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The Odesa Portside Plant, which manufactures chemical products, stands in Odesa on Sept. 13, 2017. (Photo: Vincent Mundy/Bloomberg via Getty Images)
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Editor’s Note: This is issue 87 of Ukrainian State-Owned Enterprises Weekly, covering events from May 6-12, 2023. The Kyiv Independent is reposting it with permission.

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. This publication was produced with the financial support of the European Union within the project “Supporting Ukraine in rebuilding and recovery” implemented by the KSE Institute. The contents of this publication are the sole responsibility of the editorial team of the Ukrainian SOE Weekly and do not necessarily reflect the views of the European Union.

Corporate governance of SOEs

The Cabinet published a resolution on Ukroboronprom’s corporatization, but with a six-week delay. On May 4, the Cabinet of Ministers published its resolution to convert the State Concern Ukroboronprom into a joint-stock company called Ukrainian Defense Industry.

As SOE Weekly reported in its Issue 80, the Cabinet said that it approved the corporatization on March 21. In Issue 83, we reported that the corporatization of Ukroboronprom had not yet begun: The government resolution was not public yet.

According to the minutes of the government meeting seen by Liga.net, the resolution was given only one day to be finalized, but its publication was delayed for six weeks.

The leader of the Servant of the People parliamentary faction and former member of Ukroboronprom’s supervisory board Davyd Arakhamia explained that new Minister of Strategic Industries Oleksandr Kamyshin “suspended [the publication] for a little while to look into it.”

It is unclear why Kamyshin suspended the publication of a resolution that was already approved by the Cabinet, and whether he has the authority to do so.

In Issue 80, we reported that on March 21, the Verkhovna Rada appointed former Ukrzaliznytsia’s CEO Kamyshin as the new Minister for Strategic Industries.

The publication of the resolution officially launches the corporatization of Ukroboronprom. The resolution provides for the establishment of the joint-stock company Ukrainian Defense Industry (UDI for short) through the transformation of the State Concern Ukroboronprom.

The authorized capital of the company will be Hr 237 million ($6.5 million). The charter of UDI and the regulations governing its supervisory board, approved in March, were also published.

According to its charter, the purpose of the company is to strengthen Ukraine’s defense capability, implement effective management, investment, and innovation development of Ukraine’s industry, as well as regulate, control, and coordinate the activities of business entities in the defense industry.

The sole founder and shareholder of the company is the state, represented by the Cabinet of Ministers.

According to its charter, UDI must pay annual cash dividends to the state equal to 30% of its profit no later than Sept. 1.

The governance bodies of the company will be the general meeting (effectively, the Cabinet of Ministers), supervisory board, and CEO.

The supervisory board must have six members – three independent and three state representatives. Their tenure will last for three years.

The supervisory board will appoint the CEO.

The concept of corporate governance reform and conversion of Ukroboronprom, including its target model and detailed action plan, was drafted by Andriy Boytsun, Oleksandr Lysenko, and Dmytro Yablonovskyi, members of the SOE Weekly team, as well as the international law firm Kinstellar, in March 2020. For a discussion of these documents, see the OECD Review of the Corporate Governance of State-Owned Enterprises in Ukraine.

In Issue 59, we reported that in July 2021, the Verkhovna Rada adopted Law 1630-IX (previously known as Draft Law No. 3822), which laid the groundwork for Ukroboronprom’s transformation.

On Dec. 9, 2021, the Cabinet of Ministers approved resolutions and ordinances to convert Ukroboronprom into a joint-stock company. The Cabinet also approved the conversion of Ukroboronprom’s 43 uncorporatized enterprises into joint-stock companies or limited liability companies fully controlled by the state.

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Court orders arrest of two people accused of involvement in theft of Hr 500 million ($13.7 million) from UMCC and Odesa Portside Plant. On May 4, the High Anti-Corruption Court (HACC) ordered the detention (in absentia) of the former acting CEO of United Mining and Chemical Company (UMCC).

The Specialized Anti-Corruption Prosecutor's Office, or SAPO, did not name the suspect, but the media identified him as Artur Somov. Somov is allegedly one of the members of the criminal organization that stole more than Hr 500 million ($13.7 million) from the Odesa Portside Plant (OPZ) and UMCC between 2019 and 2021.

On May 8, the HACC also ordered the detention (in absentia) of a former acting СEO of OPZ, Mykola Parsentyev.

Both in the case of Somov and Parsentyev, after their detention and delivery to the place of pre-trial investigation, the investigating judge will decide on the application of these measures of restraint, SAPO added.

In SOE Weekly (Issue 80), we reported that the National Anti-Corruption Bureau (NABU) and SAPO said that they exposed a criminal group run by the former head of the State Property Fund of Ukraine (SPFU), Dmytro Sennychenko. See more about this case in Issue 80.

The court issued a warrant for the arrest of Sennychenko’s former adviser Yuriy Lypko and OPZ’s former acting СEO Mykola Synytsia (see Issue 81).

The suspects in this case, including Sennychenko, Parsentyev, and Somov, were placed on the wanted list. (See more in Issue 83.)

Energy

Naftogaz pays Hr 33 billion ($902 million) in taxes for the first four months of 2023. On May 8, Naftogaz Group reported that it paid almost Hr 33 billion ($902 million) into state and local budgets for January–April 2023.

According to the company, that accounts for 15% of Ukraine’s total tax revenue for this period.

In April alone, Naftogaz Group paid Hr 6.2 billion ($170 million) in taxes – almost 13% of all tax revenues in April, Naftogaz’s CEO Oleksiy Chernyshov said.

Chernyshov said that heat producers only paid 41% of the cost of the gas they used and urged local governments to pay up or restructure their debts with the company. Households that buy gas directly from Naftogaz have paid about 80% of the total costs.

In SOE Weekly (Issue 85), we reported that the Cabinet of Ministers established how much SOEs must pay in dividends for 2022. Naftogaz must allocate 30%, and the rest of the profit must be used to purchase natural gas produced in Ukraine.

In Issue 77, we reported that Naftogaz expected to post a loss of Hr 40 billion ($1 billion) in 2022, according to preliminary results. If Naftogaz gets losses, it will not pay any dividends.

Chernyshov blamed significant receivables that arose due to the state’s use of Naftogaz’s working capital to meet the needs of energy consumers.

He said that the underlying receivables of the company had three components: the difference in tariffs (Hr 36 billion, or $984 million), the debt of regional gas suppliers and gas distribution companies (Hr 76 billion, or $2 billion), and public service obligations (PSOs) for 2022-2023 (Hr 158 billion, or $4.3 billion).

It appears that if Naftogaz gets the compensation for PSOs from the state budget as expected, its net fiscal impact will be negative.

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Energy regulator investigates alleged market manipulation, with DTEK benefiting at Energoatom’s expense. On May 9, the National Energy and Utilities Regulatory Commission (NEURC) started an investigation into whether energy company DTEK caused financial damage to Energoatom. DTEK is owned by Ukrainian billionaire Rinat Akhmetov.

The investigation concerns DTEK subsidiaries DTEK Zakhidenergo, DTEK Dniproenergo, DTEK Kurakhivska TPP, D.Trading, Energo-Gaz, and Energozakhid, as well as the state nuclear operator Energoatom and state-owned energy trader ECU.

NEURC will review these companies’ activities on Ukraine’s electricity market from Feb. 1 to April 30, specifically the day-ahead market and the balancing market.

There are four market segments: (i) market of bilateral contracts, (ii) day-ahead market, (iii) intraday market, and (iv) balancing market.

Ideally, buyers and sellers trade using (i) bilateral contracts. However, as electricity production and consumption are highly volatile and cannot be predicted with much precision, additional volumes are traded in segments (ii) and (iii). In case they fail to fully smoothen the fluctuations, segment (iv), the balancing market, is invoked.

If there is a shortage of electricity, the price in the balancing market is high, as sellers have no other way to buy it if they have not bought the necessary volumes in segments (i), (ii), or (iii). In case of excess supply, the price is low.

NEURC says that it identified possible violations, such as distortion of competition and/or restrictive contractual practices in the market.

The behavior of these market participants may have led to a significant reduction in Energoatom’s sales, creating a significant excess supply of electricity (in the day-ahead market), the regulator said.

The alleged scheme was discussed earlier in social and traditional media. According to these reports, Energoatom failed to sell some of its electricity on the day-ahead market in March due to high prices. Instead, it had to sell it at a much lower price on the balancing market, primarily to DTEK.

As a result, Energoatom made a symbolic Hr 0.01 per megawatt hour instead of at least Hr 2,600 per megawatt hour, observers said. Thus, the state-owned company lost at least 300,000 megawatt hours in March.

If the observers’ data is correct, assuming the minimum price of Hr 2,600 ($71) per megawatt hour, Energoatom has lost at least Hr 780 million ($21 million) this way.

At the same time, Energoatom shifted the “financial responsibility for these imbalances to the ECU by joining its balancing group,” the regulator said. As far as we understand, this suggests that the losses from such a scheme would be covered by ECU’s revenues from electricity exports.

According to observers, ECU is the state-owned trader that was established on the initiative of Deputy Head of the Presidential Administration Rostyslav Shurma and Energy Minister Herman Halushchenko to export electricity from Energoatom. In the summer of 2022, the company was the largest electricity exporter after DTEK. ECU is headed by former DTEK manager Vitaliy Butenko, observers added.

During a NEURC meeting, Natalia Karabenko, head of ECU’s Regulatory Support Department, noted that the regulator had not requested any information that could give grounds to start an investigation.

DTEK’s press service said that the group abides by the law and electricity market regulations.

Privatization

Date set for third auction to privatize Bilhorod-Dnistrovskyi seaport. The SPFU has scheduled a third auction to try to sell the Bilhorod-Dnistrovskyi trade seaport for June 6.

The starting price has been set at Hr 184.92 million, or $5 million (excluding VAT). Bidders must deposit a guarantee fee of Hr 36.98 million ($1 million).

A deposit guarantee of 20% of the starting price is required by law.

The starting price for the first auction was Hr 187.6 million ($5.1 million). For the second one, it was halved to Hr 93.8 million ($2.6 million).

Oleksandr Slavskyi, head of the SPFU’s regional office in Odesa and Mykolaiv oblasts, explained on Facebook that the starting price changed due to the change in the company’s asset value. He added that they decided to relaunch the procedure to start with a full starting price as they saw demand for the asset.

According to SPFU, whoever buys the company must pay its wage arrears within six months of the purchase date. According to Bilhorod-Dnistrovskyi, the wage arrears were Hr 96.4 million ($2.6 million) as of March 31. The final amount will be established when the ownership is transferred.

In the buyer’s expenses on purchasing the asset, the wage arrears effectively add up to the price itself. This means that the effective starting price is no less than Hr 318.3 million ($8.7 million), including VAT and wage arrears.

The first privatization auction for Bilhorod-Dnistrovskyi failed as no one registered.

At the second auction, the seaport was sold for Hr 220 million ($6 million) to Ukrdoninvest LLC, owned by Ukrainian businessman Vitaliy Kropachov. However, Ukrdoninvest did not pay up, failing to explain why.

As we reported in SOE Weekly’s Issue 85, the company said that it backed out while hashing out the terms of the purchase agreement with the SPFU’s regional office in Odesa and Mykolaiv oblasts. Ukrdoninvest did not provide any further details.

Later, SPFU announced that it would put Bilhorod-Dnistrovskyi up for privatization for a third time.

For more detail, see SOE Weekly’s Issues: 74, 78, 79, 84, and 85.

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