Facebook suggesting that Polish investors were considering participating in the privatization of the port.

For more detail, see SOE Weekly's Issues 74, 78, 79, 84, 85, 87, 93, 99, 100, and 144 - SOE Weekly. Ukrainian SOE Weekly 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. The contents of this publication are the sole responsibility of the editorial team of the Ukrainian SOE Weekly.

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.

Editorial team: Andriy Boytsun, Oleksiy Pavlysh, Dmytro Yablonovskyi, and Oleksandr Lysenko.

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