Five of the most powerful enterprises come under the full control of the state. DS is interested in how this will affect Ukrainian industry and the country's ability to meet its defense needs.
There is reason to hope for the emergence of a successful industrial policy in Ukraine, but the greatest breakthroughs will become possible only after the war
One of the main news of recent days is that by the decision of the National Security and Defense Council and decrees of the President, five strategic enterprises have been completely transferred to state ownership: Ukrnafta, Ukrtatnafta, AvtoKrAZ, Motor Sich and Zaporizhtransformator. This is not about the nationalization of companies, but about the temporary seizure of their shares, which were in private hands, on the basis of the Law of Ukraine “On the transfer, expropriation or seizure of property under the legal regime of martial law or a state of emergency.”
“Now they have to work 24/7 for the needs of our state. Enterprises that have already worked will receive more orders and more guarantees from the state for the production of products. The work of enterprises that have not functioned today will be resumed,” Prime Minister of Ukraine Denys Shmygal explained the decision.
When martial law ends, the owners must return these assets or reimburse their cost (which is given five budget periods, essentially five years).
The state quickly took (or strengthened) control over these strategic companies associated with Konstantin Zhevago, Igor Kolomoisky, Vyacheslav Boguslaev and Konstantin Grigorishin. In a matter of days, they held a general meeting of shareholders and formed new supervisory boards that appoint management. It is already known that Ukrnafta and Ukrtatnafta were transferred to the management of the former general director of the WOG gas station network, Sergei Koretsky.
Against these events, two main questions arise:
- Will they help changes in the ownership structure to increase production at these enterprises, in particular, for defense purposes.
- Why should the state have shares if, under martial law, the law allows the authorities to establish control over the activities of private enterprises.
- From an economic point of view, the first question is more interesting, so we will focus on it, and consider the second in parallel.
Victims of nationalization. The birth of an oil giant
PJSC Ukrnafta is the largest oil producing company in the country, which completed last year with almost 1.5 million tons of oil and condensate (as well as 1.1 million cubic meters of natural gas). Another line of work is the retail sale of petroleum products at more than 530 filling stations. And Ukrtatnafta's main asset is the Kremenchug oil refinery, destroyed by dozens of enemy missiles. The companies were united by a similar ownership structure: the majority is owned by the state represented by NJSC Naftogaz of Ukraine, however, 42% of the shares of Ukrnafta and 28% of the shares of Ukrtatnafta belonged to firms associated with oligarchs Igor Kolomoisky and Gennady Bogolyubov. It is also worth mentioning the president of the DCH group, Alexander Yaroslavsky, who, according to media reports, owned a 28% stake in Ukrtatnafta.
Why would the state take these assets? Taras Zagorodniy, managing partner of the National Anti-Crisis Group, considers such a move to be quite logical. Ukrnafta is a matter of strategy. The oil that is produced in Ukraine should be used primarily for military needs. Refining oil inside the country is now impossible, because the plants have been destroyed, therefore, it must be processed abroad – in Poland, Romania, Slovakia – to meet the needs of the army. Therefore, it is natural to transfer [Ukrnafta — DS] to the Ministry of Defense,” the expert said on the air of the national radio marathon.
However, the answer that the shares of oil companies are confiscated from private traders because the army needs fuel does not fully satisfy the director of the A-95 group, Sergei Kuyun. “The state has NJSC [Naftogaz of Ukraine] and Ukrzaliznytsia, which can bring any volume, why do we need a whole plant for this? In addition, there are more than enough oil products on the market. And most importantly, Ukrtatnafta was destroyed, more than 30 missiles flew there. The plant needs to be rebuilt, it costs hundreds of millions of dollars,” he wrote on Facebook.
Subsequently, the situation became clearer. After the announcement of a new leader who will manage both companies, as well as statements by the SBU on measures to ensure the transfer of the Kremenchuk Oil Refinery “in working order”, it became clear that in the future it is planned to create an oil giant with an integrated production process.
“The state has oil production and will have processing facilities (after the war, when they are repaired). The state also has a huge network of gas stations and is now becoming the second player in the bulk fuel market after the Privat group. In contrast, the state can create a vertically integrated company – from oil production to refining and sale of finished fuel – and influence the retail market. Consequently, we are building an almost Saudi model of managing the domestic market for petroleum products,” explained economist Alexei Kushch.
True, nothing will change at gas stations right now. As before, Ukraine will need to establish channels for transporting produced oil for processing abroad, and the needs of the army have been and will remain a priority.
In general, one can understand the desire of the state to fully take ownership of these oil assets. Recall that for many years a conflict continued between the government and large private shareholders of these enterprises over the controllability of management and the amount of taxes paid. And not always, even with the majority of shares, the state could control the operational activities of oil companies. Therefore, in the current situation, the temporary withdrawal of a private share from Ukrnafta and Ukrtatneft as strategic enterprises looks logical.
Victims of nationalization: Mechanical engineering. Military rails
The second group of companies taken under the wing of the state is engaged in mechanical engineering. Among them are the pillars of the Ukrainian military-industrial complex – AvtoKrAZ and Motor Sich, as well as Zaporizhtransformator, which is extremely important for supporting the energy system of Ukraine hit by Russia. Our experts assess the future of these plants as a whole positively, especially in the future.
“These are operating enterprises, and they definitely have potential. If the owners they had were unable to organize the current production process for state orders or on the market, and their own interests dominated the state, then, in my opinion, the state quite rightly settled this issue and now must ensure the proper operation of these enterprises ” , – says Igor Guzhva, Doctor of Economics, Chairman of the Board of CMD-Ukraine.
Aleksey Kushch also sees opportunities for the success of strategic enterprises in state ownership: “Each of these enterprises can have their own strategy. In general, these are large enough enterprises to start building a national industrial policy on their basis.”
So, let's talk in more detail about each company and its prospects.
AvtoKrAZ and Motor Sich . Technique for life and defense
Without a doubt, urgent defense needs are planned to be met at the Kremenchug Automobile Building Plant (AvtoKrAZ). The manufacturer's catalog contains a wide range of armored vehicles and tractors used by the Armed Forces of Ukraine and the National Guard. In particular, the company handed over a batch of KrAZ-6510TE truck tractors to the army a month before the Russian invasion. It is on the KrAZ chassis that combat vehicles, MLRS, Bogdan self-propelled guns, the Neptune coastal missile system, truck cranes, excavators, tankers, tankers, earthmoving vehicles, the transport base of the pontoon-bridge park and other army equipment. Detailed production statistics are classified. The plant also produces special civil vehicles (tractors, dump trucks, log trucks). This is the only Ukrainian full-cycle manufacturer of heavy trucks.
However, AvtoKrAZ PJSC, which was part of Konstantin Zhevago’s Finance and Credit group, has been in bankruptcy proceedings for several years (through billions of dollars in debt to Oschadbank and other financial institutions), which for some time prevented placing orders at the plant even for the needs of the Armed Forces of Ukraine. It is not completely clear where the loan money taken for the construction of the plant went, but it is known that the State Bureau of Investigation suspected Zhevago of being involved in the embezzlement and legalization of UAH 2.5 billion of the Finance and Credit Bank.
But, despite to this, the plant has a production potential that can be better developed in the ownership of the state.
“Mr. Zhevago promised many times to release products and let him down. Either it was released out of time, or at some other price. We have no time for games, no time for manipulations. It should be sustainable, transparent, understandable production,” Igor Guzhva is convinced.
In addition, there are important nuances in loading the production lines of the enterprise.
“AvtoKrAZ depends on 60-70% of the government order, primarily defense, or on government programs to stimulate the purchase of national trucks. And when state programs are created for private business, this always raises the question: why should the state, for example, compensate interest rates to this owner, that is, work for his profit, and if the enterprise is state-owned, then everything is logical, ”explained Aleksey Kushch.
Motor Sich JSC manufactures, repairs and maintains military and civilian aircraft engines, in particular for Soviet helicopters, and modernizes the corresponding equipment. The engines are used in Ukrainian missile systems (including the Neptune), and will also be installed on the Akinci heavy drones of the Turkish company Baykar (known to us as the manufacturer of Bayraktors). This is an actively operating enterprise: according to the YouControl analytical system, its net income from product sales last year amounted to UAH 13.7 billion. True, the company worked “on all fronts” to the last, supplying engines and spare parts for Russian military aviation. In the end, in October 2022, the SBU detained on suspicion of collaborationism and complicity with the aggressor state the president of Motor Sich, Vyacheslav Boguslaev, who bought shares in the plant during the privatization of the 1990s, and since 2017 tried to sell it. .
“Motor Sich has great prospects. If we talk about the classic products of the enterprise, then it now has, relatively speaking, clustering from Baykar. They plan our production, and they will install our engines [in drones]. And even if they have production in Turkey with our engines, this is also great, ”Igor Guzhva notes.
It is clear that the lion's share of Motor Sich's products will be produced under defense orders. It is likely that the company will fully reveal its potential after the end of hostilities. “After the war, this enterprise can produce heavy attack drones, and, most importantly, it can be used to launch a national program for the production of a Ukrainian multi-purpose helicopter (for the needs of the Ministry of Emergency Situations, police, medicine, etc.) instead of buying in France,” Aleksey Kushch predicts.
Victims of nationalization: “Zaporozhtransformator”. Energy system equipment
PJSC “Zaporozhtransformator” is known as a manufacturer of transformer and reactor equipment, in the past one of the world leaders in the industry (with a declared output capacity of up to 60 thousand megavoltamperes per year). Now the enterprise, which was part of the Energy Standard group of Konstantin Grigorishin, is in bankruptcy proceedings. According to YouControl, last year the company's income from product sales amounted to almost UAH 1.5 billion (despite this, it showed a loss of UAH 356 million). The exact number of products produced is not known, but it is already clear from these data that the plant has used a small part of its capacity. Recently, they explained the slowdown in output by the appearance of aggressive competitors from Central Asia on the Ukrainian market. It is interesting that the last time transformers of the plant were purchased at Ukrainian state tenders was in 2018 (for Ukrenergo), most of the lots won were for services and inexpensive.
Ukraine's needs for Zaporizhtransformator products are obvious, because Russian terrorist troops are hitting the distribution capacities of the unified energy system. First of all, we have to agree on the immediate import of the relevant equipment.
“We and our partners are looking for opportunities to get additional transformers, to deliver these elements to Ukraine in an accelerated mode, to carry out repair work – we are working extremely intensively on any damage,” adviser to the head of the President’s Office Mikhail Podolyak recently assured.
The seizure of Zaporizhtransformator into state ownership indicates that the authorities are striving to provide the country with equipment critical for the energy system and at the expense of internal capacities (although, according to some information, they could have suffered from Russian attacks). For obvious reasons, exact data on the potential of the enterprise and specifics regarding damage to the energy system are not disclosed, so it is difficult to say what percentage of domestic demand Zaporizhtransformator could satisfy at this difficult time. However, experts are sure that this enterprise can bring a lot of benefits, so the state should support and develop it.
Aleksey Kushch believes that now the plant can produce transformers for energy, and after the war – build in the Zaporozhye region a new technological chain: from lithium mining to the production of electric cars.
“One of the best cluster development models can be implemented at the Zaporozhye Transformer Plant, given that there are lithium deposits in the region… That is, it is possible to mine lithium, then produce batteries for electric vehicles at the Zaporozhye transformer plant and electric vehicles at the Zaporizhzhya Automobile Building Plant,” the economist suggests.
True, the new owner has already begun to set up barriers for the Ukrainian power engineering industry – the government has canceled duties and import VAT on power generators, transformers, electric batteries and other power equipment.
“On the one hand, this seems to be good, but on the other hand, we have Zaporizhtransformator, which needs to be loaded, and several more manufacturers of power equipment. So that it does not happen that our companies are trying to survive, investing, creating or retaining a workforce and paying taxes, and the order will be given to someone else, so the state should form a policy like this: if you want to help Ukraine, in particular with energy equipment, then buy it from us, it will reduce the purchase cost, time, logistics, delivery speed, keep employment… When we produce this power equipment for ourselves, we will receive, firstly, equipment, and secondly, a working enterprise, wages and taxes,” explained Igor Guzhva.
So, the strategic five industrial enterprises passing under the wing of the state have new prospects. Moreover, there is reason to hope for the emergence of a successful industrial policy in Ukraine. However, the biggest breakthroughs will become possible after the war, and in the near future these factories will probably not work non-stop for the needs of defense.
“Shmygal made a communication error. None of these enterprises can now work for defense 24/7, because they will be under Russian missiles. He should have said that these enterprises would work 24/7 after the war within the framework of the national industrial policy, and then the state would play a greater role than before the war,” says Alexei Kushch.
I want to to believe that Ukraine will not miss the chance to build a powerful industry.
Aleksey Shevnin, Deputy Editor-in-Chief, Editor of the Economics Department
Who will manage Ukrnafta and Ukrtatnafta: composition of supervisory councils
Ukrnafta, Motor Sich and other enterprises become the property of the state