Ukrainian cabinet tightens control over national railway company

By bne IntelliNews January 20, 2017

The Ukrainian cabinet on January 19 took direct control of the Ukrzaliznytsya national rail network from the infrastructure ministry, apparently because of inefficiency and corruption within the company.

At a closed meeting the cabinet changed the company's statutory documents and stripped the ministry of its authority to change the Board of Directors and Supervisory Board. It will also no longer approve the company's financial plans and reports.

Since the summer, Infrastructure Minister Volodymyr Omelyan turned up criticism of the rail operator's CEO, 46-year-old Polish-born entrepreneuer and rock musician Wojciech Balczun, for the slow pace of the fight against corruption in the company.

On January 16, Omelyan called on Balczun to report on Ukrzaliznytsya’s performance before the end of January. In the conflict between Omelyan and Balczun, Prime Minister Volodymyr Groisman took the side of Balczun, supporting the company's pursuit to renew rolling stock and tap its 2017 capital budget up to UAH16bn ($600mn), even before its financial plan was approved by the Cabinet.

"Groisman's support will be key for increasing freight tariffs by 25% and passenger ones by 35% in 2017, allowing the company to raise its CapEx more than twice to UAH27.4bn ($1bn)," the Art Capital brokerage in Kyiv wrote in a research note.

However, the fight for Ukrzaliznytsya might not be over yet as it has a political angle, it added.

"The latest decision effectively moved Ukrzaliznytsya from the patronage of [former prime minister Arseny Yatsenyuk's] People’s Front to that of [President Petro Poroshenko's] BPP," the analysts wrote added. "Hopefully the political conflict around Ukrzaliznytsya does not damage its reputation and investors' trust as the company could be ready to tap the capital markets within a year or two."

Meanwhile, the Ukrainian subsidiary of Russian state lender Sberbank filed a lawsuit demanding that Ukrzaliznytsia repay $58.7mn in debt.

"From the news report and court documents, it’s not clear whether Sberbank's claim is about loans provided to Donetska Railway, a subsidiary whose debt is not going to be serviced by Ukrzaliznytsia unless it regains control of its assets on the occupied territory, or other subsidiaries of the railway monopoly," Alexander Paraschiy, an analyst at the Concorde Capital brokerage in Kyiv, wrote in a research note.

"In any case, this shows that talks with banks are not going smoothly, and Ukrzaliznytsia may need even more time than the additional year to reach agreement with all its creditors," he added.

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