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6:17 AM Sunday, September 24, 2017
Energy
​Battle Over Ukraine’s Energy Champion Epitomizes Reform Hurdles
The UBJ
image/svg+xml Kyiv Lutsk Rivne Zhytomyr Lviv Ternopil Khmelnytskyi Uzhgorod Chernivtsi Vinnytsia Chernigiv Sumy Kharkiv Poltava Cherkasy Kirovohrad Lugansk Dnipropetrovsk Donetsk Zaporizhzhia Mykolaiv Odesa Kherson Simferopol Sevastopol Ivano- Frankivsk

By Daryna Krasnolutska and Volodymyr Verbyany

(Bloomberg) -- Investors wanting to take the temperature of

Ukraine’s reform drive could do worse than look in on state-run
energy firm Naftogaz, where a battle for control underscores the
obstacles hampering wider efforts to clean up the ex-communist
economy.

Press center of Naftogaz headquarters in Central Kyiv (UNIAN/Vladimir Gontar)

The company’s fortunes were improving after Prime Minister
Volodymyr Hroisman’s government eliminated crippling price
subsidies and a newly installed management team boosted
financial performance. But recent attempts to instill stricter
corporate governance have met resistance from officials
desperate to maintain access to the purse strings. A feud with
foreign creditors has ensued. Who wins will reveal a lot about
the nation’s future.
Naftogaz has long been a bellwether for Ukraine’s political
and economic trajectory. Under ousted pro-Russian President
Viktor Yanukovych, it embodied all the former Soviet republic’s
ills, from inefficiency to cronyism and corruption. Now, three
years after the country’s second pro-European revolution in a
decade, it tells a story of successful reforms that could yet be
squandered. At stake are billions of dollars in Western
financing and a strategy for economic revival that hinges on
luring back investment, even as a Russian-backed conflict
simmers in the nation’s east.


“There’s pushback -- it takes a lot of energy and a lot of
determination from Naftogaz’s management and international
financial organizations to continue pushing forward,” said
Francis Malige, managing director of the European Bank for
Reconstruction and Development, which has lent Naftogaz $300
million. “This is a flagship reform. It’s on everyone’s radar.”
The first signs of post-revolution trouble at Naftogaz
emerged in 2016, when the government unexpectedly sought direct
control of transportation unit UkrTransGaz. The London-based
EBRD and the World Bank said the step violated pledges to
separate the production, delivery and sale of gas, jeopardizing
$800 million of loans. The cabinet backed down.
The latest storm is around Naftogaz’s independent
supervisory board, created to absorb powers from the government
and management to bolster corporate governance. Board members
positions must still be re-confirmed annually, rather than at
the end of their four-year terms, while the mostly foreign
directors are threatening to quit after having been asked to
submit asset declarations -- a tool designed to root out
corruption among Ukrainian officials.

New Era

The government says it will resolve the issues and insists

it wants state-run companies to use European best practices and
modern corporate-governance standards. “For the first time
during Ukraine’s independence years, the management of public
companies having strategic importance will be distanced at most
from political influence,” Deputy Premier Volodymyr Kistion
said.
Naftogaz’s management has strengthened its position with a
vital court win last month against Russia’s Gazprom PJSC. While
supervisory board Chairman Paul Warwick sees a desire to pursue
reforms, he doesn’t expect vested interests to give up easily.
“We as a supervisory board try to maintain a positive view,
but we haven’t seen the progress that we expected,” he said in a
phone interview. “You can describe it as two steps forward, two
steps back and then one step forward.”
International lenders aren’t happy either. EBRD President
Suma Chakrabarti warned the government in April that “one of the
most meaningful reforms undertaken under your leadership is at
risk of collapsing.”

‘Difficult Situation’

Officials have long been accused of using Naftogaz for
personal enrichment, inserting middlemen into energy deals and
other procurement to syphon off cash. Reformist Economy Minister
Aivaras Abromavicius quit last year, saying a ruling-party
lawmaker tried to install an ally to oversee state enterprises.
Ukraine ranks 131st-worst of 176 countries in Transparency
International’s latest Corruption Perception Index.
Ukraine won praise for raising natural gas prices to market
level in 2016, exceeding International Monetary Fund loan
conditions aimed at shoring up public finances. While it could
work faster to overhaul its institutions and economy, the
communist legacy remains an impediment, according to European
Union Enlargement Commissioner Johannes Hahn.
“In general, I’m satisfied with the reform efforts,” he
said this month in Kiev.
There have been successes beyond energy. The central bank
shut down more than 80 lenders that largely served the interests
of their oligarch owners, culminating with last year’s
nationalization of the country’s biggest. But anti-graft
opposition remains among officials.
“The team running Naftogaz has done things no one three
years ago would have ever dreamed possible,” Nick Piazza, chief
executive officer of investment bank SP Advisors in Kiev, said
by email. “There are elements constantly putting up roadblocks
to their efforts.”


To contact the reporters on this story:
Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;
Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net

Posted June 13, 2017

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