Let us start with the economic one. The essence of NABU’s and SAP’s claims against Andrii Kobolev is that he received a bonus for the victory of ‘Naftogaz’ in the lawsuit against Russia’s Gazprom – in an amount that allegedly exceeded the maximum allowed by law. In numbers, that is $10 million in total and about $8.6 million more than the amount that investigators believe is permissible. It is impressive, I agree. However, the fact is that this victory brought Ukraine not only moral satisfaction, but also 4.63 billion (!) dollars including gas worth $2.1 billion that came in 2017, and cash payments, the actual amount of which was $2.918 billion (together with fines).
For this, under the terms of the contracts concluded long before the victory over the Russian gas company, a number of Naftogaz employees received bonuses in the total amount of about 45 million dollars – 1% of the amount of compensation that the court ordered Gazprom to pay in favor of Naftogaz (Kobolev received 0.2% of this amount). In other words, the work of Andrii Kobolev and the team he assembled and led as the head of Naftogaz brought Ukraine +4.6 billion dollars only within this lawsuit, without taking into account the transformation of the company from a stable recipient of taxpayer funds into a state budget donor.
Everyone can have own opinion how justified such bonus amounts are. It is only necessary to remember that competence and ability to achieve a result are always in demand. In the context of the public sector, we can recall Valeria Gontareva, who after the rescue of the Ukrainian banking system received a teaching position at the London School of Economics and a number of international recognitions of her results, despite a media campaign against her in Ukraine.
Instead, the widespread ‘economy’ on professionals in the public sector usually ends in one of two options – either the appearance of non-professional people (due to the reluctance of professionals to deal with the state in any format), or the appearance of people who are not even interested in the size of the official salary, ‘earning’ in other ways. The fact that the company’s management at that time received bonuses not for ‘presence’ but for the result and from the pockets of Russian, not Ukrainian, taxpayers is indisputable. It is time to move on to the legal side of the issue – what NABU and SAP incriminate Kobolev, why they accuse only him and what is their position based on.
According to the statement of the SAP, Kobolev is suspected of having committed the crime provided for in part 5 of Article 191 of the Criminal Code of Ukraine – appropriation, embezzlement or appropriation of someone else’s property by abuse of the official position by an official, committed in a particularly large scale or by an organized group.
The punishment under this part of Article 191 of the Criminal Code provides from 7 to 12 years of imprisonment with confiscation of property and deprivation of the right to hold certain positions or engage in certain activities for a period of up to three years. At the same time, the prosecution must prove the existence of an ‘organized group’; otherwise, the whole case falls apart.
The materials of the case have not been disclosed yet, but the position of the prosecution, judging by the public statements of the NABU and SAP, is based on the norms of Resolution of the Cabinet of Ministers of Ukraine No. 859 dated 19.05.1999 (as amended). This resolution regulates the terms and amounts of remuneration of managers of state-owned enterprises and contains a caveat that the amount of the quarterly bonus cannot exceed 3 official salaries of the head of the enterprise, and the annual one – 24 salaries. The total bonus for the year cannot exceed the size of 36 salaries of the manager. If we take as a basis the amount of the salary of the chairperson of the board of ‘Naftogaz’ according to the additional agreement to the contract of April 13, 2016 – 1,041,000 hryvnias, then the maximum amount of the bonus could be 37,476,000 hryvnias. According to the average dollar exchange rate at the time of the award payment (2017-2018) 26.6-27.2 UAH/dollar, this amount is approximately 1.4 million dollars, and the actual amount of the award was about $10 million, which is $8.6 million more.
The norm that the bonus should be equal to 36 official salaries did not appear immediately in Resolution No. 859 – it appears for the first time in the edition of December 15, 2015. CEO of Prozorro.Sales Oleksii Sobolev explained the emergence of this norm precisely because the state sector needed competent and qualified managers from the private sector who were not interested in ‘grey income’ at state enterprises. So, in this way, a compromise was found between the politically determined reluctance to set high salaries for managers of state-owned enterprises and the financially determined reluctance of competent managers to leave business for the public sector.
One may come across comments that managers of some public sector companies in some places have higher salaries than managers of a similar level in private companies. However, one should also take into account the risks (which are actually not ‘risks’, but a ‘mandatory option’) of a criminal case even for the achieved results, as in the case of Andrii Kobolev, or a guaranteed media campaign of hate, as in the case of Valeria Gontareva. Under such starting conditions, the only motive for a successful top-level manager to work for the good of the state is loyalty to the country. In other words, patriotism and willingness to exchange a relatively calm life in the private sector for one full of adventures and ‘surprises’ from politicians and law enforcement officers for the life of the head of a state company for relatively the same money. The ‘Kobolev case’ is able to reliably and permanently kill such motivation in anyone who considers such an option, and at a time when Ukraine needs it the most.
There is one more nuance. The norms of the mentioned Resolution No. 859 in different periods covered different types of state-owned enterprises, and the legal regime of different organizational and legal forms of enterprises is different. For example, according to the charter dated December 14, 2016, published on the group’s website, Naftogaz is a public joint-stock company. Until March 4, 2016, public joint-stock companies were not regulated by this resolution, even according to its text. Moreover, both before and after this edition of Resolution No. 859, the activities of joint-stock companies were regulated by a specific law, which determines, among other things, the procedure for establishing the amounts of management fees and the procedure for the execution of transactions (which, technically, is the payment of a bonus).
The actual amount of the Naftogaz manager’s bonus is determined not by a resolution, but by the norms of the company’s contract and collective agreement. Andrii Kobolev headed Naftogaz in March 2014, at that time, as already noted, the company was not subject to Resolution No. 859, and relevant legal relations were regulated by a specific law. Even after the amendment to the resolution, it did not prohibit the payment of bonuses for contracts concluded under the previous rules, and the amendment of these contracts was entrusted to the central and local executive bodies, ministries and committees, and not to the management bodies of state-owned companies. Andrii Kobolev does not belong to any of the listed categories by position. The most he could do in this situation is to resign if he disagrees with the new contract.
In other words, the bonus of the head of Naftogaz was calculated and paid according to the terms of the contract, to which Resolution No. 859 did not oblige to make changes, and the contract itself (signed before the appearance of the new version of the resolution) was not canceled by the resolution. Therefore, the head of Naftogaz could receive his bonus through ‘voluntary’ payment by the company, or via a lawsuit, as, for example, Yurii Vitrenko did in 2020.
At the same time, NABU and SAP, blaming Andrii Kobolev according to Resolution No. 859, did not come up with anything original. In 2019, the State Audit Service already applied this argument based on the results of a planned audit of the financial and economic activities of Naftogaz for the period from 04/01/2017 to 09/30/2018. With reference to Resolution No. 859, the State Audit Service accused Naftogaz of causing losses in the amount of 240,596,136 hryvnias (of which 228,834,009 hryvnias are the same bonuses) and demanded ‘to process the audit materials and eliminate the detected violations of the legislation in the prescribed manner’ , as well as ‘to consider the issue of bringing Naftogaz employees guilty of the specified violations to justice’. By the way, this conclusion of the State Audit Service became one of the reasons for criticism of Kobolev’s management.
For example, MP and head of the Temporary Special Commission of the Verkhovna Rada of Ukraine for the preliminary consideration of issues that could lead to crisis phenomena in the energy market of Ukraine Oleksii Kucherenko in a comment for ‘Bukvy’, with reference to the aforementioned auditors’ report, named both Kobolev and Vitrenko ‘criminals’, noting that the ‘whole chain’ of people involved in the payment of bonuses should appear in court. He attributes the progress in this case precisely to the dismissal of Andrii Kobolev and Yurii Vitrenko and the arrival of new management.
Due to such vague wording, which did not give a clear understanding of what should be done, Naftogaz appealed to the court. The Cassation Administrative Court of the Supreme Court did not agree with this approach, sending the case for a new consideration, but even after that the courts of the first and appellate instances came to the conclusion that the reasonableness of the losses accrued by the State Audit Service should be checked in the proceedings of the State Audit Service’s claim for their recovery, and not in the proceedings for the lawsuit of Naftogaz to cancel the request of the State Audit Service.
MP Oleksii Kucherenko believes that there was a conflict of interest in this case, because ‘the head of Naftogaz Kobolev, after the inspection and the requirements of the State Audit Service, should have made every effort to have the individual Kobolev return the previously received funds’. He also reminded that, based on the results of this inspection, the State Audit Service announced the groundless write-off of Gazprom’s receivables from Naftogaz for 11 million hryvnias. Naftogaz, disputing the position of the auditors, noted that it was not about write-off, but about the mutual crediting of debts between the companies.
The norms of Resolution No. 859 when applied to joint stock companies contradict (and did at the time of the events that are the subject of consideration) the Law ‘On Joint-Stock Companies’ (its previous version from 2008 with amendments). After all, by this law, the terms of the contracts and the amount of remuneration of the members of the JSC executive body were approved by the supervisory board. In addition, this law contained norms that regulated the commission of ‘deeds with an interest’ (deeds, as a result of which, in particular, an official of the company acquired property). Pursuant to Article 71 of the Law ‘On Joint Stock Companies’ of 2008 (valid until January 1, 2023), it was the supervisory board that made the decision to commit or refuse to commit such a transaction. In addition to the fact that the mentioned norms were also reflected in the statute of NJSC Naftogaz in force at that time (which was also approved by the Cabinet of Ministers Resolution No. 1044 dated 14.12.2016), it should be understood that the norms of the Cabinet Resolution, as a subordinate legal act, have lower legal force than the norms of the law and cannot be applied contrary to them.
It is these aspects that bring us back to the above-mentioned need to prove that the crime was committed by an organized group, and not by Andrii Kobolev alone. After all, as we can see, he could not decide and pay the bonus all by himself. This, in turn, means that the head of Naftogaz, together with other employees of the company who received the same bonuses for the victory over Gazprom (among them Yurii Vitrenko, to whom we will return later), should have entered into a conspiracy with the supervisory board, which agreed to pay these bonuses. At this stage, the legal aspect of the issue changes into the political one.
First, SAP does not mention any conspiracy or organized group of people in its statement. According to the investigators and prosecutors, Andrii Kobolev ‘deliberately hid from the members of the Committee on Appointments and Remunerations and the Supervisory Board the information that for managers of enterprises based on state ownership, the maximum amount of bonuses based on the results of work has been established, namely no more than 36 official salaries per year’… Please note – he did not ‘enter into a criminal conspiracy with the members of the Supervisory Board’, but ‘concealed’ publicly available information, which the Supervisory Board and the Appointments and Remuneration Committee should know by the content of their official duties.
It is not entirely clear for what reasons prosecutors and investigators want to portray professionals with an internationally recognized reputation as unfit people who believe arguments like ‘everything is fine, I tell you’ and sign everything that is brought to them, but this is exactly the impression that arises after reading the statements of the prosecution. One of the members of the supervisory board of Naftogaz at the time, Amos Holstein, is a senior advisor on energy security in the Biden administration. In other words, investigators and prosecutors must accuse a member of the Biden administration of corruption and provide sufficiently convincing evidence of this.
Member of the NABU Public Control Council Mark Savchuk, commenting for ‘Bukvy’ on the situation with Kobolev, noted, ‘I am just curious, what do they [investigators – ed.] think Kobolev did in order to convince Holstein? Did he offer him money? If the prosecution shows some recording – video, audio, where Kobolev sits with the members of the supervisory board and says, ‘I will give you ten [thousand dollars – ed.] each, and you vote for me for such a decision’, – then everything is clear. But I do not believe it.’ In his opinion, ‘receiving an award as a result of the company’s profit should not be punished, it is a normal practice’.
If there is no evidence, the current president of Ukraine will once again have to pretend that he does not remember how he already tried to do this to Biden himself based on the statements of Andrii Derkach, who is suspected of high treason in favor of the Russian Federation. And at the same time pretend that he does not remember the scandal that broke out after the current head of his Office Andrii Yermak promised to ‘help’ in the investigation of the case against Biden’s son at the request of Trump’s lawyer Rudy Giuliani.
So far, investigators and prosecutors have only actually accused Biden’s advisor of incompetence, but this does not save the case – you either need to go on and raise suspicions against the members of the supervisory board, or admit that NABU and SAP themselves are sabotaging this case.
Another interesting aspect is that besides Andrii Kobolev, other employees also received bonuses for the victory over Gazprom, but only Kobolev is accused now. For example, Yurii Vitrenko once reported receiving $4 million in government bonds. This amount also exceeds the limit established by Resolution No. 859, and even if it is assumed that Vitrenko’s position at that time was not covered by this resolution, this does not make the situation any less idiotic – for the same result and under the same conditions, the head of the company receives suspicion in a criminal case, and the rest of the participants receive bonuses.
It is the risks for corporate governance reform, which is one of the key demands of international donors and partners of Ukraine, that became one of the reasons for criticizing the actions of anti-corruption authorities in this case.
The importance of corporate governance reform in the public sector is consistently in the focus of the West’s attention. Back in 2021, when Andrii Kobolev was suddenly dismissed from the position, State Department adviser Ned Price emphasized that ‘respect for corporate governance, transparency and integrity in the appointment of personnel in the energy sector – whether government or state-owned enterprises – is key factor for maintaining trust in Ukraine and its commitment to reforms’. The current situation with the need for external assistance makes this trust much more necessary and important than two years ago.
Lawyer and diplomat Lana Zerkal, who in 2020 headed the legal group of Naftogaz in disputes against the Russian Federation, and after February 24, 2022 lobbied for the introduction of energy sanctions against the Russian Federation, believes that there will be two results in this case: ‘They will demonstrate to our American partners, that in reality there is no civilized corporate governance, which should protect foreign investment and international aid. Independent anti-corruption bodies will look like involved in politics and incompetence’.
Ludo van der Heyden, former independent member of the supervisory board of Naftogaz, expert in corporate governance, professor and former dean of INSEAD, one of the leading business schools in the world, and founder of the INSEAD Corporate Governance Center, notes that ‘the quality of government in the country is closely related to the quality of corporate governance’. According to him, ‘a lot of foreign money should come to Ukraine after the war’ and it is the elements of the corporate governance structure, such as boards of directors or supervisory boards, that are entrusted with the task of controlling that investments are spent properly.
Commenting to ‘Bukvy’ on the situation with Kobolev, the former president of Ukraine Petro Poroshenko, noted that he is proud that corporate governance reform became one of the key issues during his tenure, and Naftogaz turned from a loss-making monster into a profitable and transparent company, which brought in billions of hryvnias to the state budget.
Let us summarize. The problem with the accusation of Kobolev is not that Kobolev’s name appears in it. It would be just as ridiculous if it included the name of Vitrenko, or anyone else from the Naftogaz team that received bonuses for the victory in Stockholm over Gazprom. The problem is that this is a ‘punishment for success’. In addition, it has an extremely dubious legal justification.
The dismissal of Kobolev in 2021 already gave a clear signal – ‘the result you have achieved is of no importance, the only important thing is how much you ‘belong to the team’. This is perfectly demonstrated by the situation with Kobolev’s successor, Yury Vitrenko, who repeatedly failed in the Verkhovna Rada as a potential deputy prime minister and minister of energy, and in order to put him in the office, it was necessary to adopt a separate law that provided him with the same powers as the minister. Even in spite of this and despite a number of scandals in the position of the head of Naftogaz: with the purchase by his advisor of a Bentley for $500,000 during the war, the dismissal of the CEO of the company due to the authorities’ desire to keep Vitrenko as the head of Naftogaz at any cost, contrary to the position of the supervisory board (which led to the resignation of its members) and criticism regarding the illegality of his appointment, more than 4 billion hryvnias in losses in 2021 and 57 billion hryvnias in the first half of 2022, Vitrenko was not dismissed from his position, did not become a figure in criminal proceedings, but simply resigned the day before the heaviest heating season since 1991.
Under such conditions, Ukraine can only expect scandals with state procurement at several times inflated prices, managers of state-owned companies who continue to receive bonuses after turning billions in profits into billions in losses (but the size of these bonuses perfectly fits into the norms of Resolution No. 859, and the fact of their payment does not embarrass anyone), and after that they were promoted to minister, not for victories over Russia. The only question is whether the Ukrainian society needs this.
‘Bukvy’ contacted NABU for a comment, but did not receive a response at the time of publication. If the response arrives, the provided information will be added to this publication.