At the turn of the year, we would like to look back at the major events of 2022 in the domain of corporate governance of SOEs and privatisation.

Issue 68 (below) offers an overview of (a) key SOE developments in banking, energy, infrastructure, and agriculture, (b) key events in privatisation, and (c) major asset confiscations and seizures.

Issue 69, forthcoming during the first week of January 2023, will review the developments in the corporate governance of SOEs.

• Top 2022 events in the banking sector

• Top 2022 event in the energy sector

• Top 2022 events in the infrastructure sector

• Top 2022 events in other sectors

• Top 2022 event in privatisation

• Top 2022 events concerning confiscation of the aggressor state’s assets, nationalisation, and asset seizure

Top 2022 events in the banking sector

Supreme Court of France awarded $ 1.1 billion to Oschadbank in a long-standing litigation against the Russian Federation. In December 2022, the Supreme Court of France confirmed the decision of the Paris Court of Arbitration, entitling Oschadbank to recover $ 1.1 billion plus interest from Russia, Deputy Minister of Justice Iryna Mudra announced on 7 December 2022.

[Earlier, Mudra led Oschadbank’s litigation against Russia as the bank’s Chief Compliance Officer. She became Deputy Minister of Justice in May 2022. – SOE Weekly.]

The court ruling stems from Russia’s seizure of assets in occupied Crimea in 2014. The litigation was launched in 2015.

In Issue 21, we reported that on 22 October 2019, the Paris Court of Appeals ruled in favour of the Russian Federation and overturned the $ 1.3 billion award to Oschadbank. [Apparently, this included $ 1.1 billion plus interest, which must have been $ 0.2 billion at the time, the end of 2020. – SOE Weekly.]

In Issue 49, we reported that on 26 October 2021, Oschadbank challenged the ruling in the Court of Cassation of France, which overturned the appellate decision and ruled that Russia must indeed pay $ 1.3 billion to the bank.

In Issue 66, we reported that Oschadbank also sued the Russian Federation in the European Court of Human Rights, claiming that Ukrainian companies and citizens suffered material losses as a result of Russia’s armed aggression.

For a more detailed overview of Oschadbank’s litigation, see SOE Weekly’s Issues 06, 21, 49, and 66.

Top 2022 event in the energy sector

Due to Naftogaz’s new PSOs, gas subsidies in 2022 are expected reach as much as 19% of GDP. In 2022, the government ordered Naftogaz to sell gas at a discount to multiple types of consumers, including households, heating companies, certain thermal power plants, non-household consumers from the defence sector, and regional gas distribution companies. Most of the public service obligations (PSOs) are linked to the duration of the martial law.

As we reported in Issue 67, the Cabinet added another PSO: Naftogaz will also supply gas to electricity producers well below the market price. Depending on the terms of delivery, this will range from UAH 11,000 and UAH 16,500 per 1,000 cubic meters. [According to the Ukrainian Energy Exchange, the weighted average price for gas in January 2023 is UAH 33,581. – SOE Weekly.]

In its 2021 annual report, Naftogaz estimated that indirect gas subsidies to consumers in 2022 would increase to UAH 842 billion – an astonishing 19% of Ukraine’s nominal GDP.

Naftogaz defaulted on Eurobonds, seeks restructuring. On 26 July 2022, Naftogaz defaulted on its Eurobonds due to the Cabinet of Ministers’ refusal to approve payments on them.

Earlier, on 21 July 2022, acting in the capacity of a Naftogaz General Meeting, the Cabinet issued an order formally instructing Naftogaz officials to seek Cabinet approval before executing any transactions related to the company’s Eurobonds. According to Naftogaz, the Cabinet failed to approve payments to Eurobond holders.

Under previous CEO Yuriy Vitrenko, Naftogaz then agreed on the restructuring of the Eurobond issues maturing in 2024 (€ 600 million), while restructuring of Eurobond issues maturing in 2022 ($ 350 million) and in 2026 ($ 500 million) is still being negotiated.

New Naftogaz CEO Oleksiy Chernyshov, who was appointed on 3 November 2022, expects that in early 2023, the company will reach an agreement on the restructuring with the holders of the 2022 and 2026 Eurobonds.

Ukrenergo got new funding to rebuild after Russian attacks. Heavy missile and drone strikes by Russia have caused severe damage to Ukraine’s energy infrastructure over the past two and a half months and are continuing to do so.

[In total, Russia launched nine mass missile attacks primarily targeting Ukraine’s energy infrastructure: 10 October, 11 October, 15 November, 23 November, 5 December, 14 December, 16 December, 19 December, and 29 December. – SOE Weekly.]

To support Ukrenergo, the European Bank for Reconstruction and Development (EBRD) and the Netherlands will provide the grid operator with a € 370 million financing package (see our Issue 67 for more detail). This will allow Ukrenergo to make swift emergency repairs and keep the country’s energy system stable as winter sets in.

As part of the package, the EBRD is providing a sovereign guaranteed loan of € 300 million. Up to € 150 million of that will pay for equipment to make emergency repairs to the Ukrainian power transmission system. A further € 150 million consists of capital structure support.

Separately, the emergency repairs part of the loan is complemented by a grant of up to € 70 million provided by the Netherlands and blended into the single € 370 million package.

Also, according to Prime Minister Denys Shmyhal, Ukrenergo will receive a € 32.5 million loan from the German development bank KfW to repair substations damaged by the Russian shelling.

Top 2022 events in the infrastructure sector

New PSOs for Ukrzaliznytsia. After Russia’s invasion, the Ukrainian government effectively gave Ukrzaliznytsia new tasks, including:

• Free evacuation of millions of Ukrainian citizens caught in war zones (the company evacuated 3.7 million passengers from active war zones);
• Delivery of critical supplies and equipment to war zones;
• Transport of Ukrposhta’s parcels by train, as private logistics companies were not prepared to provide services when this was dangerous or unprofitable – Ukrzaliznytsia and Ukrposhta took on the responsibility to deliver these services;
• Purchase of petroleum products from abroad for the needs of the state after the Cabinet granted Ukrzaliznytsia the right to do so.

The government, Ukrgasbank, and international partners provided financial support to Ukrzaliznytsia throughout the year. In April 2022, Ukrgasbank extended a loan agreement for Ukrzaliznytsia with a total credit limit of $ 24 million until 30 June 2023. The bank also restored the lending limit for Ukrzaliznytsia to UAH 1.385 billion on another credit line until 30 April 2023.

On 10 June, the EBRD re-purposed its earlier loan to Ukrzaliznytsia, due to which € 50 million were redirected to finance the rail operator’s critical needs. The re-purposed part of the loan was guaranteed by the European Fund for Sustainable Development (EFSD), a financial mechanism of the EU’s External Investment Plan.

Also in June, the government increased tariffs for all types of cargo by 70%, so as to allow Ukrzaliznytsia to perform its humanitarian and defence functions. From 24 February to the end of June, the company got UAH 10 billion in subsidies.

In July, the World Bank agreed to provide $ 200 million in funding to Ukrzaliznytsia to develop grain export capacity, CEO Oleksandr Kamyshin said.

In September, the EBRD allocated part of its € 98.5 million loan to provide liquidity for Ukrzaliznytsia’s critical needs, such as repairs and PSOs.

[This type of financial help is crucial for Ukrzaliznytsia, since at least 57 railway stations and up to 200 km of Ukraine’s railroads were damaged due to constant Russian shelling. Rail freight transportation, a key source of profit for the company, has fallen by 65.3% after Russia’s full-scale invasion. As described above, the company also got a number of new PSOs. – SOE Weekly.]

Ukrzaliznytsia obtained Eurobond holders’ agreement to defer payments for two years. As we reported in Issue 67, Ukrzaliznytsia successfully completed the restructuring of payments for two Eurobond issues totalling $ 895 million. Interest and principal payments on Ukrzaliznytsia bonds were deferred for two years.

Repayments of Eurobonds issued in 2019 ($ 594.9 million) were deferred from 2024 to 2026; payments for the 2021 issue ($ 300 million) were deferred from 2026 to 2028. Coupon payments due in 2023-2024 were deferred until January 2025 with possible capitalisation.

In SOE Weekly (Issue 66), we reported that Fitch Ratings downgraded Ukrzaliznytsia’s Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) to ‘C’ from ‘CC’ following its consent solicitation to defer the debt servicing of its US dollar loan participation notes (LPN) maturing in 2024 and 2026.

S&P Global Rating downgraded Ukrzaliznytsia’s rating from ‘CCC-‘ to ‘CC’ because of the company’s solicitation to defer all payments on the above Eurobonds.

Top 2022 events in other sectors

Government defers repayment of SFGC’s state-guaranteed loan. On 17 December 2022, the Cabinet of Ministers approved the state guarantee to repay the State Food and Grain Corporation’s (SFGC) $ 1.5 billion loan from the Export-Import Bank of China.

According to the Cabinet’s Resolution, the state will ensure the repayment of the loans and interest, albeit with deferrals and capitalisation of accrued interest. [No further details on the conditions of deferral were provided. – SOE Weekly.]

This year, the Ministry of Finance paid UAH 5.3 billion of SFGC’s debt as of September 2022, according to media reports. Expected payments in 2023 were estimated at UAH 4.6 billion.

In SOE Weekly (Issue 63), we reported that the Ministry of Finance transferred UAH 2.5 billion to the Export-Import Bank of China instead of SFGC in January 2022. According to the Ministry, SFGC repays a loan instalment every six months. As of 21 January, the company paid just $ 8.8 million of the $ 96.4 million it was supposed to. Due to the state guarantee, the Ministry of Finance had to pay the rest.

In Issue 62, we reported that SFGC offered to restructure its outstanding $ 900 million debt to the Export-Import Bank of China, according to an October 2021 presentation.

In Issue 61, we reported that MP Maryan Zablotskyy (Sluha Narodu faction) wrote on his Facebook page that SFGC might go bankrupt soon. According to Zablotskyy, SFGC was unlikely to repay its next $ 95 million loan tranche on its own.

Later, Ekonomincha Pravda (EP) published an article, explaining how SFGC’s debts accrued and claiming that on 21 January, SFGC would default on its debt. According to EP’s sources, the President’s Office supported a “default scenario”, which would automatically invoke a state guarantee.

Top 2022 event in privatisation

Change in leadership of the State Property Fund. On 7 September 2022, Rustem Umerov was appointed as the Head of the State Property Fund (SPF). Previously, Umerov served as an MP from the Holos faction and a member of the Ukrainian delegation at the negotiations with Russia.

The previous acting head, Olga Batova, resigned on 26 July 2022. She had served since 17 February 2022 after the previous SPF Head Dmytro Sennychenko resigned and was dismissed by parliament.

Re-launch of small-scale privatisation. Since 19 August, when small-scale privatisation was re-launched, Prozorro.Sale conducted 220 privatisation auctions. As a result, the state and local budgets are to receive UAH 1.5 billion.

Among the most expensive objects sold during the war are the Lviv Jewellery Factory (UAH 185 million); Maryliv alcohol distillery (UAH 150 million); Vuzliv alcohol distillery (UAH 130 million); and Zalozetsk alcohol distillery (UAH 120 million).

According to the SPF, during the first half of 2022, electronic auctions were held for 29 small-scale privatisation assets, sold for a total amount of UAH 767 million. As of 30 June 2022, the actual amount received from the sale of these assets was UAH 298 million [suggesting that the remaining UAH 469 million were not yet paid by auction winners as of 30 June 2022 – SOE Weekly].

The SPF also informed that the buyers of 17 objects refused to pay a total of UAH 765 million referring to force majeure due to the war. [It is not clear which period this statistic refers to. – SOE Weekly.]

For comparison, in 2021, the SPF completed the privatisation of 353 small-scale objects with a total value of UAH 2.7 billion. The total proceeds from privatisation (both small-scale and large-scale) in 2021 were UAH 5.1 billion.

Top 2022 events concerning confiscation of the aggressor state’s assets, nationalisation, and asset seizure

Five large companies seized by the state. The corporate rights of Ukrnafta, Ukrtatnafta, Motor Sich, AvtoKrAZ and Zaporizhzhiatransformator (ZTR), were seized “for the needs of the state” and transferred to the Ministry of Defence on Sunday, 6 November 2022.

The seizures were made under the Law on the Transfer, Forced Alienation, or Seizure of Property under Martial Law or State of Emergency, which obligates the state to return the seized assets to the owners or give them fair compensation.

[Naftogaz owns 50% + 1 share of Ukrnafta. These shares were not seized. A group of companies informally known as the Privat group, associated with oligarchs Ihor Kolomoiskyi and Hennadiy Boholyubov, owned about 42% of the shares.

The remaining shares were held by some 11,000 dispersed shareholders, including company’s former or current employees, investment funds, and pension funds. All these shares were seized by the state along with those of the Privat group.

Ukrnafta and Motor Sich were traded on the stock exchange and were blue chips until the seizure.

Naftogaz also owns 43.05% of Kremenchuk Oil Refinery (Ukrtatnafta), with the remaining shares were allegedly divided between the Privat group and Oleksandr Yaroslavskyi.

In April, the Verkhovna Rada adopted changes to the law on the seizure of assets from Russian residents, also allowing property seizures from Ukrainian collaborators. However, the law has not yet been signed by the President. If this law were in effect, the state could seize collaborators’ assets without any compensation and without unfairly expropriating bona fide minority shareholders who happened to own shares in the same companies. – SOE Weekly.]

Ukrainian investment community criticised the seizures for unfair expropriation of minority shareholders and a lack of rationale for seizing Ukrnafta shares when the state already had a majority stake in that company (via Naftogaz). This decision was also criticised for the state’s poor management capacity and negative impact on Ukraine’s investment climate.

After the seizure, the state replaced the supervisory boards and executive management at most of these companies. Former CEO of WOG gas stations chain Serhiy Koretskyi became the CEO of both Ukrnafta and Ukrtatnafta on 8 and 10 November, respectively.

On 7 November, the Ministry of Defence as Ukrnafta’s new shareholder appointed a new supervisory board of the company, which includes five members:

• Nataliia Boyko, advisor to Prime Minister Denys Shmyhal and former member of Naftogaz’s supervisory board. From February 2017 to autumn 2019, she was Deputy Minister of Energy and Coal Industry of Ukraine for European Integration.
• Roza Tapanova, current member of Oschadbank’s supervisory board. Prior to that, Tapanova worked as the acting head of the Babyn Yar national memorial. Tapanova also worked at the law firm Mizhnarodna Pravnycha Kompaniia, which had been founded and co-owned until 2019 by the Head of the Presidential Office, Andriy Yermak.
• Oleksandr Hryban, Deputy Minister of the Economy of Ukraine. He worked in senior positions in investment banks, in particular as a director of Concorde Capital, and one of the managers of the Ukrainian division of Amstar, an international private equity fund.
• Andriy Gotha, an adviser to the Head of the Presidential Office Andriy Yermak. Before that, Gotha was Andriy Yermak’s chief of staff and served as the First Deputy Minister of Infrastructure of Ukraine. Gotha has also been a member of Centrenergo’s supervisory board since September 2021.
• Dmytro Abramovych, who served as the First Deputy Minister of Infrastructure of Ukraine until June 2021.

[We have not been able to identify any publicly available information on Roza Tapanova, Andriy Gotha, or Dmytro Abramovych’s experience relevant for Ukrnafta. – SOE Weekly.]

Ukrtatnafta’s supervisory board includes:

• Farid Safarov, Deputy Minister of Energy of Ukraine. Prior to that, Safarov worked as Director of the Department of Digital Infrastructure of Transport and Postal Services at the Ministry of Infrastructure.
• Olga Batova, former First Deputy Head and former acting head of the State Property Fund.
• Arsen Illin, Member of the National Commission on Securities and Stock Market. Prior to that, Illin led the Carpathian Ore Company PJSC, which is engaged in the extraction of non-ferrous metal ores, and Western Geological Exploration Company LLC (both are part of the Cyprus-based Avellana Gold Group, the only gold mining production in Ukraine).
• Andriy Smolin, head of Avellana Gold’s representative office in Ukraine [that is, Arsen Illin’s former colleague or boss – SOE Weekly].
• Dmytro Pavlov [no information is publicly available on this person – SOE Weekly].

[We have not been able to identify any publicly available information on Olga Batova, Aresn Illin, Andriy Smolin, or Dmytro Pavlov’s experience relevant for Ukrtatnafta. – SOE Weekly].

[Note that the formation of the supervisory boards of the seized companies had several flaws from a corporate governance perspective. These include the following:

• All new supervisory board members of Ukrnafta and Ukrtatnafta were appointed as state representatives, with the state represented by the Ministry of Defence as a new shareholder. However, according to the Law on Joint-Stock Companies, which is still applicable to these companies, at least one one-third of their supervisory boards should include independent members. In this regard, these supervisory boards were formed in violation of the Ukrainian law. This also implies that all the decisions taken by these boards may be challenged in courts.
• It appears that the persons appointed to these boards as state representatives were not elected via the nomination procedure envisaged by law.
• Arsen illin is a member of the NSSMC, the stock market regulator. His appointment to the supervisory board of Ukrtatnafta creates a conflict of interest between his roles as regulator and an officer of a company subject to NSSMC regulation, and it should be further reviewed by authorised government bodies.

According to the OECD Guidelines on Corporate Governance of SOEs, there should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for SOEs, particularly with regard to market regulation.

Moreover, the full administrative and legal separation of responsibilities for ownership and market regulation is a fundamental prerequisite for creating a level playing field for SOEs and private companies and for avoiding distortion of competition. Such separation is also advocated by the OECD Principles of Regulatory Reform. – SOE Weekly.]

In December, companies allegedly associated with the Privat group challenged the state’s decision to seize their shares in Ukrnafta and Ukrtatnafta.

On 30 November 2022, the Ministry of Defence appointed Oleksiy Nikiforov as the new CEO of Motor Sich. Before his appointment, Nikiforov worked as Deputy Mayor of Zaporizhzhia, and more than 10 years at Zaporizhstal. [We have not been able to identify any publicly available information on Nikiforov’s experience in the defence industry sector. – SOE Weekly].

The newly established Motor Sich supervisory board includes: Ihor Fomenko (board chair), Roman Konovalov, Serhiy Korzh, Yuriy Pashchenko, and Yuriy Shapoval. [Ihor Fomenko is a Deputy Minister of the Economy. We have not been able to identify any publicly available information on the background of other board members. – SOE Weekly].

On 9 December 2022, Volodymyr Nosov was appointed as the new CEO of AvtoKrAZ. [We have not been able to identify any publicly available information on this person – SOE Weekly].

According to the registry, the CEO of Zaporizhzhiatransformator (ZTR) is Ihor Kleiner. [We have not been able to identify any publicly available information on this person. – SOE Weekly.]

[In Issue 67, we reported that ZTR revealed outstanding debts of UAH 11 billion. Note that the current law does not specify a mechanism for the seizure of corporate rights, which may lead to difficulties and disputes around the mechanism and size of compensation to previous owners of the seized shares. We are not aware of any legal ban on the bankruptcy of companies that were seized by the state under martial law. If no such ban exists, company assets may be sold to meet creditors’ claims, in which case the state would not be able to ensure continuous usage of the assets seized for its wartime needs. – SOE Weekly.]

According to media reports, the state is preparing to introduce its representatives to the supervisory boards of AvtoKrAZ and Zaporizhzhiatransformator. No further information is publicly available.

Assets of some Russian oligarchs were nationalised. According to the Ministry of the Economy, the Cabinet of Ministers transferred the assets of Russian oligarch Vladimir Yevtushenkov to the State Property Fund on 9 December 2022.

Yevtushenkov’s property was seized according to the updated sanction law to compensate for damage caused by the Russian aggression, said First Deputy Prime Minister – Minister of the Economy Yuliya Svyrydenko. The assets included 17 real estate objects and corporate rights in five businesses primarily focused on electrical equipment manufacturing and wholesale.

In December, the state also seized the assets of another Russian oligarch, Alisher Usmanov. According to the Security Service of Ukraine (SBU), the court seized a batch of iron ore of over 160 thousand tons. The SBU said that this consignment, worth a total of UAH 2 billion, belonged to a company associated with Usmanov. The SBU said that the transfer of these assets to the Asset Recovery and Management Agency (ARMA) was being considered.

Little or no information is available on the seizure of assets of other Russian oligarchs, if any.