What will happen to the victims of nationalization?
Five major companies have come under full state control, and DS wants to know how this will impact Ukrainian industry and the country's ability to meet its defense needs.
There is hope for a successful industrial policy in Ukraine, but the biggest advancements will only be possible after the war.
Recent main news reveals that five strategic enterprises – Ukrnafta, Ukrtatnafta, AvtoKrAZ, Motor Sich, and Zaporizhtransformator – have been completely transferred to state ownership based on Ukraine's Law on property transfer, expropriation, or seizure under martial law or a state of emergency. This is not nationalization, but a temporary seizure of their shares held in private hands.
“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 within five budget periods, essentially five years.
The state quickly gained or reinforced control of these strategic companies associated with Konstantin Zhevago, Igor Kolomoisky, Vyacheslav Boguslaev, and Konstantin Grigorishin. They held a general shareholders' meeting and formed new supervisory boards appointing new management. Ukrnafta and Ukrtatnafta are now managed by the former general director of the WOG gas station network, Sergei Koretsky.
In light of these events, two main questions arise:
- Will changes in ownership structure help increase production at these enterprises, especially for defense purposes?
- Why should the state have shares if, under martial law, the authorities can establish control over private enterprises' activities?
- Economically, the first question is more interesting, so we will focus on it and consider the second in parallel.
Victims of nationalization: The birth of a major oil company
Victims of nationalization: Ukrnafta
PJSC Ukrnafta is the largest oil producer in the country, completing last year with nearly 1.5 million tons of oil and condensate, as well as 1.1 million cubic meters of natural gas. It also retails petroleum products at over 530 filling stations. Ukrtatnafta's key asset is the Kremenchug oil refinery, which was destroyed by numerous enemy missiles. Both companies had a similar ownership structure, with the majority owned by the state through NJSC Naftogaz of Ukraine. However, 42% of Ukrnafta's shares and 28% of Ukrtatnafta's shares belonged to firms connected to oligarchs Igor Kolomoisky and Gennady Bogolyubov. It's also worth noting that the president of the DCH group, Alexander Yaroslavsky, reportedly owned a 28% stake in Ukrtatnafta.
Why would the state take these assets? According to Taras Zagorodniy, managing partner of the National Anti-Crisis Group, such a move is quite logical. Ukrnafta is crucial for strategy. The oil produced in Ukraine should primarily serve military needs. Refining oil within the country is currently impossible due to destroyed plants, so it must be processed abroad in Poland, Romania, or Slovakia to meet the army's needs. Therefore, it's only natural to transfer Ukrnafta to the Ministry of Defense, the expert stated during a national radio marathon.
However, the explanation that the government took the shares of oil companies from private traders because the army needs fuel does not completely satisfy the director of the A-95 group, Sergei Kuyun. He wrote on Facebook that the state already has NJSC [Naftogaz of Ukraine] and Ukrzaliznytsia, which can supply any amount of fuel, so he questions the need for a whole plant. He also points out that there is already more than enough oil products on the market and raises concerns about the destruction of Ukrtatnafta, stating that the plant will need to be rebuilt at a cost of hundreds of millions of dollars.
Later, the situation became clearer with the announcement of a new leader who will manage both companies and statements from the SBU about measures to ensure the transfer of the Kremenchuk Oil Refinery “in working order”. It became clear that the plan is to create an integrated oil giant in the future.
“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.
However, there will be no immediate changes at gas stations. Ukraine will still need to arrange channels for transporting produced oil for processing abroad, and the army's needs will continue to be a priority.
Overall, it is understandable why the state wants to take full ownership of these oil assets. There has been a long-running conflict between the government and large private shareholders over the control of management and taxes. Even with the majority of shares, the state could not always control the operational activities of oil companies. Therefore, the temporary withdrawal of the private shares from Ukrnafta and Ukrtatneft as strategic enterprises seems logical in the current situation.
Victims of nationalization: Mechanical engineering. Military rails
The second group of companies taken under state control is involved in mechanical engineering, including key components of the Ukrainian military-industrial complex such as AvtoKrAZ and Motor Sich, as well as Zaporizhtransformator, which is crucial for supporting Ukraine's energy system. Experts view the future of these plants positively.
According to Igor Guzhva, Doctor of Economics and Chairman of the Board of CMD-Ukraine, these are operational enterprises with potential. He believes that if the previous owners were unable to organize production for state orders or the market and prioritized their own interests over the state's, then the state has rightfully resolved the issue and must now ensure the proper operation of these enterprises.
Aleksey Kushch also sees opportunities for the success of strategic enterprises in state ownership, noting that each of these enterprises can have their own strategy and that they are large enough to form the basis for building a national industrial policy.
So, let's discuss each company and its prospects in more detail.
AvtoKrAZ and Motor Sich . Technique for life and defense
Victims of nationalization: AvtoKrAZ, Motor Sich
Indubitably, the Kremenchug Automobile Building Plant (AvtoKrAZ) plans to meet urgent defense needs. The company offers a wide range of armored vehicles and tractors used by the Armed Forces of Ukraine and the National Guard. The plant also produces special civil vehicles and is the only Ukrainian full-cycle manufacturer of heavy trucks.
AvtoKrAZ PJSC, which was part of Konstantin Zhevago’s Finance and Credit group, has been undergoing bankruptcy proceedings for many years due to owing billions of dollars to Oschadbank and other financial institutions. This prevented the plant from taking orders for a while, including those from the Armed Forces of Ukraine. The whereabouts of the loan money used for the plant's construction is unclear, but it's known that the State Bureau of Investigation suspected Zhevago of involvement in embezzlement and legalization of UAH 2.5 billion from Finance and Credit Bank.
However, despite this, the plant has production potential that could be further developed under state ownership.
“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.
Additionally, there are important details to consider 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.
Victims of nationalization: what will happen to them
Motor Sich JSC produces, repairs, and maintains military and civilian aircraft engines, including those for Soviet helicopters, and upgrades related 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. The company's net income from product sales last year was UAH 13.7 billion. However, the company also supplied engines and spare parts for Russian military aviation. In October 2022, the SBU detained the president of Motor Sich, Vyacheslav Boguslaev, on suspicion of collaborationism and complicity with the aggressor state.
“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's evident that most of Motor Sich's products will be manufactured under defense orders. The company is likely to reach its full potential after the end of hostilities. Alexey Kushch predicts that the enterprise can produce heavy attack drones post-war, and can also be used to launch a national program for the production of a Ukrainian multi-purpose helicopter instead of importing from France.
Victims of nationalization: “Zaporozhtransformator”. Energy system equipment
Victims of nationalization: Zaporizhtransformator
PJSC “Zaporozhtransformator” is known for manufacturing transformer and reactor equipment and was once a global industry leader with a declared output capacity of up to 60,000 megavoltamperes per year. The enterprise, which was part of the Energy Standard group of Konstantin Grigorishin, is currently in bankruptcy proceedings. Despite last year's product sales amounting to almost UAH 1.5 billion, the enterprise reported a loss of UAH 356 million. The exact number of products produced is unknown, but it's evident from these figures that the plant has utilized only a small portion of its capacity. The slowdown in output has been attributed to the emergence of aggressive competitors from Central Asia in the Ukrainian market. It's noteworthy that the last time the plant's transformers were purchased at Ukrainian state tenders was in 2018 for Ukrenergo. Most of the lots won were for services and were 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.
</blockquote
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
