ICIS VIEW: Ukraine GTSOU CEO removal raises alarm over transit and government credibility

LONDON (ICIS)–The termination of Sergiy Makogon’s responsibilities as CEO of the Ukrainian gas transmission system operators on 16 September has been received with alarm by European traders at a time when markets are on edge over a supply crunch caused by Russia’s decision to curtail exports.

The Ukrainian TSO, managed by Makogon, had taken utmost care in guaranteeing the transit of gas in recent months even as Russia has been bombing the transmission infrastructure.

The removal of Makogon, however, raises concerns not only about the integrity of the transit as Europe is preparing for winter but also about the credibility of the Ukrainian government and its state-owned companies at a time when the country depends overwhelmingly on western support to win its war against Russia.

Ukraine has been warned by western donors to tighten up its corporate governance rules amid repeated instances where state companies came under political influence but the latest development at GTSOU shows that the warning has not been taken seriously.

Corporate governance and protecting state companies from political influence is even more important now that Ukraine is expecting to become an EU member.

In this context it is concerning that the termination of Makogon’s responsibilities was taken without even giving a proper explanation and leaving the door open to speculation by stakeholders that the step was taken so the government may get tighter control over a profitable company.

MGU tersely stated on its website the authorities of Sergiy Makogon as CEO of GTSOU were terminated.

Farid Safarov, deputy energy minister, responsible for corporate governance reform rejected any allegations of political influence, including the fact that the ministry, as the sole shareholder, had been pushing for the removal of the CEO.

ICIS had extensive discussions with all parties involved, including with Huberte Bettonville, chair of the supervisory board of MGU, the company set up to oversee GTSOU, but could not get a concrete answer regarding the reasons of removal.

She merely stated Makogon did not implement decisions taken by the supervisory board without giving proper examples, citing confidentiality issues.

In a statement posted on Facebook on Thursday, Makogon said one of one of the explanations quoted by the MGU for the termination of his responsibilities was the fact that he refused to comply with financial reporting standards recommended by the MGU supervisory board.

Several sources close to discussion told ICIS that if GTSOU had implemented the financial policies outlined by the MGU supervisory board, rather than abide by international standards as requested under Ukrainian legislation, it would have been in breach of the law. International auditors also gave a favourable opinion to the way GTSOU implemented financial reporting standards, according to documents seen by ICIS.

Bettonville declined to comment and she also declined to comment why Makogon was removed before the implementation of corporate reform that would entail the liquidation of MGU, a measure that had been outlined by international donors.

MGU’s supervisory board’s inability to give a clear official answer why Makogon was removed, raises significant questions regarding the measures and the intention behind such a decision.

Makogon insists MGU board members would like to keep their positions and salaries and had been worried about the fact that he was a vocal promoter of reform, which would have meant removing them from MGU.

Bettonville responded that at Ukraine hryvnia 270,000 (€7,500) a month, her salary was small and, potentially, not worth the trouble of working full time on the board of MGU.

ICIS attempted to speak to other board members, including Viktor Pynzenyk and Alexander Lisnichenko, amid accusations that they have a strong political background and may therefore be susceptible to political influence. There were also allegations that Pynzenyk himself had appointed a close friend to a senior position in MGU, despite the fact that he did not have the experience to carry out such a job. Neither Pynzenyk nor Lisnichenko responded.