Administrative reform is implemented in Ukraine according to the formula coined by Lenin, namely “one step forward and two steps back.” The principle of separation of authoritative powers from the functions of economic management is not accepted here all that readily. Evidence of this is the news of the transfer of state corporate rights in Naftohaz Ukrayiny to the Fuel and Energy Ministry. Presently, it is not all that clear whether this decision is merely a result of the pragmatism of the fuel and energy lobby in the government or whether it reflects a new forceful trend in economy management, in general. Perhaps, everything will fall into place when, say, the NBU will be subordinated to the Finance Ministry. But, of course, it is a stretch to say this. In all probability, it will not go that far, as market principles are not that alien to us.
Recall that the January 18 government decree made some fundamental changes to the status of Naftohaz Ukrayiny. In part, from now on the role of the highest managing body of the company will pass from the Naftohaz Ukrayiny supervisory board to, as the decree reads, a central body of power which is managing the oil and gas sector (that is, the Fuel and Energy Ministry). From now on the government will approve the composition of the board, with nominations submitted by the Fuel and Energy Ministry. The cabinet will also sign the contract with the Naftohaz Ukrayiny Board Chairman (formerly signed with the chairman of the supervisory board). It will also appoint board members and its chairman, who will be nominated by the ministry. The same mechanism has been foreseen for amending the charter, reelecting board members, supervisory board, and auditing committee, making decisions on changing the authorized fund, and dissolving the company. According to Interfax-Ukraine, the goal pursued by the Fuel and Energy Ministry in doing this was to ensure a uniform approach and coordinating the enterprises of the fuel and energy sector.
However, experts are not unanimous in their assessment of the above changes, claiming that this will bring more red tape into the decision-making process at Naftohaz Ukrayiny, which is Ukraine’s flagship company and its biggest taxpayer. Serhiy Kuyun, executive director of the UPECO consulting company, does not see compelling reasons for Naftohaz Ukrayiny to be brought under a different jurisdiction. Last year, Naftohaz Ukrayiny showed positive signs. The company reformed the domestic market of natural gas and secured a much higher rate of payments for consumed gas. It started to develop a network of filling stations, increased the capacities of the Shebelyn gas processing plant, and increased extraction of oil and gas. According to Mr. Kuyun, as a result of the reorganization of the system of corporate management at Naftohaz Ukrayiny, it will be a lot more difficult to collect payments for gas supplied to power-generating companies, which can ultimately disrupt payments to Turkmenistan. Meanwhile, the Fuel and Energy Ministry will be able to use Naftohaz Ukrayiny gas reserves to back up those power-generating companies that have not amassed adequate coal reserves. Since power-generating companies are in the habit of not paying for consumed gas, all this spells new gas debts to Russia and Turkmenistan.
Volodymyr Saprykin, director of energy programs at the Razumkov Center for Economic and Political Research, believes that subordinating Naftohaz Ukrayiny to the Fuel and Energy Ministry is a formality and will hardly affect the business activity of the company, which has always been “a state within a state.” At the same time, he reminded that the company governor is also deputy state secretary of the Fuel and Energy Ministry. Mr. Saprykin predicts that the decision to subordinate Naftohaz Ukrayiny to the ministry may be due to plans to create a gas consortium. “This involves many difficult economic and legal problems, and such a method will probably help implement the idea of the consortium,” he added.
On the face of it, this explanation is closer to the truth than the official version of the Fuel and Energy Ministry. But in this case, Naftohaz Ukrayiny and Ukraine’s entire power-generating sector may face problems that can put budget revenue at risk. The analysis of the situation calls for answers to a number of serious questions. Is the new owner of Naftohaz Ukrayiny a profit-oriented structure? Will it assist the company competing with other companies on the same market? Will the country stand to gain when the debtor absorbs the creditor? And did the Fuel and Energy Ministry make this move only because repaying debts is more difficult than establishing control over them and the creditor? Early this year the ministry’s debt to Naftohaz Ukrayiny was estimated at UAH 1.4 billion. Incidentally, the debt shows no signs of decreasing.
Naftohaz Ukrayiny experts maintain that after it is subordinated to the Fuel and Energy Ministry, the company will risk losing all control over payments for consumed gas. Ukraine’s power-generating companies, which are the biggest gas consumers and debtors of Naftohaz Ukrayiny, ended last year with more or less good results, only owing to setoffs performed late last year. Public utilities and the general population, which consume cheap gas (both Ukrainian and that received for transit from Russia), do not pay for gas with money but use various setoff schemes (privileges and subsidies). The industry and power-generating stations receive the most expensive Turkmen gas, and setoff schemes devised by the Fuel and Energy Ministry deal a hard blow to Naftohaz Ukrayiny, depriving it of floating funds needed for failsafe operation of the gas transport system. From now on, such schemes can turn into a permanent instrument, since today the Fuel and Energy Ministry and the National Committee on Regulating the Power-Generating Sector have two priorities, namely coal mines and the nuclear power sector. Naftohaz Ukrayiny comes last, crediting all of the power-generating sector, Naftohaz experts believe. Naftohaz Ukrayiny representatives fear that its subordination to the Fuel and Energy Ministry will not do them any good, and will instead legalize this situation. Meanwhile, this reorganization will find many supporters in the bodies of power. Thus, commenting on this situation, Andriy Kliuyev, chair of the parliamentary Committee on the Fuel and Energy Complex, asked, “What makes Naftohaz Ukrayiny different from other state-run companies?” To which he answered: “Its size only.” Obviously, what we have here is another trend.
