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Director-General of the Ukroboronprom state defense concern Yuriy Husyev signs an agreement on establishing a joint venture to repair tanks along with the German automotive and arms manufacturer Rheinmetall. (Photo: Ukroboronprom/Facebook)
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Editor’s Note: This is issue 88 of Ukrainian State-Owned Enterprises Weekly, covering events from May 13-19, 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 approves a draft law aimed at launching the corporate governance reform of GTSOU – criticized for not meeting obligations to the IMF. On May 12, the Cabinet of Ministers approved a draft law aimed at launching the corporate governance reform of the Gas Transmission System Operator of Ukraine (GTSOU), the Cabinet of Ministers said in its release.

Neither the Cabinet’s decision to approve the draft law nor the draft law itself has been published on the Cabinet’s website at the time of this writing.

The draft law was not registered in the Verkhovna Rada at the time of writing, either.

The GTSOU’s current model does not accord with the OECD Guidelines on Corporate Governance of SOEs, Minister of Energy Herman Halushchenko said in the Cabinet’s release.

According to the Ministry, the draft law introduces an improved model of corporate governance at GTSOU through the merger of Main Gas Pipelines of Ukraine (MGU) and GTSOU and proposes a new model: “Ministry of Energy – GTSOU (with an independent supervisory board and a collegiate executive body)”.

Apparently, the Ministry of Energy meant that GTSOU will be directly owned by the ministry after the proposed merger. Today, GTSOU is owned by MGU, which in turn is owned by the Ministry of Energy.

The GTSOU’s former CEO Sergiy Makogon criticized the draft law. He called it a “profanation, not reform.”

According to Makogon, this draft law does not fulfil Ukraine’s commitments to the International Monetary Fund (IMF). The commitments clearly state that GTSOU should be transferred to the Ministry of Energy, and a new GTSOU charter should be adopted, which should envisage an independent supervisory board at GTSOU, he said.

However, according to Makogon, MGU’s current supervisory board remains in place, although it will work until Oct. 31. A new board must be elected by this date, but this is not feasible if the competitive selection starts later than July 30, he said. In turn, this requires changing GTSOU’s charter upfront to provide for a supervisory board as a governing body of GTSOU.

According to Makogon, the main purpose of this draft law is to create an appearance of reform for international donors, as well as maintain the status quo and control over the management of GTSOU. The Ministry of Energy simply transplants the right people into the right seats with the hands of the Cabinet and MPs, Makogon wrote.

On May 19, lawmaker Yaroslav Zheleznyak (Voice faction) reported that the Cabinet’s decision on the previous version of the draft law would be cancelled, and an updated version would be adopted instead (in the Cabinet’s meeting on May 19). He also said that these changes do not solve the problem (that Makogon raised).

Later, on May 19, Taras Melnychuk, the government’s representative in the Verkhovna Rada, said that the Cabinet approved this draft law.

In the afternoon of May 19, it was registered in the Verkhovna Rada as draft law No. 9311, although its text was not yet available at the time of this writing.

In SOE Weekly (Issue 82), we reported that the IMF’s recently approved $15.6 billion EFF programme for Ukraine set a structural benchmark for GTSOU, as well as a number of other requirements. Specifically, the authorities have committed to implement the following steps:

  • Transfer all shares of GTSOU from MGU to the Ministry of Energy and adopt GTSOU’s new charter which was developed and agreed upon with the Energy Community Secretariat (EnCS) by the end of July 2023 (structural benchmark);
  • Select and appoint a supervisory board for GTSOU by the end of October 2023;
  • Subsequently, appoint a new CEO and eventually liquidate MGU.

In Issue 80, we reported that MGU’s supervisory board appointed Dmytro Lyppa as the CEO of GTSOU in March 2023.

In Issue 79, we reported that in its Priority Action Plan for 2023, the Cabinet of Ministers declared plans to bring the corporate governance of GTSOU in line with the OECD Guidelines on Corporate Governance of SOEs. According to the Plan, 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 Issue 71, we also reported that European Pravda 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 GTSOU by June 2023.

In Issue 67, we reported that on Oct. 4, 2022, the EnCS wrote a letter to Prime Minister Denys Shmyhal and Minister of Energy Herman Halushchenko, urging the government to immediately implement GTSOU’s corporate governance action plan:

  • transfer the ownership of GTSOU from MGU to the Ministry of Energy;
  • adopt a new charter for GTSOU, establishing an independent supervisory board;
  • run a competitive selection for GTSOU supervisory board members;
  • have an executive board elected and appointed by GTSOU’s new supervisory board.
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HACC will consider NABU’s motion to extend the pre-trial investigation of the Kobolyev case again. On May 17, the law firm Miller, which represents former Naftogaz CEO Andriy Kobolyev, reported that the High Anti-Corruption Court (HACC) will consider the prosecutor’s motion to extend the pre-trial investigation in the case involving Kobolyev’s bonuses.

According to Miller, on May 17 the prosecution asked to cancel the previous ruling (which was to leave the detective’s motion without consideration) and schedule a new hearing on the motion to extend the pre-trial investigation. The HACC’s Appeals Chamber satisfied the prosecutor’s motion.

At the same time, the pre-trial investigation has been officially completed, and Kobolyev and his defense are currently reviewing the materials of the criminal proceedings.

Kobolyev commented on this ruling on his Facebook page, saying that Ukrainian law does not provide for the right of investigators to appeal in such cases.

In SOE Weekly (Issue 83), we reported that the HACC dismissed the motion of the National Anti-Corruption Bureau of Ukraine (NABU) detective to extend the pre-trial investigation against Kobolyev.

Shortly after the ruling to dismiss the NABU’s request, the Specialized Anti-Corruption Prosecutor’s Office (SAPO) said that the pre-trial investigation was completed, and its materials were available to the suspect (Kobolyev) and his defence (see Issue 83).

As we reported earlier, on Jan. 19, NABU and SAPO notified Kobolyev that he was suspected of misappropriating (illegally awarding himself) over Hr 229 million ($6.3 million) in 2018, which 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 an extended background on the Kobolyev case, see SOE Weekly’s Issues 71, 72, 73, 77, 78, 79, 83 and 84.

The court increases bail for one of the suspects accused of involvement in the theft of Hr 500 million ($) from UMCC and the Odesa Portside Plant. On May 16, the Appeals Chamber of the High Anti-Corruption Court (HACC) partially satisfied the motion of the Specialized Anti-Corruption Prosecutor’s Office (SAPO) and changed the bail amount for one of the former acting CEOs of the Odesa Portside Plant (OPZ).

According to the ruling, the bail was increased from Hr 5.9 million ($161 million) to Hr 20.1 million ($550 million). At the same time, the procedural duties assigned by the HACC’s investigating judge were left unchanged.

SAPO did not name the suspect, but the media identified him as Mykola Synytsia. According to the prosecutors, Synytsia is one of the members of the criminal organization that stole more than Hr 500 million ($13.7 million) from OPZ and United Mining and Chemical Company (UMCC) between 2019 and 2021.

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 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 CEO Mykola Synytsia. The bail was set at Hr 5.9 million ($).

According to SAPO, the prosecutor disagreed with the court’s ruling on Synytsia and planned to file an appeal (see Issue 81).

The suspects in this case were placed on the wanted list. (See more in Issue 83.)

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Defense

Ukroboronprom and Germany’s Rheinmetall to establish a joint venture. On May 12, Armin Papperger, the CEO of the German company Rheinmetall, one of the world leaders in the defense industry, said that his company had signed an agreement with Ukroboronprom to set up a joint venture to repair tanks in Ukraine.

According to media reports, Papperger discussed the details of the deal with President Volodymyr Zelensky during his visit to Ukraine. “The contracts have already been signed,” he said in an interview with Handelsblatt.

According to the agreement, Rheinmetall and Ukroboronprom will set up a joint venture in which the German side will hold 51% of the shares and the management rights. The co-operation will focus on the maintenance and repair of armoured vehicles in Ukraine, while preparations will be made for the construction of tanks.

On May 17, Ukroboronprom officially confirmed the signing of a strategic partnership agreement with Rheinmetall. The joint venture is scheduled to begin operations in mid-July 2023.

Rheinmetall AG, headquartered in Düsseldorf, is one of the largest manufacturers of military equipment, weapons, and vehicle components in Europe.

The group consists of five divisions: Vehicle Systems; Weapons and Ammunition; Electronic Solutions; Sensors and Actuators; and Materials and Trade. With some 28,000 employees working in 132 locations worldwide, Rheinmetall’s sales were 6.4 billion euros in 2022.

The group’s sales are distributed geographically as follows: Germany (34.1%), the rest of Europe (30.8%), Asia (18.4%), the Americas (8.2%), and other regions (8.5%).

Rheinmetall has a large institutional investors base (280 institutional owners and shareholders). As of Dec. 31, 2022, 69% of its shares were owned by institutional investors and 21% by private shareholders. The largest shareholders were Harris Associates LP (11.6%), Wellington Management Co. LLP (5.08%), Capital Research & Management Co. (4.99%), and BlackRock Fund Advisors (2.35%).

In SOE Weekly (Issue 74), we reported that Ukroboronprom 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.

In Issue 79, we reported that Ukroboronprom had begun producing 125-mm shells for tanks jointly with a NATO member state. 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.

In Issue 80, we reported that Ukroboronprom announced that it shipped the first batch of domestic 122 mm shells to the Armed Forces, which it had produced abroad.

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Infrastructure

Ukraine to raise 200 million euros from the EBRD for Ukrzaliznytsia. On May 12, Prime Minister Denys Shmyhal announced that the European Bank for Reconstruction and Development (EBRD) will provide 200 million euros to rebuild Ukraine’s railway. According to Shmyhal, the decision was approved by the Cabinet at a meeting on May 12.

These funds will be used to purchase equipment needed to restore railway corridors with the EU, improve passenger traffic, and purchase additional locomotives, Shmyhal explained.

No further details were released, including whether this funding is provided as a grant or an EBRD loan.

In SOE Weekly (Issue 68), we reported that after Russia’s full-scale 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.

In Issue 72, we reported that Ukrzaliznytsia took losses of Hr 10.8 billion ($295 million) in 2022. The loss from passenger transportation was Hr 13.3 billion ($364 million), [suggesting that the company’s other segments, such as cargo transportation, made a profit of 2.5 billion ($68 million).

Ukrzaliznytsia also expected to lose Hr 20.2 billion ($552 million) in 2023 due to the large social burden and restrictions on cargo transportation.

HACC extends the pre-trial investigation in the Pyvovarsky case. On May 15, the High Anti-Corruption Court (HACC) extended the term of procedural duties imposed on the former Minister of Infrastructure Andriy Pyvovarsky for two months. Pyvovarsky was charged with abuse of power.

According to the court’s ruling, the ex-minister must:

  • appear at the request of the investigator (detective), prosecutor, or court;
  • notify the investigator (detective), prosecutor, and court of any changes in his place of residence and place of work, travelling outside Kyiv and Kyiv region; and
  • refrain from communicating with the persons specified in the investigating judge’s ruling.

Pyvovarsky commented on this ruling on his Facebook page, saying that the case remains in the same state as it was: In two months, the prosecution has only added information about his crossing the border of Ukraine twice during this period.

On May 16, the HACC’s Appeals Chamber partially satisfied the motion of the Specialized Anti-Corruption Prosecutor’s Office (SAPO) and extended the pre-trial investigation to six months (that is, until Aug. 22).

Pyvovarsky wrote that the prosecution’s motivation for continuing the investigation was to conduct an economic examination and interrogate witnesses involved in the decisions for which he is charged.

According to the ex-minister, his lawyers have never found a request from the Ukrainian Sea Port Authority (USPA) to recognize it as an injured party in the case files.

Despite this, his assets and those of his wife remain seized. Last week, the appellate court refused to lift these seizures, Pyvovarsky added.

As we reported in SOE Weekly (Issue 85), the National Anti-Corruption Bureau of Ukraine (NABU) and SAPO served Pyvovarsky with a notice of suspicion for allegedly causing over $30 million in damage to the state in 2015. This damage resulted from an allegedly illegal order issued by him as the Minister of Infrastructure: The order allowed private companies to charge half the harbour dues at Pivdenny seaport.

Pyvovarsky then argued that the charges were unfounded, because according to the law “On Sea Ports of Ukraine,” proceeds from tonnage tax are distributed between the user of the port’s harbour (in this case, USPA) and the owner of the operational harbour (in this case, private company TIS).

He posted bail of Hr 10 million ($273,000), as ruled by the court. Pyvovarsky has also been handed a request to extend the pre-trial investigation until May 22, with the amended suspicion accusing him of causing $43.6 million in damage.

For a detailed overview of the Pyvovarsky case, see SOE Weekly’s Issues 76, 77, 79, 80, 82, 83 and 85.

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