Naftogaz Must Be Destroyed

Yurii Vitrenko’s game of switching gears is coming to an end, but we do not envy his successor

In the near future, we will hear about the resignation of the head of the board of Naftogaz of Ukraine. The names of the new leaders have already been announced, but I really want to warn the future managers about what awaits them. In short, the company has no money, there is not enough gas in storage, the positions of the oligarchs are stronger than ever, and international partners categorically refuse to finance the hole that Naftogaz has turned into without a return to civilized corporate governance practices. The authorities are currently not ready to accept this condition, because the audit of last year will show what actually happened with hundreds of billions of hryvnias and tens of billions of cubic meters of gas. Spoiler, nothing good happened. The Bentley car, bought during the war by the management, is only the tip of the iceberg of corruption, negligence, and concealment of real problems.

To understand them, it is necessary to remember what and to whom current leader Vitrenko has promised, and why no one has received what had been promised.

“Well, it's started”

“Pour fast before it starts!” shouts the customer, running into the bar. They pour him some alcohol. “Another 50, because it is about to start!”. They’re pouring “Please, more, because it’s about to start!” The bartender begins to suspect something and wonders if the customer has money. “Well, it’s started,” replies the client, graduate of the famous INSEAD business school Yurii Vitrenko, head of Naftogaz of Ukraine.

 “Well, it's started” – that’s exactly like they began to ask him where, in fact, the money, “tops and roots,” which he promised to earn and bring to quite a large number of people for his purpose. The president’s office, the government, oligarchs such as Ihor Kolomoiskyi and Dmytro Firtash ask him about it. Only international donors, who actually understood everything and became the bartender who stopped pouring, don’t ask anything.

Act One: A profit manager is on the run from the government

Mr Vitrenko promised to bring significant profits to the government, which the previous management allegedly “couldn’t provide.” Let me remind you that the breakdown of corporate governance and the dismissal of the previous management took place under the slogans “they brought losses.” The fact that the “losses” meant the unpaid debts of Firtash, and regional heating companies bothered noone, so Vitrenko got the coveted office on the condition that the company would be turned “into profit”.

Formally, Yurii Vitrenko even did it: the financial report for 2021 records “profitable work.” The problem is that these profits actually exist only on paper.

Vitrenko was able to draw “profitability” for the past year and not drown at the same time thanks to two manipulations: (i) with the assessment of the fair value of the accumulated debts and (ii) with the money of the state company Operator of the Gas Transmission System of Ukraine (hereinafter – the OGTSU).

The main business of Naftogaz is to sell gas to the heating utility companies and gas companies owned by Firtash, which until recently supplied gas to the population. Due to administratively limited tariffs or for other reasons, these counterparties settle with Naftogaz very poorly and constantly accumulate debts, waiting for their next write-off by the state, which has already happened several times. That is, on paper Naftogaz recognizes significant revenues. But it is clear that if the company receives this money, it is not in full and not quickly.

In 2021, already under Vitrenko, Naftogaz did not reflect the real value of such dubious debt from Firtash’s gas companies and heat-generating enterprises in its reporting. They did not become better at calculating, their debts continued to grow at an accelerated pace.

This manipulation of provisions for doubtful debts helped Vitrenko to show a profit that was not supported by income.

What is the basis of Vitrenko’s unheard-of optimism, that Firtash and the heating utility officers are about to settle with him? Maybe the head of Naftogaz national joint-stock company pressured Firtash to find money and voluntarily pay the debt from his own funds in order to help the state in a difficult period?

No, everything is much simpler. At the end of the annual report, in the notes in small print, Vitrenko honestly admits that these debts will be paid off to Naftogaz by ... the state. Why? Well, since there is a so-called anti-crisis law, according to which Vitrenko hopes to receive UAH 44 billion from the state budget already this year, and a total of UAH 76 billion.

The state turned out to be the main sponsor of the successful operation of Naftogaz of Ukraine in the management model of the INSEAD graduate and a sponsor for Firtash and his pals.

Similarly, the second manipulation took place at the expense of the state. In October of last year, Vitrenko actually presented Prime Minister Denys Shmyhal with a choice: either increase the tariffs for the population or force the Operator of the Gas Transmission System of Ukraine to give money to Naftogaz. Moreover, he did it in a rather rude manner, namely by writing a letter (see the document), in which he gave the head of the government several days to decide. The wording conceals the government’s undisguised hop-stop – “either you agree to our terms, or you pay an additional UAH 120 billion, because in all the problems of Naftogaz, we will find the guilty, except for ourselves.”

It should be explained here: OGTSU is the “pipe” sung in legends and fairy tales of Yulia Tymoshenko, through which Russian gas still goes to Europe. Previously, Naftogaz earned billions from it, then to implement European rules, the company was separated into an independent enterprise. The pipe pumps much less gas now, but there are still profits. However, the profits of OGTSU had to be given little by little to Naftogaz in order to pay it for the loss of the asset.

Yuriy Vitrenko decided that he needed the money already, and therefore, without waiting, formed a vivid proposal.

First, to recalculate the tariff of previous years and create a situation in which the Operator of the Gas Transmission System of Ukraine owes its predecessor, Ukrtransgaz, UAH 47.9 billion. Available cash (UAH 27 billion) was transferred to the accounts of Ukrtransgaz, a subsidiary of Naftogaz, and the newly created “debt” was then being paid by the company from its profits. Another UAH 3 billion was paid by the JSC Mahistralni Gazoprovody Ukrainy (Main Gas Pipelines of Ukraine) as the owner of OGTSU for the loss of the asset during the distribution.

Formally, the money was transferred from one state pocket to another.

In fact, they took the money earned by OGTSU and intended for something completely different. Due to underloading of the “pipe,” the company needed investments in equipment reduction, otherwise it would have been forced to maintain an inefficient network of compressor stations. The money earned was supposed to help OGTSU to update equipment and reduce tariffs for Ukrainian consumers in the following periods.

Denys Shmyhal was indignant but had to give in to blackmail. According to the financial statements of Naftogaz, without this fraudulent artifice, the company would have run out of money by the end of 2021.

The calculation is simple: Naftogaz took UAH 30 billion from the Operator of the Gas Transmission System of Ukraine, and it was this money that was in his accounts at the end of the year. But what was not accounted for were the funds that Vitrenko received as an inheritance from his predecessors in April. These UAH 50 billion were no longer there.

Act Two: A dumpling and a neo-oligarch

So where did this money go in eight months? As you understood, no one started buying gas, and the fate of tens of billions of hryvnias became of interest to many.

The most “working” theory would be, of course, to check the direction of cooperation with another bartender who poured a drink for Vitrenko, namely Ihor Kolomoiskyi. For a long time now, he has been trying to “break up” with Naftogaz, owned by Ukrnafta. Has the coverted divorce, which Kolomoiskyi wanted very much, suddenly happened?

It even went as far as this – despite public statements, Vitrenko successfully pretended to be interested in settling with Ukrnafta. The idea was that during the distribution of ownership, Ukrnafta would receive everything it has been fighting for. In the case of a successful scenario for the neo-oligarch, he would take away part of the assets and money for the gas delivered during Tymoshenko’s time, for which he wanted to receive more than 5 billion dollars in the London court.

It is interesting, that in the international arbitration on this issue, Kolomoiskyi was refused consideration. Let me remind you, the neo-oligarch went there as an “honest Cypriot investor deceived by Ukraine.” The tribunal found his so-called investments tainted by bribery and corruption and refused to hear the case. And in Ukraine, the movement regarding the Ukrnafta lawsuit quickly resumed, and this coincided with the appointment of Vitrenko to the post.

A special working group was created to fix the debt, which documented the existence of debts. The recognition of part of the previously disputed debts also appeared in the financial statements of Naftogaz. Thus, Ukrnafta received new trump cards for any courts in this case.

Meanwhile, Naftogaz was actively preparing an agreement on the distribution of Ukrnafta property, about which there are many rumors and assumptions, and it is also said that when President Volodymyr Zelenskyi learned about the planned number of payments to Kolomoiskyi, he put the process on hold. This made it possible for Vitrenkov to shrug his shoulders and switch gears in conversations with Kolomoiskyi.

It is officially reported that the parties have agreed to suspend the reallocation of assets due to a full-scale Russian invasion.

However, one day the trials will continue, and the legal position of the neo-oligarch will already be stronger. Naftogaz will be forced to proceed from the conclusions recorded by the working group and conduct negotiations considering these circumstances. However, this will be the main pain of the authorities, not Vitrenko since he prudently left no traces on the documents.

Act Three: the dumpling and the prisoner of Vienna

Austrian scientists calculated that for the amount that disappeared from Naftogaz, it was possible to buy two thousand Bentleys in the configuration ordered in May by Oleh Didenko, Vitrenko’s adviser. However, neither so many cars crossed the borders, nor did the gas, for the purchase of which they ripped off the network operator.

The secret of the success of Firtash’s companies was the special conditions that the oligarch received on the gas market, despite the Revolution of Dignity and his life in Austria. Companies controlled by him received gas from the gas transportation system and theoretically sold it to the population. Practically at the same time, “extra” gas appeared from time to time, which was used, in particular, by chemical groups (Firtash became an oligarch in the chemical industry not because of his engineering genius, but thanks to access to cheap and sometimes free gas). The shortage was always blamed on Naftogaz, which supplied gas to Firtash’s straw companies under the pretext of “supplying household consumers.” Recently, the Firtash regional gas company has stopped paying for the use of gas from the network altogether, citing insufficiently high tariffs.

Vitrenko publicly promised curators from the president’s office to block this scheme during his appointment. He even showed a very skillful presentation, where he painted how regional gas transmission companies steal money. A simple scheme should have received a simple solution – the nationalization of regional gas transmission companies, which on paper took place at the beginning of this year. This is relatively simple, since the networks themselves have always remained the property of the state, Firtash managed them thanks to the decisions of the Ministry of Energy, which once for several years handed over the networks to him for management.

However, Mr Vitrenko did not fulfill his promise here. He never gained real control over the companies: the management remained the same, and chemical companies in the midst of the energy crisis lobbied and got the opportunity to... export fertilizers abroad. The main resource for fertilizer production is gas. Gas was extremely expensive in the summer. And Firtash’s chemists had an overproduction of fertilizers. I don’t know what Vitrenko was taught at INSEAD, but he either was unable to see this scheme and bring the work started to the end, or, more likely, he was not going to do so. The question why, I think, does not arise here.

However, Firtash also found himself in a difficult position, for gas is being pumped, there is money, but the state has finally come close to liquidating his scheme. Only proper management and transparent reporting are required.

The penultimate act: the dumpling and the emptiness

If you are tired of my retelling the combinations invented and implemented by Vitrenko, you can imagine how incomparable the energy of this manager is. True, the constant game of switching gears is coming to an end. As a result of Vitrenko’s long managerial exercises, no one got what they expected to get. There is no money left. The separation with Kolomoiskyi did not take place. There is no gas. I have already mentioned the amount of gas in storage last time — 14 billion cubic meters, five billion less than the prime minister requested, and two billion less than what is actually necessary, considering the possible needs of the power system. Firtash can finally be moved from the gas market: it is cheaper to take everything from him, and not just grab money for a Bentley car.

All these manipulations with reporting and money did not go unnoticed by international partners who ensure the financial stability of the country during the war. They perfectly understand that Ukraine needs both gas and money. But they have already understood the game of the tops and the roots and do not want their funds to repeat the fate of tens of billions of hryvnias last year.

Therefore, in mid-October, the international partners addressed the government with a very straightforward proposal. The World Bank was ready to allocate a total of 1.2 billion dollars for the purchase of gas. It has just become cheaper; Ukraine needs it very much – both for heating and for possible use at power plants. The condition was simple – to stop the manipulation of figures, appoint a supervisory board of Naftogaz and announce an open competition for the company’s head.

In fact, the lack of a normal supervisory board enabled Vitrenko to play tops and roots. They can pay no attention to the facts and listen to fairy tales from incumbent Naftogaz head in the government, which only formally performs the function of the supervisory board of the national joint-stock company in question. However, they cannot do so not at the meetings of a professionally formed supervisory board that understands the processes, the experience and the tools to stop games with reporting.

This is an offer that is not refused in time of war. It was, in fact, an interest-free loan that could be used throughout the season: buy gas, sell it on the market and buy it again.

However, the conditions turned out to be unbearable. They were voiced to two Deputy Ministers of Energy, who relatively politely refused the money and gas. Humanely, they can be understood – the current ministry is not that it is no longer able to control the industry, it is not even able to convey the proposal to the actual decision-makers. The Ministry realistically assessed its own influence on the sphere for which it is responsible by law, and in a stressful situation pretended to be dead.

The international partners were not surprised either, in addition to money, they had several other arguments in their toolbox. For instance, the forecast of the financial health of the Operator of the Gas Transmission System of Ukraine. Analysts have calculated that the company, which was so effectively ripped off last year, will generate losses regardless of whether the Russians continue the transit to the EU or not. If they continue, UAH 91 billion will be needed to save the pipeline; if they don’t continue it – UAH 129 billion will be needed. The government will ask international partners for this money since there are no other sources at the moment. And the World Bank will repeat its conditions. However, it will ask companies directly under Firtash’s control to settle. As we have already understood, these companies are responsible for potential debts, because they are the ones who take gas from the main networks.

Now, Vitrenko, an efficient manager with an international education, has only one solution to get out of the situation when the bartenders stopped pouring – to run away from Naftogaz and leave the situation to the successors. There is nothing left but to formalize the actual destruction of the company.

The last act of the dumpling will be to explain who prevented him from achieving extraordinary results. His most successful accomplishment as a manager of Naftogaz was the effective search for those responsible for problems. After the final report before the dismissal, Vitrenko in a series of posts and interviews (or maybe even in a new book) will definitely name all the culprits. And will go to the bar offended.

Especially since his personal money is about to finally arrive. What Vitrenko managed to do was to protect his own finances. The story that during his appointment, his multimillion-dollar bonus was “given to the budget” is as far-fetched as Naftogaz’s reporting. All the money was transferred to state loan bonds, which he will be happy to take after his inevitable dismissal from the company. We are still waiting for the results of investigations into the activities of balancing groups, procurement, approval of payments to contractors, etc. Because if Vitrenko’s advisor, Didenko, was able to afford a Bentley car worth half a million dollars in just a few months of work, then we can imagine the income of the people who assigned him tasks.

Read this article by Mykola Teslia in russian and Ukrainian.