Ukraine's Ukrtransgaz placed under government control

By bne IntelliNews September 19, 2016

Ukraine has brought Ukrtransgaz, the most valuable asset of state gas company Naftogaz, under government control, rendering it vulnerable to deep corruption still plaguing government structures. 

The move violates Ukraine’s agreements with the European Bank for Reconstruction and Development (EBRD), which has loaned Ukraine $300mn to buy gas - funds that may now be held up despite the impending start of the heating season. “These funds are essential for gas purchases that will allow Ukraine to get through the winter season in a stable manner,” Naftogaz said in emailed comments, Reuters reported.

The EBRD said Naftogaz must adhere to the terms of the deal. “The EBRD is looking into this, if the development is confirmed, this is a very serious matter. We do expect that our partners [Naftogaz Ukraine] will honour their commitments and continue building Naftogaz into an example of corporate governance reform,” an EBRD source told the news agency.

The move was announced by Energy Minister Stepan Kubiv on September 16 but was authorised by resolution several days earlier. It also came on the same day that Ukrainian President Petro Poroshenko publicly demanded renewed action by his government against corruption. 

Naftogaz board chairman Andrew Kobolev told Hromadske TV that the step would reawaken earlier graft issues around the company. “Now there is an attempt to go back to the time when Naftogaz was, in fact, the donor for all private, criminal and corrupt business, and it is our hope that the country’s leadership understands and draws the appropriate conclusions.”

However, the economy ministry claimed in a statement that the move complied with a Western-backed plan to separate the different businesses of Naftogaz.

“The Ministry of Economy was well within its rights to do that, and there has been frustration over the slow pace in unbundling of Naftogaz enterprises, but there is concern as to how this was done,” Nomura International strategist Tim Ash commented in a note. It also notably comes before the Stockholm arbitration ruling for Ukraine in its case against Russia’s Gazprom, with some decision possible therein in 2017.

Ukraine has not directly bought any gas from its traditional supplier Russia since last December, instead importing gas from Europe. In 2015, Ukraine produced 19.9 bn cubic metres of gas and imported 16.5 bcm, including 10.3 bcm from the EU.

With Ukrtransgaz controlling both the national gas pipeline network and the transit route that transports gas from Russia to Europe, the transfer of control can have several negative results for Ukraine. Since the EBRD’s credits are secured by Ukrtransgaz’s profits, the lender could revoke its credits, potentially bankrupting Naftogaz.

With the ministry in control of Ukrtransgaz’s profits, these profits can be expected to disappear once again, given the company's long history of being plundered. It is estimated that $3bn of its profits were stolen between 2010-2013.

The transfer of control is also likely to see a resumption of corrupt schemes like Ukrtransgaz giving businesses of favoured oligarchs a super-low gas price, with these in turn being likely to pay kickbacks to Ukrtransgaz’s management and state officials. The company’s huge procurement and maintenance operations also open up opportunities for corruption.

The move will likely impact broader recent success in improving corporate governance, say analysts. “Naftogaz has been leading the way therein in these reforms which are important in terms of the anti graft/corruption agenda,” Nomura strategist Ash added. "It would seem that old habits die hard with some politicians still seeming to think they can act at will, and override structures put in place to ensure proper management, governance and supervision of SOEs.”

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