Which oligarchs control strategic state enterprises

Which oligarchs control strategic state enterprises

State enterprises that have been preparing for privatization for more than a year have fallen under informal operational control by oligarchs and little-known business groups. BC researched who controls which enterprises.

Publicly, Ukraine’s president Volodymyr Zelensky, the prime minister and the head of the State Property Fund constantly talk about the "Great Privatization" of state enterprises, filling the budget and the future prospects of these enterprises as private entities.

In 2020 the state planned to raise 12 billion UAH from privatization of large state enterprises. The COVID-19 pandemic and the international financial crisis adjusted those plans to 0,5 billion UAH. For now the large privatization is on pause.

Meanwhile, at enterprises that have been preparing for privatization for years, the reverse processes are occurring – informal operational control over them has been acquired by oligarchs and business groups.

By controlling the purchase of raw materials and components and the sale of finished products, financial-industrial groups gain additional profit.

BusinessCensor examined who controls these enterprises.

Centrenergo

PJSC "Centrenergo" (CE) is the last state generating company. It operates three thermal power plants: Trypilska in Kyiv region, Zmiivska in Kharkiv region and Vuhlehirska in Donetsk region.

The total installed capacity of the three TPPs is 7665 MW. The company’s stations include 23 power units with capacities from 175 to 800 MW. Of these, 18 are coal-fired and 5 are gas-oil.

In 2018 the company had revenue of 14,5 billion UAH and profit of 0,5 billion UAH. In 2019, despite the company increasing electricity production by 17% to 10,2 million MWh, its losses reached 2 billion UAH.

In March 2016 CE was headed by Oleh Kozemko, who managed the company in the interests of Ihor Kononenko, an ally of then-president Petro Poroshenko.

At that time the company was saved by the fact that losses remained with the state-owned mines rather than with CE. In particular, the state enterprise "Krasnolymanska", on which the private company Krasnolymanske LLC was parasitic.

Krasnolymanske LLC, founded by Donetsk businessmen Ihor Humeniuk and Serhiy Kuzyara, already in 2003 had leased coal seams from the state enterprise. In 2014, during hostilities, the mine was seized by the Dnipro-1 unit of Yuriy Bereza, who later became a member of parliament.

BusinessCensor wrote in detail about this in March 2017.

However, in 2017 the owner of Krasnolymanske LLC became UkrDonInvest, owned by Vitaliy Kropachev. Within a few years the state mine officially stopped coal production. Instead, coal was mined and sold to CE by Kropachev’s private lessee.

In addition to Krasnolymanske LLC, Kropachev acquired beneficiation plants (CZFs) that previously belonged to DRFC, a company of Oleksandr Yanukovych. These plants processed coal from state mines that supplied Centrenergo.

In June 2019 the then-head of the State Property Fund Vitaliy Trubarov appointed acting CEO of CE Volodymyr Potapenko – a protégé of Ihor Kolomoisky. In an interview with Censor.NET Kolomoisky called the new management "understandable."

Kropachev said in his most recent interview that in June 2019 CE under Kolomoisky’s control abandoned the coal supply contract with Krasnolymanske LLC. As a result, Kropachev’s UkrDonInvest is suing CE for 1,4 billion UAH.

Under Kolomoisky’s management, since mid-2019 CE began buying coal from state mines, from imports and from Rinat Akhmetov’s DTEK. The company increased electricity production compared with the period when Kononenko was overseeing it.

The main goal of this work was to provide cheap electricity to the ferroalloy group of Privat Group (Kolomoisky): Nikopol and Zaporizhia ferroalloy plants, as well as Marganets and Pokrovsky iron ore mines that supply them ore.

CE bought coal from "Privat" traders at prices above market and sold electricity to Kolomoisky’s plants at below-market prices. BC detailed this scheme in October 2019.

Since May 2020, when DTEK lobbied protective duties on coal at 65% and gas prices fell, CE began buying gas for electricity production. The company bought gas at inflated prices from the trader "United Energy" of the Privat group. That trader, in turn, bought gas below market prices from Ukrnafta, another state company controlled by Kolomoisky’s management.

At the end of May the SPFU managed to change CE’s head. The new acting director became Oleksandr Korchynskyi. However, Kolomoisky’s manager Volodymyr Potapenko was not dismissed but only reassigned to the board.

Will Centrenergo be sold? According to the head of the SPFU Dmytro Sennichenko, today the company’s value is minus 1,4 billion UAH. The company’s accounts payable are about 4 billion UAH.

The company’s creditors include enterprises of Rinat Akhmetov, Ihor Kolomoisky, Dmytro Kryuchkov and Vitaliy Kropachev. A non-Ukrainian investor is unlikely to be able to negotiate with them.

Moreover, for normal operation the new owner must have its own sources of cheap fuel—primarily coal. However today all promising state mines are owned by Rinat Akhmetov’s DTEK (90% of national production), Vitaliy Kropachev or Maksym Yefimov, owner of Donbasenergo—another generating company.

There are currently no realistic privatization scenarios for Centrenergo.

OPZ (Odesa Port Plant)

Another enterprise managed by the State Property Fund and included in the list of the upcoming large privatization is the Odesa Port Plant (OPZ).

This plant is the largest producer of mineral fertilizers in Ukraine, and its location on the Black Sea coast in the port of Pivdennyi gives additional competitive advantages for exporting them to other countries.

In addition, OPZ is the terminal point of the international ammonia pipeline "Togliatti – Horlivka – Odesa" and manages ammonia transshipment: receipt, cooling and loading onto tankers. The pipeline connects three ammonia producers: Russia’s Togliattiazot and Ukraine’s Stirol and OPZ. Its Ukrainian section is managed by the state enterprise Ukrkhimtransammiak.

The Odesa Port Plant is a symbol of state corruption. During Viktor Yanukovych’s presidency control over OPZ was taken by his political ally, oligarch Dmytro Firtash. His companies supplied feedstock—natural gas—to the plant, purchased finished fertilizers and exported them.

Most fertilizer purchase agreements were concluded at understated prices.

As a result, in 2013, when Firtash’s companies began actively "cooperating" with OPZ, the plant’s loss grew to 1,14 billion UAH from 116 million UAH in 2012. In addition, OPZ owed Firtash’s OstChem $193 million for gas supplies.

In 2014, after the change of power, the plant began to earn for the circle around president Poroshenko and representatives of the "People’s Front": companies controlled by former People’s Front MP Mykola Martynenko sold gas, and companies from Ihor Kononenko’s orbit bought fertilizers at understated prices and sold them for export.

Due to the plant’s unprofitable operation, the Cabinet obliged Naftogaz of Ukraine to supply gas to OPZ. As a result, OPZ’s debt to the national oil and gas company amounted to 1,5 billion UAH.

Overall, OPZ’s debt to Naftogaz, Firtash’s companies and other companies amounted to 9 billion UAH.

Due to the lack of working capital OPZ could not independently produce fertilizers and was forced to switch to a tolling scheme.

The first toller in 2017 was ERU Trading of Andriy Favorov, Dale Perry and Yaroslav Mudryi.

In December of that year the plant’s toller changed—to Vseukrainska Enerho Kompaniya (VEK) of Oleksii Dubas. Work with it continued until April 2018, because VEK illegally took gas from the gas transmission system worth 500 million UAH and did not pay for the resource.

Since then OPZ’s operations were halted. In July 2019 OPZ signed a new tolling contract with Agro Gaz Trading LLC.

Agro Gaz Trading LLC was registered at the end of 2016. Officially the company belongs to businessmen Oleksandr Horbunenko, registered in Donetsk, and Volodymyr Kolot from Bila Tserkva in Kyiv region.

At the time of its creation the authorized capital of Agro Gaz Trading was 1 thousand UAH. As Economic Truth reported, in 2017 Agro Gaz Trading became the exclusive supplier of urea produced by OPZ when ERU Trading was the plant’s toller.

The tolling raw materials supply contract with Agro Gaz Trading was valid until December 2019. However, OPZ’s supervisory board approved an additional agreement and the work with the company was extended until 30 April 2020.

In January 2020 OPZ management announced a new tender to select a gas supplier on tolling terms for the plant’s operation in May–December.

The tender took place on 5 March and participants included IBE Trade of Oleksandr Rovt, TD "Socar Ukraine" from the Azerbaijani Socar group, Ukrnaftoburinnia of Ihor Kolomoisky and Vitaliy Khomutynnik, Swiss Maddox, Odesa trader Yug-Gaz and Agro Gaz Trading.

Ukrnaftoburinnia offered the highest processing fee: $39,5 per ton and $77 per ton respectively. Agro Gaz Trading was second with offers of $40 and $67,5 respectively.

On 10 March the supervisory board canceled the tender. Then the board renewed the composition of OPZ’s management, which decided to extend the contract with Agro Gaz Trading until 30 June 2020.

Due to the absence of a new tender, on 19 June the plant’s board extended the agreement with Agro Gaz Trading for another two months, or until the start date of work with a new toller chosen at a tender.

At the same time Agro Gaz Trading declares plans to participate in the plant’s privatization and actively posts promo materials saying the plant should be sold in parts.

OGHK (United Mining-Chemical Company)

The United Mining-Chemical Company (OGHK) was created in 2014 to manage the Vilnohirsk Mining and Metallurgical Plant (GMC) and the Irshansk Mining and Beneficiation Plant (GZK). It was created after the government terminated lease agreements for the property complexes of these enterprises with Krymsky Titan of DF Group of Dmytro Firtash.

Irshansk GZK is located in Zhytomyr region and mines and processes ilmenite ores (titanium ore). Vilnohirsk GMC is in Dnipropetrovsk region and produces concentrates of rare metals.

The ores mined and processed by OGHK’s enterprises are used in the production of titanium, pigments, ceramics, glass and rare metals—zirconium. For example, ilmenite ores from OGHK’s plants are used to produce titanium dioxide, which is used as a white pigment in the pulp and paint-and-varnish, rubber industries, white enamel and heat-resistant glass.

OGHK is the largest producer of ilmenite, zircon and rutile concentrates in Europe.

Before the change of power in 2014, Irshansk GZK and Vilnohirsk GMC supplied raw materials to titanium enterprises belonging to or controlled by Firtash: Krymsky Titan in Crimea, Zaporizhzhia Titanium-Magnesium Plant (ZTMK) and Sumykhimprom.

After the asset complexes of the plants were transferred to OGHK’s balance, it was headed by Ruslan Zhurilo—close to then-influential People’s Front MP Mykola Martynenko.

According to the National Anti-Corruption Bureau, after assembling a team Zhurilo implemented a scheme of selling the company’s products to affiliated foreign companies at understated prices, with subsequent resale of that product to end consumers at market prices.

The foreign companies that bought the plants’ products at understated prices turned out to be affiliated with Mykola Martynenko.

In January 2017 the NABU detained OGHK head Zhurilo on suspicion of causing damage to the company in the amount of 300 million UAH. In March he was released on bail of 12 million UAH, which at that time was posted by People’s Front MP and Martynenko’s ally Mykola Knyazhytskyi.

Zhurilo’s case is currently before the High Anti-Corruption Court.

Acting head became Zhurilo’s first deputy Oleksandr Hladushko, his ally. Thus, Zhurilo’s dismissal did not change the situation at the state enterprise.

In February 2020 the State Property Fund dismissed Hladushko and appointed Mykhailo Makarov as acting head. His first deputy became Peter Davis. However, already in 25 May the SPFU dismissed Makarov at his own request due to health reasons. The acting chairman of the board became first deputy Peter Davis.

A few days earlier the Fund decided to change OGHK’s board. Among other things, deputy and temporary acting chairman of the board became Artur Somov.

Both managers are connected by work in structures of Dmytro Firtash, who before 2014 controlled Irshansk GZK and Vilnohirsk GMC.

In particular, Peter Davis was formerly a member of the supervisory board of the bank "Klyringovyi Dim." In addition, until 2013, according to NBU data, Davis was CEO and co-owner of Promyslova Hrupa Monier LLC, which owned 50% of Klyringovyi Dim.

It seems Davis was only a front, since the bank was actually owned by Firtash’s business partners. The controlling stake belonged to sister of Serhiy Lyovochkin—Yuliia. Another co-owner was Ivan Fursin, a long-time business partner of Firtash.

At the beginning of 2015 Lyovochkina and Fursin officially registered the bank Klyringovyi Dim in their own names.

As for Artur Somov, earlier he was CFO of KarpatyGaz. Media linked that company to oligarch Dmytro Firtash.

In 2011 Ukrgazvydobuvannia, when it was headed by Firtash’s manager Yuriy Borysov, signed joint activity agreements with KarpatyGaz in gas production. As a result the company became UGV’s largest partner under joint activity agreements.

It is worth adding that Somov did not come to OGHK immediately from KarpatyGaz. In 2017 he worked for some time as CFO of Ukrenergo.

Electrovazhmash

Electrovazhmash is the only Ukrainian manufacturer of hydro and turbo generators for power plants and large electric motors. Turbines from this enterprise operate at power plants in Ukraine and other former Soviet countries.

In the past Electrovazhmash’s activities have been linked to a number of corruption scandals. In particular, sales of equipment to Russia through British intermediaries for 2,5 billion UAH; exports to Lithuania through intermediaries at understated prices; purchase of copper at inflated prices from the father of an MP from the BPP.

Several criminal cases are open against the former management of Electrovazhmash.

At the end of 2019 the Cabinet approved the SPFU’s proposal and appointed Viktor Busko as acting director of Electrovazhmash.

As the head of the SPFU Dmytro Sennichenko told NV in an interview, a well-known headhunting agency helped find the new manager for free.

The key word in the SPFU head’s phrase is "for free," because Busko is considered a man of oligarch Rinat Akhmetov, since from 2012 to 2018 he was CEO of the refractory production company PJSC "Zaporizhvognetryv," which is part of Rinat Akhmetov’s Zaporizhstal structure.

Busko then worked at Metinvest SMC LLC—a trader that sells rolled metal in Ukraine. The company is part of the Metinvest group of Rinat Akhmetov and Vadym Novynskyi.

Busko was also a deputy of the Zaporizhia regional council from the Opposition Bloc, a political force controlled by Akhmetov.

Why might Electrovazhmash be of interest to Akhmetov? The plant manufactures turbogenerators for thermal and nuclear power plants. DTEK Akhmetov controls 80% of thermal power plants in Ukraine that operate on Electrovazhmash turbines.

In addition, Electrovazhmash’s hydro and turbogenerators are installed at Ukrhydroenerho hydropower plants and Energoatom nuclear power plants.

Electrovazhmash also produces powerful electric motors used by metallurgical enterprises, including the Metinvest group of Akhmetov–Novynskyi, coal mines and rail transport.

Control over the production and sale of these important units for the energy, coal, metallurgical and transport sectors provides a market advantage and additional levers of pressure on competitors.

However, at the beginning of July the manager who worked in Akhmetov’s structures was replaced by a manager from Firtash’s structures. Instead of Busko, acting CEO was appointed Oleksii Bunesku, who previously served on the supervisory boards of gas distribution operators of RGC group of Dmytro Firtash. In those boards he represented the interests of one of the shareholders—OstChem of Dmytro Firtash.

ZTMK (Zaporizhzhia Titanium-Magnesium Plant)

Zaporizhzhia Titanium-Magnesium Plant (ZTMK) remelts ilmenite ores mined by OGHK plants into titanium sponge and ingots. ZTMK’s furnaces run on electricity, making the plant one of the largest electricity consumers when operational.

ZTMK is the only producer of metallic sponge titanium in Ukraine and Europe.

In 2013 a limited liability company Zaporizhzhia Titanium-Magnesium Plant (LLC ZTMK) was created based on ZTMK. 51% of charter capital went to the State Property Fund, and 49% to Tolexis Trading Limited of Cyprus, owned by Dmytro Firtash.

In exchange for shares in the newly created enterprise Firtash pledged to repay the plant’s debts and invest $110 million in development.

Having obtained operational control over ZTMK, Firtash’s managers supplied sponge and titanium slabs to Russia. As is known, the world’s largest producer of titanium alloys, VSMPO-Avesta, operates in the Russian Federation and is part of the Russian state corporation Rostec.

Investigators from the Specialized Anti-Corruption Prosecutor’s Office found that most of Firtash’s investments went to repay ZTMK’s energy debts to creditors affiliated with DF Group.

These funds were then withdrawn from Ukraine by transfers to offshore firms’ accounts.

At the same time, only 20 million UAH was allocated to modernization of production, which was supposedly the main goal of creating the joint venture with Firtash.

Because of this SAP lodged a lawsuit to annul the joint venture agreement, reached the Supreme Court and lost.

At the beginning of June the State Property Fund changed ZTMK’s management based on a decision made in February.

The new head was Serhiy Lubennikov. He replaced Volodymyr Sivak, who had led the LLC since November 2013—essentially since its creation.

In 2016 the NABU detained Sivak on suspicion of embezzling 492 million UAH from the plant’s co-owner Tolexis Trading; the funds were supposed to go to the plant’s development but were used to repay debts that the investor company itself was supposed to settle.

However, the Zavodskyi Court of Zaporizhia region acquitted Sivak in May 2019.

There is no information about the new head’s experience managing large industrial enterprises. Lubennikov was the founder of the little-known LLC "VS Management Group," which specializes in "non-specialized wholesale trade."