May 7, 2021

Government ousts Naftogaz chief, undermining corporate governance standards


KYIV – Ukraine’s government appointed Yuriy Vitrenko as the new CEO of state-owned giant Naftogaz on April 28, replacing Andriy Kobolyev, who had led the enterprise since 2014. The move, which occurred the day after the national oil and gas company reported a loss in 2020 of $684 million, was taken by Ukraine’s Cabinet of Ministers, which used a legal loophole to rid themselves of Mr. Kobolyev.

The Cabinet of Ministers dismissed the entire Naftogaz Board of Directors for a day and rehired all but Mr. Kobolyev a day later. During the short interval when the board was technically absent, the government added Mr. Vitrenko as the new CEO of Naftogaz, Ukraine’s largest taxpayer in the country. Mr. Kobolyev was not informed of the government’s decision.

“I learned about the ‘dismissal’ from the news,” Mr. Kobolyev wrote on Facebook shortly after the government’s decision went public.

Most of Ukraine’s state-owned companies used to be highly unprofitable, draining the country’s budget. However, after the Revolution of Dignity, some became profitable due to corporate governance reforms. Naftogaz was among the profitable group, showing net gains four years running, from 2016-2020. But in 2020 the company reported negative financial results.

Together Messrs. Kobolyev and Vitrenko influenced the success of Naftogaz, working side by side from 2014 until 2020 when they parted roads due to conflicting visions for the company’s future.

The company won a historic victory for Ukraine in an arbitration case decided in Stockholm when both Messrs. Kobolyev and Vitrenko managed Naftogaz. That arbitration proceeding between Ukrainian and Russian national gas companies ultimately became the largest commercial arbitration ever.

Mutual claims in that case amounted to roughly $125 billion, which threatened to bankrupt both Gazprom and Naftogaz. The Stockholm arbitration satisfied Naftogaz’s claim for compensation of $4.63 billion for Gazprom’s failure to deliver the agreed volume of gas transited to Ukraine from Russia.

Following Naftogaz’s recent reported losses, the Cabinet of Ministers made the decision to remove Mr. Kobolyev, a move largely viewed as undermining the company’s corporate governance system. The use of that system was one of the reasons analysts said the company became profitable in the first place.

“The net consolidated loss of the Naftogaz group of companies in 2020 amounted to UAH 19 billion,” a statement from the Ukrainian government said. “At the same time, the company’s financial plan approved by the Cabinet of Ministers provided for a profit of UAH 11.5 billion. According to the results of the general assembly of shareholders, the work of the Supervisory and the Management Board of Naftogaz in 2020 was considered unsatisfactory,” the Cabinet of Ministers said in their statement announcing the decision to remove Mr. Kobolyev.

“Accordingly, the powers of the Supervisory Board of Naftogaz and the Chairman of the Board, Andriy Kobolyev will be terminated,” the government’s statement said.

Announcing their decision to retain the rest of the board of directions, the government said, “On the outcomes of the meeting of the general assembly of shareholders of Naftogaz, the current members of the Supervisory Board were re-elected in the same composition.”

In response to the news of the dismissal, the company issued a press release calling Mr. Kobolyev’s sacking a “legal manipulation,” arguing that the Cabinet of Ministers has the right to appoint and dismiss Naftogaz’s chairman only at the request of the Supervisory Board. The company said that the Cabinet of Ministers fired the Supervisory Board for a day in order to fire Mr. Kobolyev. They called the move an insult to state-owned enterprises’ corporate governance principles.

Naftogaz noted that such a decision demonstrates a return to manual management of state-owned enterprises and sends a clear signal to investors that the working conditions of state-owned enterprises in Ukraine are unpredictable.

U.S. State Department spokesman Ned Price said via his Twitter page that “respect for corporate governance, transparency and integrity in energy sector personnel appointments – whether government or state-owned enterprises – is key to maintaining confidence in Ukraine’s commitment to reform.”

The G-7 ambassadors also responded to the government’s decision on Twitter, noting that effective governance of state-owned companies, free from political interference, is crucial to Ukraine’s competitiveness, prosperity and fulfillment.

The European Union, the European Bank for Reconstruction and Development, the European Investment Bank, the World Bank and the International Finance Corporation in a joint statement expressed serious concern over the change in Naftogaz’s management.

“We call on the Ukrainian leadership to ensure that critical management decisions in state-owned enterprises are taken in full compliance with the recognized principles of corporate governance standards. We hope that the Ukrainian authorities will reaffirm their commitment to pursue reforms that unlock investments to help overcome the crisis and realize their potential,” the statement reads.

According to the authors of the statement, in recent years, Ukraine has made significant progress in implementing corporate governance reform in the public sector to ensure transparency, accountability and independence.

“There is a critical need to strengthen the progress made to improve the investment climate in Ukraine and attract much-needed private sector investment,” the EU and leading financial institutions said in their statement.

Members of Naftogaz’s Supervisory Board disagreed with the Cabinet’s decision to underestimate the Board’s performance, arguing that the damage was due to circumstances beyond the company’s control. Given these circumstances, the Supervisory Board assessed the results of the Board as very high, if not excellent.

Late in the evening of April 30, the Board of Naftogaz announced that all of its members present at the extraordinary meeting had submitted written notices of early termination. The statement did not specify whether the entire Supervisory Board was present during the extraordinary meeting.

The outgoing Board also cited a potential conflict of interest with Mr. Vitrenko. He had previously insisted on the government assessing the Supervisory Board performance as unsatisfactory and pushed for firing Mr. Kobolyev. The resignation of Naftogaz’s top manager brings additional uncertainty to the transition process at the enterprise. Mr. Vitrenko is expected to fire loyalists of Mr. Kobolyev’s from the management team. The result would likely provoke a massive management change during an already volatile period in Ukraine.

This situation sends a threatening message to other state-owned enterprises. The government may try to control companies even though installing corporate governance was one of Ukraine’s most essential reforms in recent years.

“If the government thinks supervisory boards don’t matter, then this is a whole new reality,” Mr. Kobolyev said on May 1. “I don’t believe Western partners will agree because this is a return to, at best, ineffective management and, at worst, deep corruption. If corporate-governance reforms are nullified, it will be a huge and unpleasant blow to economic growth” in Ukraine.

Naftogaz’s ex-CEO also said that the enterprise has more than $ 2 billion of free funds on its account and 7 billion cubic meters of natural gas owned by the company in underground storages.

“Thus, with the financial plan, which was not approved for us for this year, we were going to ensure the safety of the next winter, ensure all investments in production and transfer, in addition to all standard tax payments,” Mr. Kobolyev said, adding that he believes that the Cabinet of Ministers replaced him to gain access to those funds. He also said that he was planning to challenge his dismissal in court.

On May 5, the financial director of Naftogaz reported that the company generated a net income of UAH 12.6 billion ($ 450 million) in the first quarter of 2021.

“Earlier, we announced that we expected Naftogaz to be profitable in the first quarter,” the company’s financial director, Peter Van Driel, wrote on his Facebook page. “I am pleased to announce that the net income in the first quarter of 2021 is UAH 12.6 billion (unaudited preliminary result subject to further review). Net income for the same period in 2020 was UAH 3.2 billion.”

The financial director also added that, “The business environment shows clear signs of recovery with higher prices and more demand than last year. The expected result shows our resilience with three quarters in a row of improved profitability. Our transformation efforts are paying off. Naftogaz staff have stepped up and delivered an outstanding result this quarter.”