Naftogaz independent board members resign, Cabinet seeks substitutes

Ukraine PM Denys Shmyhal wrote in social media on
Sept. 7 that he ordered Energy Minister Herman Halushchenko to initiate a
selection process for four independent members of the Naftogaz (NAFTO) supervisory
board. The process should start this week and new board members should be
appointed in November, so that they have enough time to select a new Naftogaz
CEO by May 2022, according to Shmyhal. The Naftogaz supervisory board should
consist of seven members, of which four are independent (currently one place is
vacant) and three are representatives of the government.

In related news, rbc.ua reported on Sept. 7 that the
three existing independent members of Naftogaz supervisory board decided to resign.
This happened after all board members had a meeting on Sept. 6 with Shmyhal who
asked them to find common ground with Naftogaz CEO Vuriy Vitrenko. According to
an rbc.ua report, the board was planning to gather on Sept. 7 to consider
dismissing Vitrenko (for this to happen, the votes of the three independent
board members are enough). However, the vote did not happen, and the
independent board members decided to resign instead, as they failed to find
common ground with Vitrenko.

Recall, the three independent board members were
against Vitrenko’s appointment as Naftogaz CEO
by Cabinet in April. Soon after Vitrenko’s appointment, in early May, they decided to resign, but later
in May they found common ground with the Cabinet and decided to stay for one year under certain conditions.
In mid-June, the National Agency on Corruption Prevention (NACP) decided that
Vitrenko’s appointment was made in breach of anti-corruption law and recommended to dismiss him. Based on
this, Naftogaz supervisory board’s head Clare Spottiswood initiated the dismissal of Vitrenko
at a board meeting, but such a meeting has not happened.

Alexander Paraschiy: As we expected, backing
from the government (and the Cabinet’s representatives on the supervisory
board) allowed Vitrenko to withstand the pressure from NACP and the independent
supervisory board members, and retain his CEO position. Now that the
independent board members are very likely to leave the company soon, Vitrenko
will be able to reshuffle the company’s top managers (which remained from the
previous CEO) with the backing of the company’s shareholder, the Cabinet of
Ministers. The good news here is that such changes will finish all the
conflicts inside the company and will allow the top management to fully
concentrate on operating performance and resolving its current challenges (high
international gas prices, poor payment discipline of utilities, need to keep
gas prices affordable for households). Before the new supervisory board members
are appointed, it will be Vitrenko and Cabinet (Shmyhal) who have all the power
in Naftogaz and bear all the responsibility for its performance. Time will show
whether Vitrenko is able to run the company.

The key question now is what the reaction of Ukraine’s
western partners (inducing IFIs which provide financing to Naftogaz) will be
regarding the dismissal of the foreign supervisory board members. If the
reaction is negative, this would make it harder for Naftogaz to secure
international financing in the short-term. Recall, Naftogaz is seeking to place
a new Eurobond to accumulate funds for the smooth repayment of the USD 335 mln
bond that matures in July 2022. Thus far, we retain our neutral view on NAFTO
bonds.