Another personnel reshuffle at Ukrzaliznytsia: the state-owned company's board chairman was dismissed in the midst of reforms at this natural monopoly. We tried to understand the reasons behind this and who benefits from it, writes DS.
Removal from office
On March 17, the Cabinet of Ministers approved the early termination of the powers of the head of the board of Ukrzaliznytsia (UZ) Volodymyr Zhmak. In his place, another member of the company's board, Ivan Yurik, will serve as acting head.
The day before, the Supervisory Board of Ukrzaliznytsia (Ukrzaliznytsia) spoke out about Zhmak's ineffective performance. Incidentally, Volodymyr Zhmak was scheduled to attend a board meeting on March 15 and a meeting of the Verkhovna Rada's temporary investigative commission (TIC) on March 18 to review and assess the state of Ukrzaliznytsia. However, on the day of the Supervisory Board meeting, he announced he had tested positive for Covid-19. Shortly before this, Ukrainian Prime Minister Denys Shmyhal asked the TIC to provide information on the company's performance from 2015 to 2021 within one day.
The reference here is to the Temporary Investigative Committee, which the Verkhovna Rada created in January to assess UZ and possible abuses between 2017 and 2020. Zhmak was appointed Chairman of the Board of UZ on August 26, 2020, having previously served on the supervisory board of the mobile operator Kyivstar. It appears that the parliamentary Temporary Investigative Committee, which was created to investigate previous abuses to which Zhmak could have no connection, has instead made him the scapegoat.
Notably, on March 11, UZ board member Irakli Ezugbaya, responsible for freight transportation, resigned. Prior to this, he had been repeatedly accused of deliberately undercharging UZ railcar rates, which led to a decline in the state-owned company's revenue. As Andrey Ryazantsev, former UZ business development director, wrote on his Facebook page, "Irakli Ezugbaya's resignation was merely an unsuccessful attempt to save Vladimir Zhmak's position."
Commenting on his resignation, Zhmak wrote on his Telegram channel that the Cabinet of Ministers lacked sufficient justification for his dismissal, and that the decision itself was made in violation of all procedures and legal provisions. According to his version of events, on his birthday (March 16), Zhmak received a call from the Supervisory Board congratulating him, and then was asked to urgently resign by mutual agreement.
"After this, today (March 17), breaking all stereotypes about the Ministry of Infrastructure's slow decision-making, the minister prepared and submitted a motion to the Cabinet of Ministers for my dismissal early this morning. Someone was in a hurry to get this done," Zhmak wrote.
What could such a sudden resignation mean?
"Perhaps Zhmak crossed someone. If they're removing him so quickly, then perhaps he was doing the right thing," Yaroslav Pilipchuk, head of the investment firm Investegy, told DS. "There are many vested interests within UZ that existed before Volodymyr Zelenskyy, and some remain. It's no secret that freight carriers wield significant influence, and SCM also has an influence. There's a big game going on there. I think these vested interests are simply taking advantage of the lack of governance and the president's authority."
Non-reformer
Vladimir Zhmak's maximum goal upon his appointment as head of UZ was to reform this unwieldy monster; his minimum goal was to improve its economic performance.
Zhmak faced five main reformist tasks:
- moving away from cross-subsidizing the passenger sector through freight tariffs,
- renewal of the locomotive and carriage fleet,
- modernization of railway infrastructure,
- disposal of non-core assets,
- the issue of staff optimization.
It's clear that all the problems—long-standing and complex—and any of the aforementioned reforms will inevitably affect the interests of various business groups across the country. Therefore, anyone who undertakes to reform UZ will, by definition, become a target for attack, no matter who they are.
Zhmak himself claims that his tenure has resulted in improved UZ performance and the development of an ambitious plan that would allow for the company's unbundling. (This refers to its division into four divisions: freight, passenger, infrastructure, and container.) His opponents, on the contrary, claim that last year UZ underperformed its financial plan by UAH 25 billion (a quarter of expected revenue). But is this the fault of Zhmak, who took over the company at the end of August?
In any case, it's already clear that Zhmak's problems began after UZ announced the creation of a separate freight transportation business vertical as part of its structural reform. The Ministry of Infrastructure supported this decision, but in early February, UZ's supervisory board decided to overturn the company's board's decision to create a freight transportation subsidiary, UZ Cargo, thereby halting the reform. One of the reasons cited was the underestimation of freight transportation costs—the state-owned company's main source of income.
The supervisory board also stubbornly refused to approve the company's financial plan, without which it can only pay salaries and make current payments.
Looking at last year's results, UZ ended with a loss of UAH 11,5 billion. One of the reasons for this is the decline in transportation volumes. In 2020, the company transported 305,5 million tonnes, a 2,4% decrease compared to 2019 (313 million tonnes). The decline in passenger traffic was even more noticeable: in 2019, 53 million tickets were sold on UZ trains, while in 2020, only 19 million were sold.
What Vladimir Zhmak stumbled on
UZ Supervisory Board member Sergei Leshchenko has repeatedly pointed out on his Facebook page that Metinvest (or rather, Metinvest-Shipping) has received almost half of UZ's gondola cars for three years in advance at a very, so to speak, attractive price.
The contracts in question are those signed between UZ and Metinvest, which insure steelmakers against rising freight rates. UZ has effectively reserved half of its gondola car fleet for Rinat Akhmetov's SCM Group (which includes Metinvest) until 2025.
Plus, a significant discount: with the auction's starting price at UAH 800 per day, Metinvest emerged as the sole winner, securing the minimum price of UAH 480. Estimates suggest that Akhmetov's company could save UAH 770 million on railcar usage fees.
This blatant use of UZ resources (essentially state resources) in the interests of one very large businessman has caused understandable indignation not only among his competitors, but also in the government.
The only question is whether this became the reason, or just the pretext for removing the head of UZ from his post.
Another problem for Zhmak was his poor relationship with the company's staff. Indeed, it would be strange if the railway workers supported a manager who came in to, among other things, fire a significant portion of the workforce.
On March 31, railway workers planned to hold a warning strike against UZ management. According to their statement, preparatory work began in production units on March 15, including handing administration reports, statements, and detailed memos detailing violations of labor laws, operating regulations, occupational safety laws, and instructions governing train safety.
Employees also complained that the health care facility's management had not paid them sick leave or bonuses for six months due to a lack of funds.
Who is Ivan Yurik?
Ivan Yurik, 39, has previously led UZ, serving as acting chairman of the board from April 16 to September 24, 2020. He is a US-educated businessman who worked for Blackstone in Ukraine and later at the Ministry of Finance of Ukraine. Since 2017, he has served as Deputy Director and Investment Manager at UkraineInvest, the Ukrainian Government Investment Promotion Office. In 2018–2019, he was a member of UZ's supervisory board, and in 2019–2020, he was a member of the state-owned company's management board.
Our experts doubt that the new head of UZ seriously represents any specific business or political interests. "I think this person is a comfortable figure for everyone associated with UZ. For us, the consumers of services, this is probably not the best option. For financial-industrial groups, it's probably convenient," Yaroslav Pilipchuk told DS. "But I know the experts' opinions—they say that Yurik is, in fact, a compromise figure."
Who benefited from Vladimir Zhmak's departure?
It's important to understand that any railway network is a state within a state, with its own laws, budget, and so on. Whoever controls a railway carrier can influence the entire national economy. And UZ accounts for 82% of freight traffic and almost 50% of passenger traffic in Ukraine.
So far, it appears that Volodymyr Zhmak's tenure at UZ was beneficial to Rinat Akhmetov, as it allowed him to increase the profitability of his metallurgical business. But many in Ukraine are interested in reducing freight transportation costs and are willing to weave intrigues at the Cabinet level to achieve this. The question is, who can actually achieve this?
"Considering the sanctions against Kolomoisky, and the possibility that there were also pro-Russian interests involved, the balance has shifted slightly and a more equidistant young man has been appointed," says Yaroslav Pilipchuk. "But the Ukrzaliznytsia issue still requires the political will of the president and the Cabinet of Ministers. That is, it's a matter of the highest political level."
Political will will be needed. As the expert notes, there are less than two years left until the end of the period when EU rail transport directives must be implemented and the main law, "On Rail Transport," must be adopted. These are deadlines stipulated in the Association Agreement with the EU. If Ukraine fails to implement this reform, it will mean we have effectively failed to expand our railway network to Europe. And this is directly related to investment projects, including infrastructure ones. Therefore, the state is currently most interested in bringing order to UZ and "equally distancing" all major businesses from it. Whether this will be possible is largely a rhetorical question.
In topic: Wagon black marketeers, get ready!
Subscribe to our channels in Telegram, Facebook, Twitter, VC — Only new faces from the section CRYPT!