ISSUE 11
18. 09. - 01. 10. 2022
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- Security situation update
- NATO application
- Russian formal annexation of four Ukrainian territories
- Western concerns about government interference in the work of Ukraine's energy companies
- Ukraine moves businesses to safe territory
- Preparations ahead of the Berlin Recovery Conference
- New sanctions against Russia
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SECURITY SITUATION UPDATE |
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“Russia will continue waging war against Ukraine until its military goals are achieved”, Putin’s spokesperson Dmitriy Peskov told reporters on 30 September, following the proclaimed annexation of the four Ukrainian regions. The borders of the annexed territories were defined vaguely in the Russian documents, whereas on the ground Russia does not fully control either of the regions it lays claim to, with only 60% in Donetsk Oblast. Peskov blamed Ukraine’s “unwillingness” to talk but Zelenskyy said Ukraine is ready to resume dialogues when there is a new president in Russia, which was considered to be a clear signal to the internal Russian forces opposing Putin’s further escalation of the situation.
Meanwhile the Armed Forces of Ukraine (AFU) continue gradual advances in North-Eastern and Southern directions. On 1 October, the AFU liberated Lyman, which was occupied by the Russians since 26 May and was announced as part of the Russian Federation following Moscow’s ceremony of annexation.
Central and South Ukraine is regularly attacked by Russian missiles and drones. Attacks against civilian targets intensified. On 30 September, three Russian missiles struck a highway where a long convoy of civilian cars was waiting to cross into the occupied parts of Zaporizhzhia Oblast, reportedly to evacuate people from there, the Interior Ministry said. At least 30 people were killed and 88 were wounded, including children. On 2 October, Mykolaiiv was attacked by seven Iranian Shahed 136 kamikaze drones, five of which were downed by the Ukrainian Air Defence. Russians continue to shell Ukrainian areas close to its border mainly in Kharkiv and Sumy regions. Belarus maintains seven batallion tactical groups (BTGs) close to the Ukrainian border, supporting railway transportation for Russian troops.
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Over the month of September, the AFU liberated approximately 10,608km² of Ukraine. This means that Russia currently occupies ~17.72% of Ukraine, which is ~1.76% less of the total area of the country than at the end of August. Ukraine’s advancement into the occupied territories has not been suspended following the annexation of these regions. So far, Ukraine holds the upper hand on the battlefield, though Russia is expected to significantly increase the number of troops on the ground over the coming month. This could potentially lead to Ukraine’s withdrawal from some positions, though experts agree that with the current logistical challenges Russian command is facing, the factor of the newly mobilised forces is unlikely to change the situation dramatically. Lack of success on the ground is likely to be compensated by the Russian Armed Forces (RAF) with increased violence through missile attacks, or by the application of non-conventional arms in longer perspective. However, experts believe that Russia has not exhausted its conventional potential to escalate the situation. In addition to combat actions, analysts expect intensification of the information and psychological operations, targeting audiences inside Ukraine and abroad, including further accusation of the Ukrainian government (as U.S. proxy) in provoking escalation and forcing Russia to consider a nuclear response.
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On 30 September, following the proclaimed annexation of the four Ukrainian regions by Russia, the Ukrainian National Security and Defence Council and President Zelenskyy announced that Ukraine had submitted an official application to join NATO. "We are de facto allies already," Zelenskyy said. "De facto, we have already proven compatibility with Alliance standards… Hence, Ukraine is applying to confirm it de jure by an expedited procedure," he stated. The Deputy Head of the Office of the President, Ihor Zhovkva, later elaborated that Ukraine refers to the precedent of Finland and Sweden, which are rapidly moving towards NATO without the Membership Action Plan (MAP), and wants to join the Alliance under a similar procedure.
The move was positively met by the internal audience, both pro-governmental and opposition, whereas international reaction was ambiguous. NATO officials’ response to the news was rather non-committal, citing “open door policy” with no clarification of what Ukraine's “accelerated" application to join the alliance would mean, as Ukraine was already considered an “aspirant country” since 2018. “Our focus now is on providing immediate support to Ukraine, to help Ukraine defend itself against the Russian brutal invasion”, NATO Secretary General Stoltenberg stated at his press conference on the same day. White House national security adviser Jake Sullivan said the application process in Brussels “should be taken up at a different time.” However, on 2 October, the heads of nine European NATO members on Sunday issued a joint statement backing a path to NATO membership for Ukraine, and calling on all 30 NATO nations to ramp up military aid for Kyiv.
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Zelenskyy’s Office claimed that the announcement on the accelerated application was pre-coordinated and consulted with Ukrainian partners. However, according to many insiders, it came as a surprise to NATO officials, as well as Allied governments. It is worth noting that the reaction of the Allies to this impromptu announcement turned out to be more favourable than could be expected under such circumstances. This was the case because it does not entail any obligations for the Alliance and remains a political declaration rather than practical step, since the procedure for joining NATO (unlike the EU) does not foresee the need for official application at all. Experts believe that the language on the “accelerated approach” was inspired by the Ukrainian recent successes on the European integration agendaand warn against inflated expectations very visible in Kyiv. Amongst those concerns are also the Ukrainian government’s confidence that Ukraine fully meets NATO standards and principles, and that its accession to NATO therefore only depends on the political consensus of 30 member-states, rather than on the internal reform processes. However, Ukraine’s readiness to meet all the political and military criteria of the membership is objectively lower than that of Finland and Sweden, despite recent progress of the implementation of the Annual National Programs, which served since 2009 as substitution for the Membership Action Plan. Finally, NATO’s bid is unlikely to change recently announced Kyiv Security Compact plans. Summing up, Kyiv is likely to move towards membership no faster and no slower than it was before 30 September, but this symbolic application announcement will help Ukraine to consolidate its internal audience, as well as institutions, to meet this goal. In addition, that may intensify the advocacy efforts of the Allies, who are in favour of Ukraine’s joining NATO.
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RUSSIAN FORMAL ANNEXATION OF FOUR UKRAINIAN TERRITORIES |
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On 30 September, the Kremlin held a ceremony on the "joining the Russian Federation of new territories" – Donetsk Peopleʼs Republic, Luhansk Peopleʼs Republic, Kherson and Zaporizhzhia regions of Ukraine. Vladimir Putin signed the relevant documents together with the so-called "leaders" of these territories, who were appointed to "positions" by Russia. Putin asked the Federal Assembly to support constitutional laws on the adoption and formation of four new subjects of the Russian Federation and not one common, an option considered earlier.
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“Accession” was the result of the so-called “referendums” that Russia held on the occupied territories of Ukraine on 23-27 September. None of the Western democracies recognized these “referendums”. In his address, Putin spoke about Donetsk, Luhansk, Zaporizhzhia and Kherson regions despite the fact that they are only partially controlled by Russia. Moreover, after the recent liberation of the city of Lyman in the Donetsk region, the AFU have begun a large-scale liberation of Luhansk region as well as Kherson region. Lyman most probably became only the first of the liberated cities that were formally “annexed” by Russia on 30 September.
According to the logic of the Russian authorities, further attempts by the Armed Forces of Ukraine to liberate these territories will be perceived as an encroachment on the sovereignty of the Russian Federation, which will allow the Kremlin to use all necessary force against Ukraine and also officially declare full mobilization (instead of the “partial mobilization” already underway).
For Kyiv, as president Zelenskyy announced, these events haven’t change anything – the counteroffensive of the Armed Forces will continue. In the statement released by the White House, US President Joe Biden announced that “these actions have no legitimacy. The United States will always respect the internationally recognized borders of Ukraine.” The European Council and many world leaders made similar statements in support of Ukraine.
Vladimir Putin once again (for the third time in recent weeks) declared that he is ready for negotiations with Ukraine, but that "we will not discuss the choice of people in Donetsk, Luhansk, Zaporizhzhia and Kherson" (Zaporizhzhia was and is under the control of Ukraine). In turn, Volodymyr Zelenskyy noted that Ukrainians are ready "for a dialogue with Russia, but already under a different President of Russia".
The Russian Orthodox Church announced that it "will organize the life of parishes in the territories where the referendum was held”. That in fact means the annexation of the corresponding parishes of the Ukrainian Orthodox Church (UOC; previously named as Ukrainian Orthodox Church - Moscow Patriarchate). At the beginning of June, this already happened with all Crimean UOC parishes.
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WESTERN CONCERNS ABOUT GOVERNMENT INTERFERENCE IN THE WORK OF UKRAINE'S ENERGY COMPANIES |
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The G7 ambassadors in Ukraine expressed concern about the government's interference in the management of state-owned companies - the Gas Transportation System of Ukraine (GTSOU; which transits gas through the territory of Ukraine) and Ukrenergo (operator of electric grids). In a traditionally diplomatic manner, they noted that following the principles of corporate governance of the OECD (Organization for Economic Cooperation and Development) in state-owned enterprises will increase the confidence of investors, stop corruption and speed up post-war recovery.
Earlier, the US Ambassador to Ukraine Bridget Brink, following the meeting with the Minister of Energy of Ukraine Herman Halushchenko, stated that it is important for Ukraine to have transparent management of state-owned energy enterprises in accordance with OECD standards, so that it remains strong in the face of Russian aggression, especially Ukrenergo and GTSOU.
The problem has been brewing for some time, but the trigger was the scandalous dismissal of Serhiy Makohon, the general director of GTSOU. He was fired on 16 September, but plans to appeal his dismissal. This situation highlighted several similar cases, which became the reason for journalistic investigations of the actions of Ukrainian high-ranking officials in relation to the top management of the largest energy companies.
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The cause of the problem is the state's desire to manually manage energy companies that operate with the huge funds. There is only one safeguard against such malign interferences – an independent supervisory board and effective management. Ukraine undertook to implement OECD principles in all the largest state-owned companies. The OECD principles are the rules according to which state-owned enterprises must work without political influence, when the company is managed by a supervisory board, operational activities are handled by an independent manager, and the government sets targets for everyone. This system works only if the supervisory board is chosen according to transparent procedures, its members value their own reputation, and the CEO, chosen by competition, is immune against the phone calls “from the top” (in Ukrainian state-owned enterprises a lot is often decided by such calls). Most often these interferences concern the “money flow”. For better understanding we provide the latest examples.
Case of GTSOU
Makohon was dismissed by the supervisory board of the state company JSC “MGU” (Main Gas Pipelines of Ukraine). It was this company that was supposed to become the operator of the gas transportation system of Ukraine (GTS). At the same time, in the process of unbundling (separation of gas transportation and sale, as required by European legislation) of Naftogaz of Ukraine, GTSOU became the operator of GTS. In turn, GTSOU was transferred to the ownership of MGU. Back in October 2021, the Secretariat of the European Energy Community (which participated in the certification of GTSOU) stated that JSC “MGU” had fulfilled its function and could be disbanded. In June 2022, the supervisory board of MGU approved the merger with GTSOU, and later decided on a candidate for the position of head of GTSOU. However, the Cabinet of Ministers refused MGU’s right to appoint its own candidate for this position.
In a letter to the Prime Minister of Ukraine on 18 July, the Secretariat of the Energy Community expressed concern about the Cabinet's control over GTSOU and the implementation of corporate governance reform. The Secretariat expected that the supervisory board of MGU would act as a counterweight to any interference and improve proper corporate governance, but the reality in recent years has shown that this two-layered corporate governance has not led to independent and effective management of the GTSOU. The OECD corporate governance plan was approved by all parties at the beginning of 2021. Following that, the Secretariat, together with the World Bank, advised to appoint a truly independent supervisory board of GTSOU and subsequently liquidate MGU. However, this was not implemented. Instead, the Ministry of Energy, through MGU, is lobbying for the candidacy of one of the Deputy Ministers of Energy, Mykola Kolisnyk, for the position of the general director of GTSOU (instead of the dismissed Makohon). The National Agency on Corruption Prevention sent a letter to the chairman of the supervisory board of MGU, warning of a possible conflict of interest in Kolisnyk. If Mykola Kolisnyk is appointed as the head of the GTSOU, it will confirm the authorities' intentions to hide certain financial schemes and will disregard normal rules of corporate governance, ethics and anti-corruption requirements.
Case of Naftogaz
Another vivid example is Naftogaz of Ukraine. Last year, its CEO Andriy Kobolev was de jure dismissed due to poor financial performance. It was done in such a way that the entire international community exploded. Only the supervisory board could dismiss the CEO. In order to remove the top manager, it took the Ukrainian government only 15 minutes to dismiss the whole supervisory board, take over its powers, dismiss the CEO, appoint another and renew the supervisory board. The reason for the conflict with Kobolev, according to the media, experts and Kobolev himself, was that he did not want to scarify UAH 50 billion from the company's accounts after calls from the president's office.
As a result, the independent supervisory board also resigned, the government temporarily took over its powers, and this "temporary" lasted for more than a year. Manually managing a company with multibillion-dollar cash flows is a handy tool, especially if the new CEO is loyal to the government. The fact that this blatant misconduct will discourage new investments does not scare the government.
In early August, G7 ambassadors called on Ukrainian government officials to speed up the election of the supervisory board of Naftogaz of Ukraine. Almost two months have passed. No development in this regard has been observed. The Ministry of Economy of Ukraine announced a competition for the selection of four independent members of the supervisory board of Naftogaz exactly one year ago and the approval of the new composition was expected in February 2022. Still, the Cabinet of Ministers continues to perform the functions of the supervisory board of the Naftogaz. For instance, recently they did not allow Naftogaz to make a payment on Eurobonds, as a result of which Naftogaz declared a technical default.
Case of Ukrenergo
Several sources in the market reported attempts to change the head of Ukrenergo, Volodymyr Kudrytskyi. The motive is again simple - money. During to the war, only the energy industry continues to generate large cash flows thanks to a fast pace of synchronization of the Ukrainian energy system with the European one and thus securing the opportunity to sell electricity to the EU. Only in the first two weeks of September, Ukraine set a trade record, exporting $131 million worth of electricity, and electricity took second place in Ukraine's trade balance. This money is received by the state (through the state operator Ukrenergo). The mechanism of distribution of these funds established by the parliament is quite transparent. It is difficult to violate it, but there is obviously a desire to get third-party access to these funds. The trust of international financial organizations to the current management of Ukrenergo is relatively high. It can only be undermined by very serious accusations. According to the media, the Ministry of Energy has collected compromising material to prove to president Zelenskyy that he can use his authority to convince everyone that Kudrytskyi should be removed (all accusations against Kudrytskyi are related to auditing and financial reporting). The general trend, methods, purpose and selection of affected companies are strikingly similar.
Guided by the ultimate argument of “We have a war!”, the government can do anything, and foreign partners are asked to understand, sympathize and help. But the latest signals from Western partners seem to be clear - there will be no additional funds until there is transparency in the management of the largest state-owned companies. Apparently, the signal was still not heard. If certain power structures manage to implement their plan to remove progressive top managers and delay the introduction of high-quality corporate governance, the energy sector will permanently be closed for Western partners who monitor how Ukraine spends the provided funds.
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UKRAINE MOVES BUSINESSES TO SAFE TERRITORY |
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Due to the ongoing war, the Ministry of Economy of Ukraine in March started a program to relocate businesses to safer regions. Every entrepreneur can apply for it online. Since the beginning of the program, 745 enterprises have already moved to safer regions, and 558 have resumed operations in new locations. The largest number of businesses moved from Kharkiv oblast - 193, Kyiv oblast - 180, Donetsk oblast - 106, Dnipropetrovsk oblast - 27, and Zaporizhzhia oblast - 26 enterprises.
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Ukrainian business is actively recovering from the impact of the war. At the end of summer, almost 65,000 Ukrainian businesses were registered in the temporarily occupied territories. One of the many assistance methods from the state is the relocation program. This program has been in place since the beginning of the war, and there are no restrictions on the form and scale of enterprises that can take advantage of it. However, only 1,846 requests for relocation were registered during this time.
On the one hand, Ukraine would hardly be able to help a larger number of businesses in a short period. On the other hand, the small number of applications may indicate insufficient awareness of such a program. In addition, the Ministry of Economy requires that those enterprises which took advantage of the program will return to their communities after the war and will be helping in the recovery of the local economy. This condition may deter many entrepreneurs since not all have the desire to return to the territory destroyed by war.
The state prioritizes enterprises which are part of the defense and military complex and those that ensure the vital activities of the population and the economy. However, the privileges of such businesses end with the fact that their applications are processed a little faster than everyone else’s. There are no criteria by which entrepreneurs can be refused relocation. After a favourable decision, the enterprise will receive a package of state support, which includes:
- selection of the location of the company's facilities;
- assistance with transportation to a new location;
- assistance in the resettlement of employees and the search for new employees;
- support in restoring logistics, purchasing raw materials, and finding sales markets.
The process of relocation from dangerous areas takes a long time due to logistical difficulties and high costs. In addition, the east of Ukraine, which now suffers the most from constant shelling, was the country's industrial centre. The industrial infrastructure in the west simply does not meet the criteria for these enterprises. However, the western regions benefit from the relocation of other businesses. This contributes to the creation of new jobs, the development of industry, and an increase in the number and choice of goods in local markets. Therefore, the local authorities of various communities are trying to create favourable conditions which would attract entrepreneurs from the east and south of the country. For example, in Lviv, resettled entrepreneurs can receive financial assistance from 2,700 to 8,300 euros as a support, industrial parks are being created in various regions, etc. The Ministry, state-owned enterprises, and local authorities are trying in every possible way to help in this process. After all, every saved business means taxes, jobs, and support for the country's economy.
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PREPARATIONS AHEAD OF THE BERLIN RECOVERY CONFERENCE |
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On 25 October, Berlin will host an international conference on the Recovery of Ukraine within Germany’s G7 Presidency together with the EU and Ukraine. The official announcement about it appeared on the dedicated website of Germany’s G7 Presidency.
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The status of the Berlin conference surely creates questions. Unlike the previous Lugano conference that was a high-level event hosting state leaders, this one is called an “expert conference”. As stated by Olaf Scholz within the UN General Assembly, “Together with supporters of Ukraine from all around the world, we will think about how we can manage this Herculean task” (meaning Ukraine post-war reconstruction). Therefore, it is most likely to gather the world’s “brains” to discuss possible solutions for the reconstruction puzzle (earlier calculations by the World Bank estimated reconstruction needs of USD 350 billion). Any substantial commitments on funding Ukraine’s reconstruction are less likely to happen also because of the unpredictability winter can bring to Ukraine’s partners and the shortage of funds to cover Ukraine’s immediate needs.
The Ukrainian government will probably arrive to Berlin prepared with some practical steps made. First of all, the it will present its new “Rebuild Ukraine” digital management platform. This system will manage reconstruction process within five modules, which are: collecting damages, reconstruction projects planning, implementation, public procurement (through Prozorro), and public monitoring. Open questions here are where the money will come from and how donors would be able to control it. To that end, the Office of the President speaks about the Ukraine Recovery Fund presented to partner embassies at the Office of President on 13 September. The draft law was expected to be registered in Verkhovna Rada a week after, however it is not on Rada’s register as of 3 October. The reason for this delay is probably the ongoing debates with international partners with whom this draft should have been agreed. Some international partners previously criticized the idea of creating a separate fund for Ukraine’s recovery as many of them have their trusted funds and banks through which they support Ukraine. By creating a recovery fund and digital platform, Kyiv is evidently trying to lead the recovery process. However, the EU, G7, and German government might have a different view on the reconstruction architecture. For example, the GMF report, prepared on the request of the German government ahead of the conference by the German Marshall Fund, suggests that reconstruction should be led jointly by G7 and the Ukrainian government and coordinated by “an American with global stature”. At the end of the day, the sides will have to reach consensus on the distribution of roles and focus on the most important issue – where to get the money.
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NEW SANCTIONS AGAINST RUSSIA |
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Partial mobilization, nuclear threats made by the Kremlin, and pseudo-referendums in the temporarily occupied territories of Ukraine caused a wave of criticism from the leaders of western capitals and led to new sanctions against Russia. The United Kingdom was the first to impose sanctions against Russia due to fake referendums. The EU strongly condemned the further escalation of the Russian Federation. On 28 September, the European Commission presented the eighth package of sanctions, which will be approved on 6-7 October during a meeting of the European Council. On 30 September, the United States and Canada announced the expansion ofsanctions in connection with the attempted annexation of four regions of Ukraine by the Russian Federation.
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Russia's aggressive war against Ukraine and the new escalation forced Western leaders to respond accordingly. The instrument of deterrence will be the new restrictive measures. In particular, the draft of the eighth package of EU sanctions against Russia contains new bans on imports of Russian products, restrictions on oil prices (price cap), and a ban on entering the governing bodies of Russian state-owned companies for EU citizens. It is estimated that the ban on imported Russian goods will deprive Russia of 7.5 billion euros. In addition, it is proposed to expand the list of goods and services prohibited for export from the EU to Russia. Ursula von der Leyen listed such goods as aviation parts, electronic components, and some chemicals. Such restrictions will deprive the Kremlin's military-industrial complex of many key technologies. And this, in turn, will weaken the Russian economy and its ability to modernize. It is also planned to introduce fines against those who try to evade sanctions. This will be applied to companies that buy the banned goods in the EU, deliver them to third countries, and then send them for sale to Russia. After its expansion, the sanctions list will have more than 1,300 individuals and legal entities. In the future the list will be replenished by supporters of pseudo-referendums and the invasion of Ukraine. In general, approving such a list of restrictions has significantly reduced the Russian Federation's income. In monetary terms, this will cost Russia about 12 billion euros.
Sanctions are still one of the important tools for forcing Russia to peace. However, this is not enough at the moment. The most significant impact of Western sanctions on the Russian economy should be expected no earlier than the end of 2023. Economists gave such forecasts in August. Therefore, introducing stricter restrictions by democratic countries is extremely important to stop sponsoring Russia's aggression against Ukraine and the entire civilized world.
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CZK: Transparent account
AN: 2300405420/2010
VS: 2022
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