Ukraine government seeks to dismiss head of state-owned natural gas monopoly

Ukraine government seeks to dismiss head of state-owned natural gas monopoly
Ukraine’s Naftogaz CEO Andriy Kobolev has oversee extensive reforms and lead the fight against Russia's Gazprom
By Sergei Kuznetsov in Kyiv March 7, 2019

A fight for control of Ukraine’s national gas company Naftogaz has broken out as the government moves to oust the current CEO Andriy Kobolev, who has been running the company and representing it in its legal battles with the Russian counterpart Gazprom.

The Ukrainian government this week said it will appoint a new head to the nation's state-owned natural gas monopoly, according to the cabinet's resolution published on March 6. Kobolev’s contract is due to expire on March 22.

Investors and Ukraine-watchers are not happy with the announcement and Kobolev is well regarded in the international community. Over the last few years, Kobolev has won the reputation of a reform-minded manager among Western donors for his attempts to transform the monopoly from the loss-making basket case it used to be into a profitable modern energy company. Under his leadership, Naftogaz has also secured a resounding victory in its dispute with Gazprom in the Stockholm Arbitration Court.

According to the Arbitration's ruling, Gazprom should pay $4.63bn to Naftogaz for the failure to meet gas transit obligations. However, since the court previously ordered Naftogaz to pay Gazprom for gas supply arrears in January, Gazprom's net payment after two arbitration decisions will be $2.56bn.

Against this, Kobolev has been under fire for his multi-million bonuses. In 2018, Ukraine’s State Fiscal Service (SFS) has fined him by UAH8.3bn (around $20mn) for alleged violations of customs regulations during 2015 natural gas imports in 2015. Kobolev has denied any wrongdoing.

According to the Ukrainian government, applications from persons wishing to participate in the tender for the post of Naftogaz's head are accepted within 30 calendar days from the date of publication of the tender announcement.

Growing risks

Alexander Paraschiy at Kyiv-based brokerage Concorde Capital wrote in a note on March 7 that the nation's Prime Minister Volodymyr Groysman has been long at odds with Kobolev and criticising him publicly. "The comment [of the PM] about Kobolev not being responsible for the landmark ruling against Gazprom removed any doubt that that Groysman no longer wants him in charge," he added.

On the one hand, Kobolev’s possible replacement raises Naftogaz's operating risks, as well as risks related to its pending legal claims against Gazprom, in which Kobolev took active role, the expert believes.

"That can be also a reputational loss for the company," Paraschiy added. "At the same time, a possible replacement may speed up the planned unbundling of Naftogaz, a process that is being demanded by Ukraine’s Western partners, who are dissatisfied with the current pace."

"This contradicts the spirit of reform"

Meanwhile, Kobolev told reporters on March 6 that he is going to complete arbitration proceedings with Russia's Gazprom while he still holds his post.

"I want to complete this process for many reasons," Interfax news agency quoted him as saying. "As a professional, I believe that the victory we achieved and the tools we gave to the Ukrainian negotiating side cost many billions of US dollars. To lose them, to convert them into another defeat, as it was stupidly done several times in the past, for example, in 2006 or 2009, I consider it absolutely wrong for both the country and myself."

Kobolev added that the cabinet's decision to terminate his contract and to announce a tender contradicts Ukrainian legislation. "This contradicts the spirit of reform, because the entire ideology consisted of the fact that the shareholder, that is, the government, its main tool of influence on the state-owned company is the appointment of a supervisory board, professional and non-corrupt," he underlined.

He added that he is not going to leave his post. "I need this post to achieve the goals I have talked about, and I hope that the rule of law, a civilized approach and corporate governance principles that were laid in the last five years, they will win in this situation," Kobolev said.