Vitrenko: Naftogaz will suffer losses as oligarchs ‘feel much more comfortable’

Naftogaz CEO
Yuriy Vitrenko
https://www.kyivpost.com/ukraine-politics/vitrenko-naftogaz-will-suffer-losses-as-oligarchs-feel-much-more-comfortable.html

By Brian Bonner

Yuriy Vitrenko shows part of the paperwork that makes up Naftogaz's international arbitration case against Russian state-controlled gas company Gazprom on June 20, 2018, in his office in Kyiv. Despite winning the case in 2019 and a $2.9 billion settlement of a dispute over transit fees, Vitrenko lost his job on May 13, 2020. He faults Naftogaz CEO Andriy Kobolyev for his dismissal.

They appeared to be the Frick and Frack of Ukrainian energy reforms, the pair who courageously stopped corrupt insiders from fleecing Naftogaz to the tune of a half-billion dollars monthly.

Together they turned the state-owned oil and natural gas monopoly – the nation’s largest company with roughly $10 billion in annual revenue and 80,000 employees — into a profitable enterprise and one of the biggest taxpayers to the Ukrainian state budget.

But all is not what it seemed in the long-time business partnership between Andriy Kobolyev and Yuriy Vitrenko.

On May 13, Kobolyev, the Naftogaz CEO, eliminated the job of executive director Vitrenko, who must be allowed to stay for another two months, according to Ukraine’s labor code.

‘He’s part of the government, the state’

To Vitrenko’s regret, he said Kobolyev has become a tool of Ukraine’s political leaders rather than an independent corporate executive.

“The way I perceive Kobolyev, he’s not a professional manager,” Vitrenko told the Kyiv Post in an interview after his firing. “He’s part of the government, the state.” Because of Kobolyev’s subservience, Vitrenko said, reforms achieved in the last six years are in danger of being reversed.

“All of these reforms can be reversed easily,” he warned. “This is a huge business with a lot of cash and a lot of financial opportunities to corrupt people.” While Naftogaz proclaims “zero tolerance” for corruption, he said, managers in fact “ignore flagrant corruption.”

Naftogaz issued an official statement on Kobolyev’s behalf. It did not directly respond to Vitrenko’s allegations but said the company is moving in the right direction on reforms and expressed confidence in its leadership.

“The real reason for my firing is this fight with Gazprom is not a priority for the government as well as the fight with corruption and some reforms,” Vitrenko said, referring to an array of lawsuits that could help Ukrainian taxpayers recover up to $17.3 billion from the Russian energy company and other market players for past misdeeds and seizure of assets in now Kremlin-controlled Crimea.

“They don’t want me because I’m stubborn. I talk too much. I upset Gazprom,” Vitrenko said. “I upset this ‘peace process’ that they have. It’s that simple.” He is pessimistic that the state will continue to pursue litigation against Gazprom and others, such as the RosUkrEnergo firm, because the authorities “lack the capacities, the drive, the competence to do it.”

‘The oligarchs never left’

The May 13 events bring to a bitter end the partnership that started in 2002 at PwC, involved working together in a private investment firm, and that blossomed during the post-2014 EuroMaidan Revolution period when progress prevailed after the kleptocratic President Viktor Yanukovych fled power.

Vitrenko, always more public and combative than the aloof Kobolyev, told the Kyiv Post that two oligarchs who preyed on the company for profit, the exiled Dmytro Firtash and the embattled Ihor Kolomoisky, are in stronger shape today.

“The oligarchs never left,” Vitrenko said. “They feel much more comfortable. We have this oligarch consensus. They are fighting these changes altogether. When you start fighting powerful people and powerful vested interests, they will fight back.”

Firtash controls 80% of Ukraine’s regional gas supply companies and owes Naftogaz more than $1 billion for unpaid natural gas supplies. Kolomoisky, likewise, long stands accused of milking Ukranafta, the state oil producer, for huge profits and stiffing the public with a large unpaid tax bill, also measured at more than $1 billion.

Firtash, who is fighting extradition to the United States on corruption charges that he denies, could not be reached on May 13, nor could any Group DF representative. But Firtash has always insisted that he played a positive role in the Ukrainian energy sector.

Kolomoisky, meanwhile, has portrayed himself as the victim of state swindles involving Ukrnafta even as he faces long-running investigations into alleged financial wrongdoing from the National Anti-Corruption Bureau of Ukraine.

Vitrenko also warned there are plenty of “parasites” seeking to find a way to siphon up to $5 billion in transit fees for Russian gas moving through Ukraine and destined for Europe as part of a 2019 agreement.

Naftogaz should be ‘privatized or liquidated’

Moreover, he said, he expects Naftogaz to start losing money after he leaves. He said that only his areas of responsibility made money in 2019. Those were the successful ruling by the Arbitration Institute of the Stockholm Chamber of Commerce against Russia’s Gazprom, leading to a $2.9 billion payment to settle a dispute over transit fees, and a new gas transit agreement with Russia.

“Everything else was a failure. The only source real money was gas transit,” Vitrenko said. “You will see that Naftogaz is losing money very, very soon. Most probably it will be loss-making for the first quarter of 2020.”

He noted that natural gas production is stagnant and oil production is falling as Naftogaz remains largely uncompetitive and incapable of attracting the required capital to boost domestic energy production.

He said that Naftogaz should be “privatized or liquidated” because it is not run like a modern and efficient company and has not created competitive markets in the energy sector. “It’s not a business. It’s a former state committee on oil and gas,” he said.

For the time being, he said, Naftogaz is “sitting on this money that my team earned in 2019” – the legal settlement paid by Gazprom and gas transit fees.

Return to cronyism

Also disappointingly, he said, Naftogaz is failing in the goals of state-corporate governance reform, and the independent supervisory board overseeing the company is not fulfilling its oversight duties.

He cited, for instance, the lack of a competitive search when Kobolyev’s contract ended earlier this year and the board’s decision to bow to the government’s wishes to suspend bonuses for top Naftogaz managers. Kobolyev won a four-year extension in March from the Cabinet of Ministers in a “clear sign there was a political agreement,” he said.

He also said that Kobolyev initially was installed in the top job in 2014 as the choice of ex-Prime Minister Arseniy Yatsenyuk and ex-member of parliament Mykola Martynenko, implicated in corruption charges that he denies.

He said the public should watch to see how effectively the state responds to Gazprom “abusing their dominance at the moment by not selling gas on the Ukrainian-Russian border” to any buyers, rather than only selling the gas in Europe, an anti-competitive arrangement.

With regard to Firtash’s RosUkrEnergo, he said that Naftogaz illegally “lost a lot of money” – billions of dollars — to the firm in 2009 “and nobody paid for that.” He said Firtash still retains enormous clout in Ukraine.

After he is finished working and taking a summer vacation, Vitrenko said he hopes to “make my own contribution to make Ukraine a civilized country that is part of the European family and Western world” with a market economy and rule of law.

2014’s transformative reforms

He said he’s proud of the accomplishments he was able to achieve when he returned to Naftogaz in 2014 after Yanukovych left power.

“Before, Naftogaz was a vacuum cleaner taking money out of Ukraine. Now it’s a vacuum cleaner to bring money to Ukraine,” he said of the changes that he was instrumental in making when he returned to Naftogaz six years ago. “The state failed in 2014 when Gazprom interrupted gas applies and increased the gas price by two times and demanded repayment of a $10 billion debt. The state failed in its role to protect the country. And Naftogaz, as a state-owned company, failed miserably.”

He said that Kobolyev focused on trilateral negotiations among Ukraine, Russia and the European Union, while Vitrenko worked on reverse flows – gas sent from Europe to Ukraine, rather than the other way around.

Different values

Yet there was friction even then because Vitrenko had a Western education (master’s in business administration from INSEAD) while Kobolyev did not.

He said the “Ukrainian elite looks like you are alien” if you have Western education and background. “They feel you have different values and cultures. They are reluctant and more difficult to work with. Kobolyev, without a Western background, understood them better. His major strength was how to liaise with the Ukrainian elite, business-wise.”

After defeating Gazprom at the Stockholm arbitration court in 2019, Vitrenko said he thought Kobolyev would “walk the talk” of genuine reform of Naftogaz to spur domestic energy production and end monopolies in the sector.

Instead, he said, Kobolyev hired cronies such as Andriy Favorov, who was “not a merit-based appointment” but a “personal friend” who proceeded to overpay for natural gas supplies to fill the company’s reserves.

While Naftogaz has built up 16 billion cubic meters in reserve, enough to supply Ukraine for many months, “they will have to sell this gas at a lower price than they bought it for,” he said.

Favorov, fired earlier this year, has nothing good to say about Vitrenko. “I’m happy that the company got rid of him,” he said. “Self-confidence and love for himself are the only things that Vitrenko manages to do successfully.”

If Naftogaz has any hope for transformation, Vitrenko said that it comes from the May 8 appointment to the chief operating officer of Otto Waterlander, who is also the chief transformation officer.

He noted that Waterlander of the Netherlands was a senior partner at McKinsey & Company, where he co-led the global oil & gas practice. “He is someone we should watch. He has a different culture from Kobolyev. I hope he won’t change. I hope he will stick to his values. Sometimes when foreigners come to Ukraine, they degrade their standards to the Ukrainian standard. They feel like they are on an African safari.”

Attack on reformers

Vitrenko said his firing shouldn’t be considered an isolated event.

This year, President Volodymyr Zelensky has sacked his entire government. New ministers or parliament have forced out respected reformers heading the General Prosecutor’s Office, the State Tax Service, the State Customs Service, and other key posts.

“It didn’t come out of the blue,” he said. “It’s a pattern.”