The Orthodox Easter in Ukraine was marked by questionable staff reshuffles at Naftogaz, the counterpart of PGNiG. These adjustments may complicate the dispute over Nord Stream 2 at a key moment and undermine the efforts of, among others, Poland – Wojciech Jakóbik, editor in chief at BiznesAlert.pl, writes.
The Naftogaz scandal
Right before the Orthodox Easter holiday, the CEO of Naftogaz Andriy Kobolyev was fired from his job. He’s held this position for seven years, since the Euromaidan revolution in 2014. He was replaced by Yuriy Vitrenko, his previous rival and subordinate. Officially, he was called off because of the losses Naftogaz had suffered in 2020. However, it is difficult to accept that this was the real reason, because the entire gas sector in Europe recorded losses last year due to the coronavirus pandemic. It is also worth mentioning that Naftogaz owes a debt to the state-owned Ukrnafta and the state budget due to the unpaid bills on the domestic market between 2015 and 2019. In lieu of the debt, Naftogaz paid into the Ukrainian budget UAH 141 billion, which is 13 percent of the entire budget revenue. In 2020 changes were introduced to the retail gas market. Their goal was to gradually get rid of those arrears. During Kobolyev’s time in office, the company continued the dialogue with the US and Germany on the contentious Nord Stream 2 gas pipeline, through active lobbying to stop the pipe’s construction. These processes are now in jeopardy, because of the unexpected upheaval at the company located by the Khreschatyk Street in Kiev.
On the 28th of April, the Ukrainian government dismissed the supervisory board and the Naftogaz CEO. The board met on the 30th of April and quit. It still has a two-week notice period, during which it will hand over its duties to the new board. Officially Kobolyev thanked his team for contributing to the reforms, while Vitrenko announced he would continue them. However, he started his term in office by bringing up the “disappointing 2020 results” and a drop in gas extraction by the Dnieper. It is worth reminding that back during the presidency of Petro Poroshenko, Ukraine announced it would become independent of gas imports by 2020 thanks to increasing domestic production. It looks like Vitrenko is going back to those plans. “We have to force Ukrgazwydobywania to increase output to cover the demand of Ukrainian consumers,” he said during his first press conference. He also ensured that any future staff changes would be based on merit. Vitrenko also wants to move gas reception points from Ukraine’s eastern to western border, so that Naftogaz could be made responsible for deliveries in the territory of Ukraine. This idea also originated in 2014, but is yet to be implemented.
The changes in Naftogaz had been questioned by the company before they were implemented. Already on April 28, Naftogaz argued in a press release that the Ukrainian government’s decision to call off the supervisory board was a “legal manipulation” that undermined the rules of corporate governance at state-owned companies. The company warned that the proposal to change Naftogaz’s board could be presented only by the board itself, not through “manual control” from Kiev. “Despite the crisis and growing debts of Naftogaz’s partners due to the legal loopholes that stemmed from state regulations, the company managed to contribute to the budget UAH 141 billion in 2020,” Kobolyev’s team reminded before being fired. It also mentioned that UAH 57 billion was sitting on Naftogaz’s bank account, which allowed the company to maintain liquidity, as the only state-owned company with such reserves. “The government’s decision is a message to all companies controlled by the state. Working for the benefit of the budget and Ukraine’s citizens is not in the interest of particular political powers, and may be punished. This is a clear message to investors that the conditions under which companies in Ukraine work are unpredictable and may change depending on the political situation,” Nafogaz said in a statement that has been since removed from its website.
Changes at the finish line of the dispute over Nord Stream 2
The West reacted to the developments in Kiev. The US State Secretary Antony Blinken is to talk about this issue during his visit to Ukraine’s capital city in the first week of May. Americans are “deeply concerned” about the recent changes. “Unfortunately, these actions are just the latest example of ignoring best practices and putting Ukraine’s hard-fought economic progress at risk,” the US State Department spokesperson said. “We will continue to support Ukraine in strengthening its institutions, including advancing democratic institutions and corporate governance reforms, but Ukraine’s leaders must do their part as well,” he stated. Philip Reeker who is the Acting Assistant Secretary for European and Eurasian Affairs, replied to the question on whether Nord Stream 2 and Ukraine would be discussed during the bilateral talks between the US and Germany at the G7 summit. Reeker ensured “Nord Stream 2 remains an issue.” “And we will continue to make very clear to the Germans our views of that project, that it should stop, the laws that we have in place, and, of course, we have a lot of other issues to discuss with Germany as well. And so we will have the standard range of bilateral discussions on that,” the diplomat explained. He also reminded that the US was concerned about the lack of transparency with regard to the changes at Naftogaz. “And any attempt to change governance and the selection procedures at government agencies is troubling,” Reeker stated. He also mentioned the US was supporting the reform of the energy sector by the Dnieper with USD 110 million. These topics are to be discussed with the Ukrainian president Volodymyr Zelensky. “Corporate governance is a critical part of a stable democratic society, and we will continue to call on Ukraine’s leaders and representatives to respect transparent corporate governance practices, particularly in the management of state-owned enterprises and particularly in the energy sector,” Reeker said.
The controversy over Naftogaz has emerged at the worst possible time. The Fortuna barge and Akademik Cherskiy continue the construction of the contentious Nord Stream 2 gas pipeline between Germany and Russia. Americans have not extended the sanctions, but in line with the regulations drafted by the State Department, the list of entities that are to be encompassed by them is to be updated with a new “black list” by the 17th of May. The shift in tone among the biggest critics of Nord Stream 2 is also visible. Annalena Baerbock, the Green Party’s candidate for the seat of the German chancellor, admitted during a DFS 2021 conference organized by a German think tank DGAP, that Nord Stream 2 may be completed, but that no gas deliveries should be allowed through it. In this context she referred to the EU gas directive, which is to encompass the contentious pipeline if it is completed. This means that even those forces that are most skeptical about the project in Germany have admitted that it may be impossible to block it, even if the Greens enter the government after the September parliamentary election. The construction of Nord Stream 2 is to be concluded in September 2021 as well, so that it is ready to work in 2022.
Undermining Poland’s efforts
The scandal in Naftogaz will not make it easier to lobby against this project in Washington, which is still vacillating between taking action that would really threaten the completion of Nord Stream 2 and finding a way to cooperate with Germany, to make it possible to finish it. It’s a choice between a moratorium on the construction, and a shut down mechanism that would turn off deliveries in case Russia was acting inappropriately. It is worth adding that Ukraine has been an active opponent of Nord Stream 2 in cooperation with, among others, the Polish government. The foreign ministers of both countries wrote a letter to the US in the Financial Times, where they called on stopping the contentious Nord Stream 2 project. Both diplomats pleaded with Washington to act quickly, but when it comes to extending the sanctions this has not happened. However, it is still possible to include Warsaw and Kiev in the possible talks with Germany on the moratorium or the switch off for Nord Stream 2. The Naftogaz scandal will make cooperation in this regard more difficult, and it will undermine the credibility of this company, which wants to cooperate with Poland on gas extraction, a step the new CEO is hoping for so much. This is certainly a way to undermine the possible talks about the long-term contract between PGNiG and Naftogaz, which have been taking place for years without any conclusions.