Photographer: Martin Divisek/Bloomberg

Battle at Gas Champion Exposes Struggle to Rebuild Ukraine

  • Government clashes with international creditors over Naftogaz
  • IMF has questioned political will to push through reforms

Investors wanting to take the temperature of Ukraine’s reform drive could do worse than look in on state-run energy firm Naftogaz, where a battle for control underscores the obstacles hampering wider efforts to clean up the ex-communist economy.

The company’s fortunes were improving after Prime Minister Volodymyr Hroisman’s government eliminated crippling price subsidies and a newly installed management team boosted financial performance. But recent attempts to instill stricter corporate governance have met resistance from officials desperate to maintain access to the purse strings. A feud with foreign creditors has ensued. Who wins will reveal a lot about the nation’s future.

Naftogaz has long been a bellwether for Ukraine’s political and economic trajectory. Under ousted pro-Russian President Viktor Yanukovych, it embodied all the former Soviet republic’s ills, from inefficiency to cronyism and corruption. Three years after the country’s second pro-European revolution in a decade, it tells a story of successful reforms that could yet be squandered. At stake are billions of dollars in Western financing and a strategy for economic revival that hinges on luring back investment, even as a Russian-backed conflict simmers in the nation’s east.

“There’s pushback -- it takes a lot of energy and a lot of determination from Naftogaz’s management and international financial organizations to continue pushing forward,” said Francis Malige, managing director of the European Bank for Reconstruction and Development, which has lent Naftogaz $300 million. “This is a flagship reform. It’s on everyone’s radar.”

Post-revolution trouble at Naftogaz emerged in 2016, when the government unexpectedly sought direct control of transportation unit UkrTransGaz. The London-based EBRD and the World Bank said the step violated pledges to separate the production, delivery and sale of gas, jeopardizing $800 million of loans. The cabinet backed down.

So-called unbundling will now begin this year. Naftogaz signed an agreement with PwC Polska Sp. z.o.o on Monday to help separate its gas-transportation business and meet European Union rules.

Ceding Power

The latest storm is around Naftogaz’s independent supervisory board, created to absorb powers from management and the government to bolster corporate governance. Board members positions remain subject to annual review, while the mostly foreign directors are threatening to quit after having been asked to submit asset declarations -- a tool designed to root out corruption among Ukrainian officials.

The government says it will resolve the issues and insists it wants state-run companies to use European best practices. “For the first time during Ukraine’s independence years, the management of public companies having strategic importance will be distanced at most from political influence,” Deputy Premier Volodymyr Kistion said.

Naftogaz’s management, which strengthened its position with a vital court win last month against Russia’s Gazprom PJSC, accuses the authorities of contradicting corporate-governance recommendations issued by the Organization for Economic Cooperation and Development. While supervisory board Chairman Paul Warwick sees appetite for reforms, he doesn’t expect vested interests to surrender easily.

“You can describe it as two steps forward, two steps back and then one step forward,” he said in a phone interview. “We should double our efforts to put in place those actions as quickly as possible.”

‘Meaningful Reforms’

International lenders aren’t happy. EBRD President Suma Chakrabarti warned the government in April that “one of the most meaningful reforms undertaken under your leadership is at risk of collapsing.”

Officials have long been accused of using Naftogaz for personal enrichment, inserting middlemen into energy deals and other procurement to siphon off cash. A reformist minister quit last year, saying a ruling-party lawmaker tried to install an ally to oversee state enterprises. Transparency International ranks Ukraine 131st-worst of 176 countries for corruption.

Ukraine won praise for raising energy prices to market level in 2016, exceeding International Monetary Fund loan conditions aimed at shoring up public finances. While it could work faster to overhaul its institutions and economy, the communist legacy remains an impediment, according to EU Enlargement Commissioner Johannes Hahn.

“In general, I’m satisfied with the reform efforts,” he said this month.

There have been successes beyond energy. The central bank shut down more than 80 lenders that largely served the interests of their oligarch owners, culminating with last year’s nationalization of the country’s biggest. But anti-graft opposition remains among officials.

“The team running Naftogaz has done things no one three years ago would have ever dreamed possible,” Nick Piazza, chief executive officer of investment bank SP Advisors in Kiev, said by email. “There are elements constantly putting up roadblocks to their efforts.”

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