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The State Food and Grain Corporation is on the verge of bankruptcy due to its high debts, exacerbated by alleged embezzlement by the company's former management. (National Police)
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Editor’s Note: This is the 61st issue of Ukrainian State-Owned Enterprises Weekly covering events from Jan. 15 to Jan. 22, 2022. The Kyiv Independent is reposting it with permission.

Corporate governance in SOEs

State Food and Grain Corporation on the brink of bankruptcy. Lawmaker Maryan Zablotskyy, from the ruling Sluha Narodu party, wrote on his Facebook page that the State Food and Grain Corporation of Ukraine (SFGC) may go bankrupt this week. According to Zablotskyy, the SFGC is unlikely to repay its next $95 million loan tranche on its own.

Much of the $1.5 billion received from China as a loan in 2012 was stolen during the presidency of Viktor Yanukovych, and about $250 million disappeared from the company’s accounts during a half-year period under the SFGC’s management, which was allegedly related to the Svoboda party. Criminal proceedings have been opened against all these executives, and all these people are on the run, Zablotskyy wrote.

He added that lawmakers are preparing a draft letter to the U.S. Congress regarding the possibility of issuing bonds to Ukraine under “US guarantees.”

Later, Ekonomincha Pravda (EP) published an article, explaining how the SFGC’s debts were accumulated, and claiming that on 21 January the SFGC will default on its debt. According to EP’s interlocutors, the “default scenario”, which automatically invokes a guarantee by the state, has been allegedly supported by the Office of the President.

The SFGC’s debt to China is worth more than a billion dollars, plus potential losses from litigation with China. EP’s source at the Ministry of Finance explained that preparations for a possible default of SFGC had been made since 2017, with funds being budgeted for the fulfilment of state guarantee obligations.

According to EP, the budget for 2022 includes $243 million (Hr 6.9 billion) for state guarantees. This is enough to cover the SFGC payments scheduled for 2022. However, the funds will not be enough if the Chinese side claims the entire remaining amount of the loan, as provided by the agreement – that is, more than $1 billion (Hr 28 billion).

In SOE Weekly (Issue 47), we reported that the Cabinet of Ministers set up an inter-ministerial working group to look into the SFGC’s debts and grain supply obligations to Chinese state-owned companies. SFGC received a $1.5 billion loan in 2012 to be repaid by 2027. It was issued under Ukrainian state guarantees in order to establish a systematic supply of grain to China.

As was reported in SOE Weekly (Issue 44), from January to September 2021, SFGC’s elevators were working at 10% of their total capacity, and the corporation has not sent a single grain shipment to the China National Machinery Import and Export Corporation. This was a record low since the start of their business relationship.

In SOE Weekly (Issue 42), we reported that Andriy Vlasenko, who is suspected of embezzling $2.5 million (Hr 71 million) and placed under house arrest, was “relieved of his duties as acting CEO” by order of the Ministry of Economy dated Sept. 15, SFGC said on its Facebook page, and Vasyl Kovalenko was appointed as new acting CEO.

In SOE Weekly (Issue 39), we reported that National Police investigators established that the management of the SFGC had squandered the corporation’s property by selling grain to offshore companies at reduced prices, without prepayment. On 13 August, the National Police detained Vlasenko at Kyiv’s Zhulyany airport when he was trying to flee Ukraine. His accomplice was detained along with him.

In SOE Weekly (Issue 30), we reported that the SFGC was among the biggest loss-makers among all Ukrainian SOEs, with its 2020 loss totalling as much as $208 million (Hr 5.9 billion).

Ukrposhta starts competitive selection of independent supervisory board members. According to the Ministry of Economy, the SOE Nomination Committee announced a competitive selection for five independent supervisory board members of Ukrposhta.

Ukrposhta’s current supervisory board has served since 10 October 2018.

Ukrnafta announces a new date for the general shareholders’ meeting. Ukrnafta’s extraordinary  general shareholders’ meeting is to take place on 17 February 2022.

This is the third attempt to hold the company’s general meeting. The two previous meetings on 30 November and 23 December did not take place due to the lack of a quorum.

In SOE Weekly (Issue 54), we reported that President Volodymyr Zelenskyy said at a press conference that the split of Ukrnafta’s assets among its major shareholders has not yet been approved, but it would be a way out of the difficult situation with the Naftogaz’s historical debt to Ukrnafta.

The President said that without dividing Ukrnafta, there is a high probability that the companies that own Ukrnafta’s shares [Privat group – SOE Weekly] could win their lawsuit against the state over these debts.

[Naftogaz owns 50% + 1 share of Ukrnafta. A group of companies informally known as the Privat group, associated with oligarchs Ihor Kolomoiskyi and Hennadiy Boholyubov, own about 42% of the shares. – SOE Weekly.]

SOE Updates


Ukreximbank provides $15.5 million (Hr 440 million) to build up social infrastructure in Irpin. The loan agreement between the bank and the Irpin city council has a term of up to 60 months, with funds to be drawn during 2022 and 2023.

Irpin is a Kyiv Oblast town of 60,000 which lies a few kilometers north-west of Ukraine’s capital.

According to Mykhailo Medko, a member of Ukreximbank’s executive board, the funds will be used to build and rebuild schools and kindergartens, sports facilities, a swimming pool, and an ice arena.

[Note that $15.5 million is equivalent to 36% of Irpin’s entire municipal budget for 2022. The estimated cost of the ice arena is as high as Hr 170 million, or 39% of the entire loan amount. – SOE Weekly.]

In SOE Weekly (Issue 52), we reported that Ukreximbank and the Zaporizhzhia City Council signed a loan agreement for $10.5 million for up to five years. According to Ukreximbank, the funds will be used to develop the city’s transportation, housing, and infrastructure, as well as to upgrade the plant and equipment of its municipal enterprises.

Energy sector

AMCU opens a case against Naftogaz Trading. The Antimonopoly Committee of Ukraine (AMCU) will investigate whether Naftogaz Trading abused its dominant market position in wholesale natural gas trade.

The AMCU received complaints from natural gas suppliers claiming that Naftogaz Trading’s contracts for natural gas supply contain discriminatory conditions. The contracts deal with the introduction of annual gas tariffs for households, which have been in force since 1 May 2021.

The Committee said that Naftogaz Trading’s share of the wholesale gas market in 2020 and the first half of 2021 was over 35%, which is indicative of a dominant position.

Naftogaz commented that that the complaints concerned the agreement signed with JE Energy LLC [allegedly owned by oligarch Dmytro Firtash – SOE Weekly], when Andriy Kobolyev served as Naftogaz’s CEO, and Otto Waterlander was its Chief Operating Officer and Chief Transformation Officer.

According to Naftogaz, the contract did give JE Energy the opportunity to buy gas at a cheaper rate than other gas suppliers. It also made it possible to resell all gas purchased at $0.26 (Hr 7.4) per cubic metre not just to households, but also private companies, for which market prices may exceed $1.41 (Hr 40) per cubic metre. Naftogaz said it ended the contract starting from October 2021, preventing over $3.8 billion (Hr 110 billion) in losses.

[This practice of different gas prices for different consumers was one of the core corruption schemes before the gas market was reformed. The idea behind the reform is that the only way to prevent misuse of price arbitrage is to allow a single market price. Households that cannot afford it should get direct monetary subsidies to pay for gas. The subsidies should be distributed and verified by the Ministry of Social Policy. – SOE Weekly.]

In SOE Weekly (Issue 37), we reported that according to media reports, Naftogaz signed new contracts with regional gas distribution companies in April 2021.

According to the contracts for the period from May 2021 to April 2022, Naftogaz is obliged to sell the gas to regional distributors at a fixed price, with the gas to be further resold to households at the fixed price, plus a margin.

In SOE Weekly (Issue 20), we reported that Naftogaz signed an agreement for the sale of natural gas with JE Energy LLC. This would allow market participants to offer gas to households at a fixed price throughout the year.

Naftogaz Group wins litigation against Donetskoblgaz for $113 million (Hr 3.2 billion), GTSOU’s lawsuit rejected. According to the media, the Donetsk Regional Commercial Court upheld Naftogaz’s two lawsuits against Donetskoblgaz.

In the first case, the court ruled that Donetskoblgaz had to pay $93 million (Hr 2.63 billion) for debts accrued to Naftogaz from November 2018 to July 2020.

In the second case concerning gas balancing services, the court partially satisfied the claim of Ukrtransgaz (a subsidiary of Naftogaz) and decided to award Ukrtransgaz $19.2 million (Hr 543.3 million) out of $83.7 million (Hr 2.37 billion).

The court also rejected the claim of the Gas Transmission System Operator of Ukraine (GTSOU) that Donetskoblgaz owes it $14.8 million (Hr 418 million) for negative daily imbalances from January to December 2020.

Earlier, the Cabinet of Ministers issued an order to transfer 49.9% of the shares of Donetskoblgaz which had been seized in criminal proceedings under management of Naftogaz.

Naftogaz owns 38.2% of Donetskoblgaz shares, while Hong Kong’s Endless Moonlight Limited and Trading Field Limited own 24.95% each.

GTSOU warns about the threat of the gas supply due to billions in debts. According to Ekonomicnha Pravda (EP), the Gas Transmission System Operator of Ukraine (GTSOU) states that the debts of regional gas distribution companies and Naftogaz pose a threat to the security of natural gas supply, and can lead to a serious crisis.

GTSOU’s letter to the Ministry of Energy, seen by EP, stated that regional gas distribution companies cannot purchase process gas [gas used for the production and technological purposes – SOE Weekly] themselves, and they require 1.4 billion cubic meters of such gas in 2022.

Naftogaz must supply process gas to regional gas distribution companies at preferential tariffs, in accordance with a governmental decree and upon instructions from the National Security and Defence Council (NSDC). However, GTSOU notes that Naftogaz does not conclude the agreements for selling such process gas to regional gas distribution companies.

Currently, the regional distribution companies de facto take gas from the network free of charge, and GTSOU cannot stop them without disconnecting all consumers on these companies’ networks.

Thus, in November-December 2021, Naftogaz owed GTSOU $130 million (Hr 3.7 billion), and in January 2022, it could owe another $243 million (Hr 6.9 billion). The debts of regional gas distribution companies in 2020-2021 reached $434 million (Hr 12.3 billion).

These problems, as well as the GTSOU being required to pay Naftogaz $1.16 billion (Hr 33 billion) for unbundling plus 50% of monthly transit revenues, the pipeline operator has the following risks: (i) loss of financial liquidity in February 2022; (ii) loss of its certification as an operator; and (iii) Ukraine may be found non-compliant as a party to the Energy Community.

The GTSOU, therefore, asks the Ministry of Energy to submit to the government a draft resolution on special obligations in the natural gas market and take immediate action to resolve the crisis.

In SOE Weekly (Issue 60), we reported that according to EP, the Energy Community Secretariat wrote in a letter that transmission system operators are prohibited from producing or supplying gas. If the GTSOU is given these obligations, it will jeopardise its financial stability, the Secretariat stated, invoking the EU Gas Directive.

In SOE Weekly (Issue 57), we reported that according to EP, Naftogaz wants to give the GTSOU its public service obligation (PSO) to supply process gas at the special price of $0.26 (Hr 7.42) per cubic meter. The volume of the process gas required is about 1.3-1.4 billion cubic meters per year.

In SOE Weekly (Issue 28), we reported that according to GTSOU, as of the first quarter of 2021,the total debts and accruals of regional gas companies amount to almost $353 million (Hr 10 billion), and the provisions for bad debts have increased. Yuriy Kulyk, the company’s CFO, stated that if it were not for these debts, GTSOU’s net profit would have been almost double, $303 million (Hr 8.6 billion).

Naftogaz to invest $900 million in modernisation of coal plants. According to the CEO of Naftogaz Teplo LLC, Vitaly Mykhailyo, Naftogaz Teplo estimates the amount of funding for the modernization of the coal-fired thermal power plants (TPPs) at about $900 million.

Mykhailyo stated that Naftogaz would act as one of the co-investors. He added that Naftogaz Teplo plans to raise “funding from several sources… such as green bonds issued by either Naftogaz or Naftogaz Teplo, loans from foreign banks, or funding from product manufacturers.” [Apparently, in the latter case, Mykhailyo meant sale of equipment on credit – SOE Weekly].

In SOE Weekly (Issue 38), we reported that according to media reports, on 4 August, the Cabinet of Ministers adopted an order transferring six state-owned TPPs from the State Property Fund (SPF) to Naftogaz.

These include the Severodonetsk TPP and the shares of the Dnipro TPP, Mykolayiv TPP, Kryvyi Rih TPP, Kherson TPP, and Odesa TPP. All six have been excluded from large-scale privatisation.

Energoatom conceals $15 million embezzlement. During a meeting at Energoatom, Mykola Bozhko, the CEO of Atomproektinzhyniryng, a separate division of Energoatom, allegedly discussed the way to hide the disruption in the construction of a strategic facility at the Chornobyl nuclear power plant. This follows from audio recordings, received by the Sсhemy journalists.

Atomproektinzhyniryng has commissioned the construction of the Centralised Spent Fuel Storage Facility in Chernobyl. Journalists claim that Energoatom’s management chose a contractor without a tender and signed a non-public contract for $15 million (Hr 422 million) with BK KBR LLC.

Journalists also found out that, in 2021, Energoatom transferred more than $35 million (Hr 1 billion) to this company, but the facility has not yet been launched. Energoatom’s management did not share either the contract or an estimate of its costs with the journalists.

As recorded, allegedly Bozhko offers the meeting participants either to conceal the embezzlement via fictitious budgets for old contracts or issue a new non-public procurement contract with a new contractor.

The Chernobyl Centralised Spent Fuel Storage Facility is a strategically important facility for Ukraine in the context of its confrontation with Russia. By 2021, Ukraine had to pay Russia between $150 million and $200 million annually for the disposal of nuclear fuel.

In the early 2000s, the Ukrainian government decided to build its own centralised storage, and only in 2017 did Energoatom start the construction, although it has constantly postponed the launch of the facility. The launch date most recently announced by Energoatom’s management was March 2022.

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