Uncertainty about Naftogaz: What does it mean for Ukraine?

The recent problem regarding Naftogaz can damage Ukraine’s reputations internationally and threaten the stability of the biggest taxpayer in Ukraine. Ukrainenu has taken a look at what we know so far. 

The state-owned company Naftogaz recently reported a loss in 2020, and the Cabinet of Ministers of Ukraine reacted by firing the company’s CEO, Andriy Kobolyev, and suspending the supervisory board temporarily after three Naftogaz supervisory board members sent a letter to Prime Minister Denys Shmyhal, complaining about the firing of Kobolyev.

The three members defended Kobolyev’s results and also criticized the appointment of the new CEO of Naftogaz Yuriy Vitrenko. It resulted in a much larger crisis, where four executive board members of Naftogaz threatened to resign due to the decision of the Cabinet of Ministers to suspend the supervisory board.

Naftogaz is the largest taxpayer in Ukraine and accounts for around 13 to 17 percent of the state budget. The company’s former CEO, Andriy Kobolyev, has denied any wrongdoing and has said that the company’s loss in 2020 was attributed to the pandemic, significant investments, and other factors such as lower gas prices.

“I do not consider that the decision of the Cabinet of Ministers of Ukraine was legitimate. I believe that this decision puts an end to corporate reform. This is important not only for Naftogaz or for me personally, it is important for the entire corporate governance system that has been under construction for the last seven years,” said Kobolyev to Interfax-Ukraine recently.

Not the first problem 

Kobolyevs dismissal has attracted a lot of attention. Several organizations have pointed out that this is not the first time that the government is interfering in state company’s and the free market. Political interference might also be on the way in the state-owned train carrier, Ukrzaliznytsia, where the Temporary Commission of Inquiry, under the Verkhovna Rada, wants to fire the entire railroad board. Last year, international organizations also criticized the Ukrainian government’s plans to interfere with gas prices in Ukraine, the resignation of the former Head of the National Bank of Ukraine, Yakiv Smoliy, and changing the green tariffs system, affecting the earnings of several international companies.

These are all events raising concern from international organizations such as the International Monetary Fund, which has suspended the last payments under the five billion dollar program, agreed with Ukraine in 2020. The Ukrainian government has defended their actions and pointed out that they are trying to reform the country. 

“We are seriously concerned about recent events in Naftogaz of Ukraine… We urge the leadership of Ukraine to ensure that critical management decisions at state enterprises are approved in full compliance with the main fundamentals of recognized corporate governance standards,” wrote the European Union, the European Bank for Reconstruction and Development, the European Investment Bank, the World Bank, and International Finance Corporation in a joint statement on Facebook.

The U.S. also reacts to Naftgogaz dismissal

It is still unclear whether the Naftogaz-events will receive any consequences from international organizations. Still, U.S. Secretary of State Antony Blinken has said that the decision to change the head of Naftogaz could damage Ukraine. 

“Well, honestly, it sent a bad message, a bad signal, and I think it had the potential to be damaging to Ukraine’s reputation internationally,” said Blinken, according to Kyiv Post, “But I think – my own sense is that the government understands that and hopefully will move forward on corporate governance with Naftogaz but also with other big state-owned enterprises to make sure that that governance is independent, is transparent, and is looking out for the interests of the Ukrainian people.”

Radio Free Europe speculated that Blinken might have brought up the issue of Naftogaz in his recent visit to Ukraine because the U.S. is increasingly annoyed by the slow reform progress in Ukraine. They reported that Philip Reeker, who is the acting U.S. assistant secretary for European and Eurasian Affairs, has called the move “troubling”.

Dr. Alan Riley, a Senior Fellow at the Atlantic Council, and Suriya Evans-Pritchard Jayanti, a US international energy policy expert, wrote an analysis about the dismissal in the Atlantic Council. They pointed out that the recent problems could get consequences for Ukraine as it threatens foreign companies’ willingness to invest in the country. 

“The recent decision to abuse the Naftogaz corporate governance regime in order to remove Kobolyev now threatens to bring all the gains of the last seven years crashing down. Already, a proposed Eurobond issue has been canceled. It is questionable whether the recent Black Sea exploration agreement will go ahead, as Western investors are likely to walk away from the deal,” they wrote.

Unclear what will happen

There have been concerns about the slow reform progress in Naftogaz, which the government is pointing out as the reason to fire Kobolyev but Riley and Jayanti point out that things have been moving in the right direction. They say that “Naftogaz has gone from being a drain on the state budget to providing 13% of annual state revenue.” 

“Corruption has been flushed out of the sector, and more investment has been brought in. Ukraine has fully unbundled its gas sector, encouraging greater transparency and more competition,” they wrote, “These reforms have reassured beneficiaries of the Ukrainian transit regime that gas can be safely transited and stored in Ukraine. It has permitted Kyiv to effectively respond to Russian claims of Ukrainian “unreliability” by pointing to the gas sector’s compliance with EU liberalization and corporate governance norms, something almost entirely absent from the Russian gas sector.”

Aura Sabadus, a senior energy journalist, writing about Eastern Europe for Independent Commodity Intelligence Services (ICIS), noted that the dismissal could lead to problems.

“Kobolyev is credited with overseeing the transformation of Naftogaz from a financial basket case accounting for 27 percent of state budget spending in 2014, to a net contributor of UAH 121 billion to government coffers in 2019,” Sabadus wrote. 

“There are concerns that his dismissal may now pave the way for greater political influence and the return of corrupt practices. However, the future direction of the Ukrainian energy giant is far from clear. The new CEO is a former colleague of Kobolyev who has a reputation as a reformer, so it remains far too early to write off the long-term prospects for further progress,” he wrote in the Atlantic Council. 

Loss in Naftogaz in 2020 – what we know

The state-owned company Naftogaz, reported losses of 19 Billion hryvnias, around 680 million dollars, in 2020. The company reported a profit of 2.6 Billion hryvnias, about 94 million dollars, in 2019, and Naftogaz blame the pandemic and the economic crisis with low gas prices for the bad result.

“All key global mining companies recorded losses in 2020. At the same time, Naftogaz’s management responded to the crisis in a timely manner and prevented unprofitable work in the segment it had a direct impact on,” wrote Andriy Kobolyev, the former CEO of Naftogaz, on Facebook after the results. 

“In early 2020, the board developed an anti-crisis work plan, which was successfully implemented. According to our reports, losses from low prices and the crisis are estimated at UAH 11.9 billion, while operating profit is UAH 12.6 billion. Were it not for the debt crisis caused by inefficient state regulation of gas prices; the Group would have been profitable,” Kobolyev pointed out. 

Naftogaz reported having been making a profit of 3.2 Billion hryvnias before servicing debt and other extraordinary costs in 2020. The company also pointed out that they expect to make a profit in the first quarter of 2021 and that net debt was reduced from 42.6 Billion hryvnias in 2019 to 29.2 Billion hryvnias in 2020.

Financial Summary by Naftogaz