Attacks on Naftogaz, a critical piece of Ukraine’s economy, have not
gone unnoticed by investors and have already resulted in real costs for both the state-owned enterprise and the country’s taxpayers.
Ukraine is currently facing an increasingly challenging budgetary situation, but relations with the International Monetary Fund (which provides critically important loans) are strained by what experts describe as a growing trend to reverse anti-corruption reforms from recent years.
According to Alexander Paraschiy, head of research at investment bank Concorde Capital, there is a fundamental lack of understanding by the administration of the culture and values of international institutions.
Despite the recent challenges, however, there has also been some progress. The government of PM Shmyhal has made important steps forward in reforming corporate governance at Naftogaz.
Naftogaz plays outsized role in the country’s finances. The gas heavyweight is Ukraine’s biggest taxpayer by far, contributing $3.5 billion in taxes to the national budget through September this year alone – 11.5% of total budget revenue.
But just a week later, on October 20, faced with a growing tide of negative news that caused interest rates to rise, Naftogaz confirmed it would postpone the placement.
“As a result, those corrupt parties that are threatened by the reforms have been able to influence the administration in reversing them, using various forms of pressure and incentives for corrupt individuals,” he wrote in a note to investors.
The Cabinet has approved a long-awaited ownership policy and a new charter for Naftogaz. These changes will make the company more operationally resilient and better insulated from political meddling. Furthermore, the government has removed populistic limitations on salaries of supervisory board members and management of state-owned enterprises. Thus the struggle between pro-reformists and revisionists in Ukraine continues. Which wing is going to win in this fight is yet to be seen.
On October 14 Naftogaz initiated a tender to purchase $335 million in its bonds coming due in 2022 and 2024, hoping to finance them through a placement of a $500 million Eurobond and thus to extend its average debt maturity.
But while politics continues to interfere in the life of state-owned companies like Naftogaz, proper administration and managerial tasks are falling behind. Annual financial plans for 2020, for instance, have not yet been approved by the government.
International investors that were eager to invest in Naftogaz began to doubt in Ukraine’s investment environment. The attempt to dismiss several members of the Board of the National Bank, then the leaked audit report – all these bad news influenced the investors’ decision
“When it is one incident you can digest it, when there are two – it's already hard. When there is a whole sequence of different incidents, the market votes with its own feet,” van Driel noted while speaking on Energy Inside, a weekly expert discussion hosted by the Federation of Employers of the Oil and Gas Industry.