There was a great outcry over the supposed assault on the sanctity of corporate governance of state-owned enterprises this week when Prime Minister Denys Shmyhal’s government sacked Andriy Kobolyev and replaced him as Naftogaz CEO with Yuriy Vitrenko, the acting minister.
It was overblown. Actually, the government — the shareholder of an enterprise with $7 billion in revenue in 2020 — followed the rules, such as they are, in first removing the supervisory board and then Kobolyev.
The bigger problem, however, is not the many shortcomings of corporate governance in this nation, but rather the state enterprises themselves.
Two of the largest — Naftogaz, the oil & gas giant, and Ukrzalyznytsia, the state railway, lost collectively more than $1 billion in 2020. It’s a staggering amount of money in a poor country.
The situation is not better in the 3,000 enterprises still owned by the state, often for no other reason than to allow corrupt insiders to suck money from them and stick taxpayers with losses. Take, for example, the Kozatsky hotel on Independence Square. It is one of several hotels owned by the Ministry of Defense. Andriy Boytsun, who writes a weekly column on state-owned enterprises, reports that the National Anti-Corruption Bureau of Ukraine discovered that, from 2015–2019, the hotel’s officials used online booking services to channel customer payments to their private accounts rather than the hotel’s accounts. The alleged theft from this one hotel: $432,000.
Back to Naftogaz. This company has been troubled for decades. Energy has been the source of Ukraine’s biggest corruption. While Kobolyev, Vitrenko, and others deserve praise for squeezing out some corrupt schemes, others remain.
Let’s temper praise for the supervisory board. They were not transparent and many considered the foreigners on the board to be incompetent and picked precisely for their lack of knowledge of Ukraine. They were not independent of management. They seemed more loyal to Kobolyev than anything else.
Take a look at the 2020 financials: The top 17 officials were paid $25 million in 2020, despite $674 million in losses. That is double their 2019 compensation when Naftogaz was actually profitable. To add insult to injury, the pay is not broken out individually.
Oil and gas production has been declining for years. The board let Kobolyev get away with not restructuring Naftogaz or cutting a bloated workforce. Naftogaz kept supplying natural gas, mainly to exiled Dmytro Firtash, without getting paid — costing the state billions of dollars. Kobolyev did nothing to break up Firtash’s near-monopoly status in gas distribution — forcing the state to re-regulate gas prices again to prevent price-gouging.
The breaking point in the Kobolyev-Vitrenko relationship, according to Vitrenko’s telling, is when Kobolyev sided with Ihor Kolomoisky’s choice for CEO in Ukrnafta, the state oil company, in which the rapacious billionaire oligarch has a minority share. Vitrenko also told the Kyiv Post that Naftogaz let some oil field licenses go to billionaire oligarch Rinat Akhmetov.
There’s more, but Kobolyev is no model reformer. In our view, Vitrenko deserves credit for pursuing the arbitration cases against Gazprom’s contract violations, netting the state $3 billion. He’s also developed a credible plan for boosting oil and gas production, while developing renewables, curbing the dominance of the oligarchs, and establishing a more competitive market that is integrated with Europe.
The larger problem remains: Ukraine needs to sell off most of its poorly run and poorly governed state enterprises — and quickly.
