Conflict between Ukraine’s tax police and Naftogaz (amidst growing financial difficulties)

Update (11/29): According to an article in Nov. 28th’s Ekonomicheskie Izvestia, Naftogaz has secured a UAH 260 million ($52 million) one-year loan from the state-owned Oschadbank (Ukraine’s state savings bank) which will be used to refinance its current debts to foreign lending institutions. Naftogaz’s debts to creditors currently stand at about $2.2 billion, and it had budgeted about $800 million for this year to repay some of those debts and pay off their interest. In the face of mounting pressure from its crediting institutions, Naftogaz turned to the domestic credit market for the means to refinance and keep the foreign lenders at bay, thus avoiding a potential default.

Oschadbank answered the call, in a deal likely orchestrated at the top level of leadership. Vladislav Kravets, the head of “NRB Bank,” is quoted as saying,

“The conditions of granting the loan will have been decided at the political level and the rate of the credit will have been negotiated with the leadership of the industry.”

This rate is likely to be “below market because the liabilities of the state bank are sufficiently cheap,” according to Sergei Borisov, the deputy head of the bank “Finance and Credit.” Anatoly Gulei, chairman of Oschadbank, noted that they agreed to the loan after “verifying [Naftogaz’s] ability to pay, [and] evaluating their security [pledge, deposit].” A likely factor in the decision is the outstanding debt owed to Naftogaz from the Ukrainian public (via the public utility system) of nearly UAH 1 billion ($200 million) since the start of the year.

Given this mounting financial pressure, it’s no wonder Naftogaz has been negligent on its tax payments (see below) — however, relying on state-controlled banks to stay afloat is not tenable or recommendable for the future. Instead, greater collection rates and higher tariffs (and possibly outside investment) are likely to be the only options for a viable, sustainable future for Naftogaz.

Naftogaz's company logo outside their main office in downtown Kyiv

Original (11/27): When the delegation from Ukraine’s national energy company Naftogaz Ukrainy urgently and unexpectedly left gas price negotiations in Moscow last week to fly back to Kyiv, early press reports suggested that Ukraine’s tax service was preparing to move against the company in an attempt to recover unpaid tax debts. According to a UNIAN representative,

Naftogaz possesses information regarding the possible forceful seizure of the [Naftogaz] administration building by the tax organ of Ukraine with the goal of the administrative arrest of the activities of the company.

The State Tax Administration (GNA) responded by calling such an idea “absurd:”

“This information is unreliable and even absurd, since forceful actions against NAK Naftogaz Ukrainy by the GNA were not only not conducted, but were not even planned.”

The GNA goes on to state that Naftogaz owes about UAH 2.3 billion (about $45 million) through November 1st, including UAH 90 million ($18 million) for the month of October alone. There doesn’t appear to be an agreement on the exact number, however, as the GNA had given Naftogaz’s debt at UAH 2.9 billion in October, while the company seems to think it only owes UAH 89 million.

Evgeniy Bakulin, the current head of Naftogaz, claims that the majority of the tax debt (however much it actually is) was accumulated during the first quarter of 2006, when the company was under the leadership of Alexander Bolkisev, implying that his management is not to blame. Of course, this was also the time-period directly following the contentious gas negotiations with Russia that resulted in unexpectedly higher prices — and problems — for Naftogaz.

Bakulin went on to issue a statement that suggests various interpretations of tax laws may be behind the different totals for the debt, but that he expects a resolution “soon:”

The financial plan of the company for 2007, approved by the Cabinet of Ministers Decree #1265, regulates all issues regarding tax debts, but due to irregularities of domestic law, there has arisen competition of some normative acts, resulting in different interpretations or varying obligations [debts].

The makeup of the relationship of Naftogaz and the GNA is an internal issue between the company and the tax service, and a settlement will be reached soon [в ближайшее время].

Also coming “soon,” he says, is Naftogaz’s deficit-free financial plan for 2008. I’m not sure which one is harder to believe — that Naftogaz will break even next year, or that it will pay all of its taxes (and debts) any time soon.

One response to “Conflict between Ukraine’s tax police and Naftogaz (amidst growing financial difficulties)

  1. Pingback: Kremlin, Inc » Naftogaz facing default if 2006 report isn’t published by end of the year

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