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Editor’s Note: This is issue 79 of Ukrainian State-Owned Enterprises Weekly, covering events from March 11-17, 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

Corporate governance reform of SOEs – including Ukroboronprom, GTSOU, and Energoatom – is among the government’s priorities for 2023. On March 14, the Cabinet of Ministers approved the government’s Priority Action Plan for 2023.

The Plan includes further reform of SOEs, which involves reducing their number through privatization, liquidation, and reorganization. Before Russia’s full-scale invasion of Ukraine, the state owned more than 3,300 SOEs. The data was classified later.

The Priority Action Plan also sets out actions on the corporate governance of specific SOEs: Ukroboronprom, Gas Transmission System Operator of Ukraine (GTSOU), and Energoatom, as discussed below.

Ukroboronprom. The Cabinet plans to establish a joint-stock company, Ukrainian Defense Industry, which will be the legal successor of the current defense concern Ukroboronprom.

In SOE Weekly (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 transform Ukroboronprom into a joint-stock company. The Cabinet also approved the conversion of Ukroboronprom’s 43 strategic state unitary and state-owned enterprises into business companies (joint-stock companies or limited liability companies) which will be 100% controlled by the state.

– GTSOU. The Cabinet also plans to bring the corporate governance of the GTSOU in line with the OECD Guidelines on Corporate Governance of SOEs. The GTSOU must be transferred to the Ministry of Energy, get a supervisory and executive board, and a new version of its charter must be approved. The deadline is December 2023.

In SOE Weekly (Issue 71), we reported that the European Pravda media outlet revealed the conditions that Ukraine must meet to receive the EU’s macro-financial assistance (MFA) package. One of these conditions is to launch the corporate restructuring of the GTSOU by June 2023.

As we can see, the EU’s MFA package and the government’s Priority Action Plan for 2023 set different deadlines for reforming the GTSOU. In this respect, it is not yet clear what steps – among those envisaged by the government’s 2023 Plan – should be implemented in the GTSOU by June 2023 to meet the conditionalities of the EU’s MFA package.

In Issue 67, we reported that on Oct. 4, the Energy Community Secretariat wrote a letter to Prime Minister Denys Shmyhal and Minister of Energy Herman Halushchenko, urging the government to immediately implement the GTSOU’s corporate governance action plan:

  • transfer the ownership of the GTSOU from Mahistralni Gazoprovody Ukrainy (MGU) to the Ministry of Energy;
  • adopt a new charter for the GTSOU, establishing an independent supervisory board;
  • run a competitive selection for supervisory board members of the GTSOU;
  • have an executive board elected and appointed by the GTSOU’s new supervisory board after the latter is established.

– Energoatom. Also, according to the government’s plan, Energoatom is to be transformed into a joint-stock company by May 2023. The state nuclear power operator is also slated to receive a competitively selected supervisory board, with a majority of its members being independent. The deadline is November 2023.

In SOE Weekly (Issue 74), we reported that on Feb. 6, the Verkhovna Rada passed Draft Law No. 8067 (in the second reading) on the corporatisation of Energoatom. The first reading of the draft law was approved in October 2022, as we reported in Issue 69.

The bill was proposed by lawmakers Ostap Shypailo, Andriy Gerus (both from the Servant of the People fraction), and other members of parliament. It establishes the legal, economic, and organizational foundations to transform Energoatom from an (uncorporatized) state enterprise to a joint-stock company (JSC) to improve its efficiency and corporate governance.

According to the Energy Committee of the Verkhovna Rada, establishing good corporate governance of SOEs is one of Ukraine’s obligations under the Association Agreement with the EU.

Energoatom will remain 100% state-owned, with the Cabinet of Ministers as its ownership entity, the committee explained. At the same time, the shares acquired by the state as a result of converting the company into a JSC are not subject to privatization, and it is also prohibited to divide the state-owned package of shares, meaning that these shares cannot be transferred to an owner other than the state in any manner.

In SOE Weekly’s overview of the top 2021 events (Issue 58), we forecasted that Energoatom had every chance to be corporatised in 2022.

Decisions to corporatise Energoatom have been made since 2012, starting with the National Action Plan for 2012 on the Implementation of the Programme of Economic Reforms in Ukraine for 2010-2014.

In Issue 41, we wrote that President Volodymyr Zelenskyy signed a Presidential Decree on Aug. 28, 2021, instructing the Cabinet of Ministers to develop and submit a draft law on the transformation of Energoatom by Sept. 30, 2021.

In Issue 53, we wrote that the 2021 IMF Memorandum included a commitment from the Ukrainian authorities to ensure that the law on the corporatisation of Energoatom is enacted by the end of December 2021. Energoatom would then have to get a supervisory board with a majority of independent members. It would also be required to produce financial accounts per international standards by May 2022 (a new structural benchmark at that time).

The High Anti-Corruption Court imposes electronic monitoring on Kobolyev. On March 14, the High Anti-Corruption Court (HACC) partially granted the National Anti-Corruption Bureau of Ukraine (NABU) detective’s motion to change the measure of restraint for former Naftogaz CEO Andriy Kobolyev, pending trial.

The court upheld a bail of Hr 229 million ($6.3 million) on Kobolyev. In addition, the HACC judges added a new obligation to the previous ones, imposed by the HACC’s Appeals Chamber earlier: Kobolyev must wear an electronic monitoring bracelet.

As of now, Kobolyev is forbidden from leaving Kyiv without the permission of a detective or prosecutor. He must refrain from communicating with witnesses, hand in his passports, and wear a monitoring bracelet, the law firm Miller, which represents Kobolyev in this litigation, said. The restriction period is two months.

Kobolyev commented on the court’s decision on his Facebook page, posting a photo of the bracelet. “I must admit that this is not an Hr 8 billion ($219 million) personal fine as in March 2018, but it is still a good distinction,” he wrote.

In SOE Weekly (Issue 71), we reported that on Jan. 19, NABU and Specialized Anti-Corruption Prosecutor’s Office (SAPO) notified Kobolyev that he was suspected of misappropriating (illegally awarding himself) over Hr 229 million ($6.3 million) in 2018.

This payment was part of the bonuses granted to Naftogaz’s team in May 2018 for the company’s historic victory against Russia’s Gazprom in Stockholm’s court of arbitration. For a more detailed overview of this case, see SOE Weekly’s Issue 71.

In SOE Weekly (Issue 72), we reported that on Jan. 23, the HACC refused to grant the NABU detective’s request to detain Kobolyev. As we wrote in Issue 73, the HACC judge ruled that SAPO’s motion to detain Kobolyev was unfounded. On Jan. 31, SAPO challenged HACC’s decision.

In Issue 77, we reported that the HACC’s Appeals Chamber partially satisfied the motion of SAPO and NABU, setting bail at Hr 229 million ($6.3 million), which Kobolyev had until March 6 to pay.

In Issue 78, we reported that according to SAPO, Kobolyev did not pay his required bail of Hr 229 million ($6.3 million). As of March 7, almost Hr 97 million ($2.7 million) has been paid for Kobolyev’s bail, according to SAPO. Per the court decision, the bail must be paid in full to the accounts of the State Treasury Service of Ukraine no later than five days after the court ruling is announced.

As a result, the SAPO prosecutor filed a motion requesting NABU to apply a more stringent preventive measure to the suspect, namely detention with a bail of Hr 365 million. This is an equivalent of the $10 million that Kobolyev received as the first tranche of his allegedly illegal bonus, according to SAPO.

State Property Fund plans to replace CEOs at 65 SOEs. On March 15, the State Property Fund of Ukraine (SPFU) announced that it planned to replace chief executives at 65 SOEs. The decision is based on the analysis of those enterprises’ financial indicators.

According to the SPFU, new CEOs have already been appointed at 22 companies, with another 20 awaiting approval from local military administrations, and documents for the appointment of another 15 being prepared.

The SPFU also said it had shared the results of a management performance audit of the United Mining and Chemical Company (UMCC) for 2022 with the Security Service of Ukraine (SBU) and NABU.

In SOE Weekly (Issue 75), we reported that the SPFU announced that it began dismissing SOE managers found to be lacking integrity.

As we also reported in Issue 75, the SPFU announced the dismissal of the acting CEO of UMCC, Vladyslav Itkin. 100% of UMCC’s shares are held by the SPFU, and the company is slated for privatization. According to the SPFU, this dismissal decision was based on a thorough internal financial and economic audit of the company.

In Issue 33, we reported that the UMCC privatization auction was scheduled to take place on Aug. 31, 2021.

Later, in Issue 41, we reported that the SPFU cancelled that privatization auction, which had only one qualified bidder. The SPFU’s Auction Commission set Oct. 29, 2021, as the new auction date.

In Issue 49, we reported that the SPFU cancelled the Oct. 29, 2021, auction as well. The SPFU then explained that it only received two auction applications, one of which did not meet the requirements. The SPFU’s Auction Commission then set a new auction date again, Dec. 20, 2021.

In Issue 56, we said that BDO Corporate Finance, the SPFU’s adviser on the privatization of the UMCC, said that international companies were not prepared to participate in the UMCC auction despite their interest in these assets. BDO said that this was because there were no warranties that would protect the prospective buyers’ investments. As of Dec. 14, 2021, the Cabinet of Ministers had not approved the privatization terms of the UMCC auction that would include such warranties.

In Issue 57, we reported that the SPFU postponed the UMCC’s privatization auction for the third time. Just like in October 2021, the SPFU said that it had received two auction applications, one of which did not meet the requirements of the applicable law.

Holding an auction with only one participant is not allowed by the privatization law. For that reason, the UMCC privatization auction was declared invalid (for the third time). At that time, the SPFU noted that a new date for the UMCC auction would be set on a separate occasion.

Banks

HACC detains one of the suspects in the case of Hr 206 million allegedly siphoned from Ukrgasbank. The High Anti-Corruption Court (HACC) imposed a measure of restraint on one of the members of an organized group led by Ukrgasbank’s former CEO Kyrylo Shevchenko, which allegedly siphoned Hr 206 million ($5.6 million) from the bank. This follows a release by the Specialized Anti-Corruption Prosecutor’s Office (SAPO).

The suspect was the bank’s fictitious agent in the scheme, SAPO said. According to the release, the court partially granted SAPO’s motion, ruling to detain the suspect for two months (until May 14), with a bail of Hr 6.4 million ($175,000) as an alternative measure of restraint.

According to the investigation, Ukrgasbank’s employees signed contracts with individuals posing as “agents” who ostensibly attracted large clients to the bank in exchange for a financial reward. SAPO said that 52 individuals were involved in this scheme between 2014 and 2019 – they received a total of over Hr 206 million ($5.6 million) in unjustified payments from Ukrgasbank.

In particular, Shevchenko, the bank’s former CEO, was notified of suspicion.

Shevchenko served as the acting CEO of Ukrgasbank from October 2014 to May 2015. He went on to serve as the bank’s permanent CEO for five years, from May 2015 to July 2020.

From July 2020 to October 2022, he was the governor of the National Bank of Ukraine.

On Oct. 24, 2022, the National Anti-Corruption Bureau of Ukraine (NABU) put three Ukrgasbank officers, including Shevchenko, on the wanted list. Shevchenko believes that this is “another confirmation that the investigation is biased and politicized”.

On Feb. 10, 2022, the HACC’s Appeals Chamber upheld the arrest of Shevchenko in absentia.

Defense

Ukroboronprom starts production of shells for three types of tanks for Ukraine’s Armed Forces. On March 14, Ukroboronprom announced that it had begun producing 125-mm shells for tanks jointly with a NATO member state. Ukroboronprom did not name the NATO country.

By request of the Ministry of Defense, the first batch of 125-mm shells for T-64, T-72, and T-80 tanks, which are used by the Armed Forces of Ukraine, has already been delivered, according to Ukroboronprom.

This is the second ammunition production programme that the Ukroboronprom businesses have produced in close partnership with a NATO member state abroad, the conglomerate said.

Ukroboronprom noted that Ukraine is producing its own ammunition for the first time since independence: 82-mm and 120-mm mortar shells, 122-mm and 152-mm artillery rounds, and now, 125-mm tank shells.

For security reasons, production has been moved outside the country, but Ukrainians are involved in the design and making of the ammunition, including designers, technologists, turners, foundry workers, and others.

In SOE Weekly (Issue 74), we reported that Ukrorboronprom announced that it had begun producing 120-mm mortar shells jointly with an undisclosed NATO member state. According to the company, the 120-mm mortar shell is the first product to be jointly produced by Ukraine and a NATO member state. Recently, Ukroboronprom signed a contract with Ukraine’s Defense Ministry for the supply of these munitions.

Infrastructure

HACC imposes a bail of Hr 10 million for ex-Infrastructure Minister Pyvovarsky. On March 16, the investigating judge of the High Anti-Corruption Court (HACC) imposed a bail of Hr 10 million on the former Minister of Infrastructure of Ukraine, Andriy Pyvovarsky, for alleged abuse of power.

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

Back then, Pyvovarsky responded that according to the Law “On Sea Ports of Ukraine,” proceeds from tonnage tax are distributed between the user of the port’s harbor (in this case, USPA) and the owner of the operational harbor (in this case, private company TIS). He argued that the Ministry’s order was therefore not a crime. See In SOE Weekly’s Issue 76 for more detail.

The HACC ordered Pyvovarsky to pay the full amount within five days of the court ruling.

He also has to abide by the following obligations:

  • to appear at the request of the investigator, prosecutor, detective, or court;
  • to notify the investigator, detective, prosecutor, and court of any change of place of residence and place of work, as well as any travel outside Kyiv and Kyiv Oblast;
  • refrain from communicating with persons specified in the court ruling.

The obligations are valid for two months, i.e., until May 16 inclusive.

On his Facebook page, Pyvovarsky wrote that the long process of consideration of the case on the merits comes next, with all the “joys” of criminal proceedings, such as interrogation of witnesses and filing of documents.

In SOE Weekly (Issue 76), we reported that on Feb. 22, NABU and the Specialized Anti-Corruption Prosecutor’s Office (SAPO) served Pyvovarsky a notice of suspicion of abusing his powers, 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 had been the First Deputy Minister of Infrastructure and chaired the Ministry’s Tariff Council, was also charged in absentia.

In SOE Weekly (Issue 77), we reported that Pyvovarsky wrote on his Facebook page that NABU asked the court to set his bail at Hr 20 million ($547,000). Pyvovarsky emphasized that he fully disagreed with the charges and the motion to set bail.

Privatization

Resuming large-scale privatization is among the government’s priorities for 2023. As we said above, on March 14, the Cabinet of Ministers approved the government’s Priority Action Plan for 2023.

In particular, the plan envisages continuing privatization of small-scale assets throughout 2023.

The Cabinet also plans to approve an updated list of large-scale privatization objects by May 2023, and the sale of these objects would be carried out throughout the year.

In addition, during 2023 more than 1,000 SOEs should be transferred to the State Property Fund of Ukraine (SPFU) according to the 2023 Priority Action Plan.

No specific large SOEs to be privatized have been named in the plan.

The revenue from privatization to the state budget is projected to be Hr 6 billion ($164 million) in 2023. During the first two months of 2023, Hr 668 million ($18.3 million) was transferred to the state budget from privatization.

Bilhorod-Dnistrovskyi trade seaport privatized. On March 13, the SPFU sold the Bilhorod-Dnistrovskyi trade seaport on the second attempt for Hr 220 million ($6 million), a more than twofold increase from the starting price (Hr 93.8 million).

According to Prozzoro.Sale, the winner is Ukrdoninvest LLC, owned by Ukrainian businessman Vitaliy Kropachov. According to the SPFU, the auction winner has 20 working days to pay the lot price. Only after the funds are transferred to the state budget can the sale and purchase agreement be signed.

Kropachov is the owner of the Ukrdoninvest Group of companies with assets in the coal industry, machine-building, construction, transportation, and media.

In 2018, Kropachov’s Ukrdoninvest took part in the privatization auction for Centrenergo, but the SPFU later cancelled the auction because the documentation submitted by the bidders did not meet the legal requirements.

At that time, the SPFU intended to sell the state-owned stake in Centrenergo (78.3%) at an auction with a starting price of Hr 5.9 billion ($161 million). Kropachov did not say what stake he already had in Centrenergo, revealing only that it was more than 1%.

In 2018, the Ekonomichna Pravda media outlet (EP) wrote that Kropachov had monopolized the supply of coal to Centrenergo. According to the EP, more than 80% of the coal supplied to Centrenergo was provided by entities directly or indirectly linked to the businessman.

In SOE Weekly (Issue 74), we reported that the SPFU announced a privatization auction for the Bilhorod-Dnistrovskyi trade seaport on March 3.

In Issue 78, we reported that the auction did not take place. A new auction was scheduled for March 13. The starting price had been halved – from Hr 187.6 million ($5.1 million) to Hr 93.8 million ($2.6 million).

According to Oleksandr Slavskyi, head of the regional office of the SPFU in Odesa and Mykolaiv oblasts, the first auction failed because no one registered for the auction. According to him, after the full-scale Russian invasion, Bilhorod-Dnistrovskyi has been blocked from the sea and thus used for transshipment only.

In SOE Weekly (Issue 71), we reported that on Jan. 17, the SPFU sold the Ust-Dunaisk trade seaport for Hr 201 million ($5.5 million), a more than threefold increase from the starting price (Hr 60 million). This was the first sale of a seaport in the history of independent Ukraine.

Note that, unlike Bilhorod-Dnistrovskyi, the Ust-Dunaisk seaport is operational.

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