Yuriy Vitrenko has just returned from a significant visit to the US. While in America, he met with a number of senators and congress members, and encouraged them to keep fighting against Nord Stream 2 via sanctions. According to international media reports, the US Administration had expected the Ukrainian authorities to welcome the recently announced deal between America and Germany, and had hoped Kyiv would end its resistance to the Kremlin’s pipeline project.
The Biden White House had earlier signalled its intentions by sitting down with Russian President Vladimir Putin without first meeting Ukrainian President Volodymyr Zelenskyy. One of the reasons for this apparent US snub is believed to be American frustration over recent leadership changes at Ukrainian energy giant Naftogaz. With Zelenskyy now due to visit the White House in late August, the changes at Naftogaz remain a hot topic for the company’s new CEO Yuriy Vitrenko and for the wider geopolitical community.
You have been at the helm of Naftogaz of Ukraine NJSC for nearly three months now, yet your appointment is still the subject of heated debate. How did the reshuffling go at the company?
The Ukrainian government found the company’s 2020 performance unsatisfactory, so they fired the previous director and appointed me instead.
I did not initiate this appointment. I did not ask for this job and I did not offer my candidacy. Nevertheless, I did agree to this position because it is necessary to clean up the company and organize its work in the right direction. I have successful experience working at Naftogaz and I have a clear vision for the company’s potential development, which I have shared on several occasions, including publicly.
Much of the controversy over your appointment is because the Ukrainian Cabinet of Ministers orchestrated the Naftogaz change in leadership without any nomination from the supervisory board.
The Cabinet of Ministers has a history of acting without any say from the supervisory board. On this occasion, the government found the supervisory board’s performance to be just as unsatisfactory as the executive board’s, and fired them too. In such situations, current legislation and the Naftogaz Charter give the Cabinet of Ministers the right to make independent decisions.
Following your appointment, the Cabinet of Ministers decided to bring back the same supervisory board. Can you work effectively with a supervisory board that believes you are behind their earlier dismissal and regards you as critical of their performance?
Let’s finally put this matter to rest: I wasn’t the reason why the supervisory board’s performance was found unsatisfactory and why they were fired – that happened because Naftogaz yielded losses and had other major problems. The supervisory board’s job was to hold the executive board to account, but unfortunately, they failed to do so. They actually did the opposite thing and recognized the executive board’s performance in 2020 as excellent. As the shareholder, the Cabinet of Ministers recognized the 2020 performance as unsatisfactory. It is the shareholder’s right to disagree with the supervisory board’s assessment and fire its members. In this case, judging by the current state of business and the company’s performance, the shareholder was objectively right.
The Cabinet of Ministers only brought back the same supervisory board as a temporary measure while they were selecting new members to entrust with the decision of appointing a new CEO. I think the Cabinet of Ministers was probably counting on the board members’ respect for the shareholder’s rights, and expected that the supervisory board’s composition would undergo revision within the coming months.
The current situation does not mean we should lose our faith in corporate governance reform in Ukraine as a whole. I have always been and remain an advocate for this reform and believe that the development of Naftogaz depends directly on our compliance with OECD principles. In the corporate business world, the recent situation at Naftogaz would never have turned into such a big problem because members of supervisory boards do not play political games.
The government’s motivation for inviting you to work for Naftogaz is clear. What is your motivation for coming back to the company, knowing how much political heat there is around Naftogaz? You are a professional manager. You have graduated from one of the world’s leading business schools and worked at one of the world’s top three investment banks in London as well as an international private equity fund. Why do you need Naftogaz?
It all depends on the targets the company sets. If these are ambitious and large-scale targets, and they are not only political but also corporate, my experience could be at least of some use (laughs - ed. note).
The supervisory board, the ex-CEO, and some members of the executive board say that the performance of both the executive board and the supervisory board was actually outstanding, and that the government flagrantly violated international corporate governance standards by replacing the Naftogaz CEO without the supervisory board’s decision.
When it comes to big money and a lack of effective control systems, we can expect to see attempts by company management to manipulate the facts. It is worth recalling the Enron case. In Ukraine, the poorly developed institutional environment in terms of capital markets and rule of law adds to these problems. In our country, manipulations often go unpunished. This is why you always need to pay attention to figures.
What do the figures say?
The data makes clear that losses incurred in 2020 amounted to UAH 19 billion. It is therefore a manipulation to claim that losses reported in financial statements for 2020 were misleading, and that in fact, if you look at "other" indicators, everything is fine.
In reality, the financial statements for 2020 comply with international financial reporting standards. International auditor conclusions also confirm that the company’s financial reports are accurate.
We are moving towards the best international standards at Naftogaz. Officials in many Western countries could potentially go to jail for indulging in such manipulations. We received warnings specifically about this when I obtained a certificate in International Financial Reporting Standards. This process involved 14 exams over 2-3 years in addition to 3 years of practical experience.
In international investment banks, supplementary indicators were tools to analyze a company in addition to financial disclosure. There is a standard practice on how these indicators are calculated and what conclusions you can draw from them.
Therefore, when the focus is inexplicably on “other” indicators, it is obvious to all specialists that manipulation is taking place.
Our calculation, which is in line with standard practice, confirms the reported consolidated net loss under International Financial Reporting Standards (IFRS) for 2020. Naftogaz’s financial results were negative. The “normalised” loss without non-recurring and non-operating items was UAH 6.4 billion in 2020. “Normalised” free cash flow was minus UAH 12 billion in 2020.
Former management in their defense says that all the obligations to the state-shareholder have been fulfilled.
It’s essential to show causality honestly. Record payments in the 2020 state budget resulted from profit distribution from 2019. The amount of money on the bills has increased because the gas from storage facilities (previously bought on credit) has been sold. Additionally, this amount was due to currency appreciation in 2019 and incomes from gas transit in 2019. But these credits must still be paid. It therefore does not seem to indicate positive results for work in 2020, especially considering the 19 billion hryvnia net loss in 2020.
A similar situation had existed concerning the decline of capital investment into gas production. Amid reduced gas production in 2020 and still ongoing insufficient investment, it is unreasonable to present this as an advantage. Of course, one can blame the state because it has not provided the necessary licenses for new fields. But non-compliance of plans on already licensed fields is even more significant than issues with new fields. And there is no one else to blame for this.
It’s also incorrect to excuse bad results by referencing external factors. We cannot simply say that everyone had terrible results. If we look at the closest analogs of Naftogaz such as national oil and gas companies in neighboring countries Romania and Poland, they were both profitable in 2020. This comparison is much more accurate than with global private oil and gas giants.
Despite these concerns, the first quarter of 2021 was profitable. And this is the work of the former management team.
It is to their credit. But we must also take into account the significant increases in gas market prices that influenced the results of the first quarter. Unfortunately, there is little evidence of internal factors such as the declared “successful transformation of the company.”
Moreover, the financial report for the first quarter was not checked by independent auditors. So it is not really an argument at all. For example, there is an ongoing discussion about displaying two problems in the half-year report, but they existed for the first quarter too. If they are fully displayed in the first quarter report, then instead of profit, the state will suffer losses of up to 105 billion hryvnas.
Firstly, this means taking into account the condition of communal heating companies. Their current condition would not allow them to repay debts for consumed gas.
Secondly, there are also issues over Naftogaz debts to Ukrnafta. At the time when the Q1 report was complete, it might be clear that Ukrnaft would demand repayment for this debt. It does make sense to assess the respective commitments of Naftogaz under the current market price.
Are you talking about 105 billion hryvnia losses for the state in the first quarter of 2021? How could such a huge loss be transformed into a profit in the quarterly report?
This is an example of why only reports checked by independent auditors should be used. Otherwise, losses may be tranformed into fictional profits. Management is eager to talk about about profits and positive results in order to justify their own bonuses and to postpone any questions over losses.
If the losses you are talking about feature in the report for the first half of the year, it may serve as the basis to blame you as the new CEO and the government for causing these losses by changing the company’s management.
It would be irresponsible but predictable to do so.
There are still allegations that changes in Naftogaz management were conceived to secure access to company accounts. The sums available amount to about 50 billion hryvnias or almost 2 billion dollars.
As I said, this money came from the sale of gas that was bought on credit. And it must be repaid. Naftogaz is currently using this money to buy gas for the winter season. This gas has to be sold at a profit to cover credits and interest on loans. Procurement of gas for the winter season is a priority for Naftogaz, for the government, and for the president. That is why speculation about using this money for construction projects is nothing but an attempt by some people to play the victim and demand protection.
Unfortunately, some representatives of foreign partners and civil activists responded to this provocation because they think that Ukraine is so corrupt. But it is illogical for a state enterprise to hide resources from the state and spend these resources inefficiently without government approval. Those who want to fight corruption must follow the principles of accountability, transparency, and the development of market institutions without taking actions that are harmful to the state.
Naftogaz is an example for Ukraine’s international partners of successful reforms. Accordingly, the government’s actions towards the company's corporate governance were perceived as an attack on this symbol of reform success.
If we look at Naftogaz from March 2014 to October 2018, and from November 2018 to April 2021, it looks like two different enterprise. In the first period, Naftogaz managed to emerge from a problematic situation. The company helped save the country when we were facing catastrophe in 2014. Naftogaz has some major achievements from this period including the supply of gas from Europe when Gazprom cut Ukraine off aiming to force our country to its knees. We won Stockholm arbitrage, leaving Gazrpom forced to pay us and even sign a new transit contract. That was an outstanding achievement, and the West saw it. Unfortunately, some small failures in gas production and financial results during the second period when Naftogaz took a wrong turn were less conspicuous.
Coming back to the issue of Naftogaz corporate governance. Ukraine’s international partners have been critical not only of the Cabinet, but of the President as well. According to one version, the decision to replace the company’s CEO was Zelenskyy’s decision, while Ukraine’s international partners believe that only the supervisory board could take this decision.
Corporate reform must protect against political interference of all kinds. The state of Ukraine is the owner of Naftogaz. This is entirely in line with OECD guidelines. The main point here is to maintain transparency and accountability. The Cabinet made a public decision and took responsibility. The President’s political colleagues make up this Cabinet and assumed responsibility. I understand the reasons for apprehension in the West, but once Ukraine’s real partners in the West have figured out what has really happened and why, they should have no complaints. This is especially true at a time when the company had been gradually becoming less of reform success story.
Naftogaz reported huge losses in 2020. In 2019, it posted a profit secured by the success of the unit engaged in gas transit, which I was managing. However, while profits are an important indicator of reform success at a state-owned company, it is far from being exhaustive. Production is dwindling, which undermines Ukraine’s energy independence. Naftogaz has largely failed to attract direct foreign investments. Truly successful reforms should yield results for the country’s economy, for its people.
During the last month when the previous CEO was in office, Naftogaz awarded major contracts to companies tied to Ukrainian oligarch Firtash, while the procedure involved was obscure and vague. The question is not about the political will to meet the needs of households at a price fixed for a year, which is now much lower than the spot price, but the fact that these contracts allow Firtash’s companies to resell gas at huge profits, and not to the households. As a result, there may not be enough gas for households at a low annual price, while other gas suppliers have significantly worse conditions for households.
Following deeper analysis, it becomes clear that practically every branch of Naftogaz has become economically unprofitable. This is a classic example of “milking assets for the benefit of those who exercise managerial control.” This is a chronic problem for Naftogaz. We reduced this problem significantly during 2014-2018 and demonstrated solutions. Unfortunately, the situation has since deteriorated.
As a country, we are now paying a very high price for failures such as the drop in production of 2019-2021. Had the production program been fulfilled in terms of the brownfield areas at least, Naftogaz would not have had to import $2 billion of gas this summer.
Due to Naftogaz’s failure to attract large-scale foreign investments, this state-owned company alone now spends a lot of money on very risky gas prospecting projects.
At the same time, politicians and activists continue to discuss flagrant violations of international corporate governance standards in the decision of the Cabinet of Ministers.
But they fail to recall that Naftogaz’s supervisory board itself was not formed in line with international corporate governance standards, nor did it act in accordance with these standards. It is actually far more accurate to see the government’s actions as a response to an existing crisis. And it is important to steer as soon as possible towards a course of proper corporate governance, which should start with the appropriate appointment of supervisory board members.
Moreover, many experts regard the supervisory board’s failure to publish a report on the remuneration of the executive board as a flagrant violation of corporate governance standards. In this situation, the owner, the Cabinet of Ministers, and the ultimate beneficiary, the people of Ukraine, do not see how much those exercising managerial control over the company receive. There is a lack of transparency and accountability, which are basic principles of corporate governance. It is reasonable to conclude that there was no report because the remuneration itself does not comply with either Ukrainian laws or international standards. This is a clear case of institutionalised corruption. The US government spent American taxpayer money on technical assistance to Naftogaz, including on how to determine the remuneration of the executive board. Despite this, the executive board’s remuneration for 2020 did not follow US recommendations.
It is also worth recalling the decision to abandon a transparent and competitive selection process for the CEO of Ukrnafta under far-fetched pretexts. Naftogaz is a majority shareholder in Ukrnafta, but Ukrainian oligarch Ihor Kolomoisky owns a major stake. His representatives opposed a competitive selection process. The CEO and supervisory board of Naftogaz supported this position.
Lastly, the CEO of Naftogaz was reappointed in 2019 and 2020 without a transparent, competitive, or merit-based candidate nomination procedure.
Therefore, let us honestly admit that for a long time, even before Zelenskyy became president, the situation at Naftogaz had been far from in line with international corporate governance standards. Instead, there were political compromises and arrangements. Let us fix this together.
At the same time, I am glad that genuine investors have a clear understanding of the changes taking place at the company. This is clear if we look at the recent increase in the value of Naftogaz Eurobonds.
The most recent complaint about your appointment comes from the National Agency on Corruption Prevention (NACP) and addresses a possible conflict of interest.
The NACP had not found any conflict of interest with my appointment. The head of the agency has confirmed this. They supposedly saw a breach of existing legislation in my appointment. At the same time, reputable international law firms reached the conclusion that there had been no such violations. The law indicates that in case of claims of this kind, the NACP should go to court and prove its case. Instead, the NACP unfortunately hastened to demand that the Cabinet of Ministers and the supervisory board terminate my contract. This looks more like a political statement than following the letter and spirit of the law.
How is your work going overall? The supervisory board is constantly striving to either remove or fire you altogether, and obliged you to coordinate all key matters with them. It is no secret that foreign members of the supervisory board are in direct contact with your subordinates, breaking the management vertical. At the same time, you have not had the opportunity to change executive board members.
These are indeed problems. The overwhelming majority of people expect that as CEO, I am the person who should be responsible for the work of the company. At the same time, I do not yet have all the powers necessary to achieve this. At present, the government and I personally are trying to make this work in a meaningful manner. We make every effort to move the company forward. We will not be idle observers of how production drops, gas market speculation takes place, or how the state loses money while Firtash makes money and the Ukrainian people have to pay for it.