When Yevhen Kravtsov took over as CEO of Ukrzaliznytsia two years ago, he inherited a state railway monopoly with 260,000 employees that had not been run like a single entity. Rather, Kravtsov describes it as a collection of six fiefdoms in which the largest customers got rich subsidies and the company routinely overpaid for diesel fuel and other expenses.
“We were still in the Soviet times with a market economy around us. It was a very interesting cocktail that gave us the best examples of Chinese corruption,” Kravtsov said of how Ukrzaliznytsia ran in the recent past.
When Pavlo Riabikin took over Kyiv Boryspil International Airport two years ago, he inherited a 4,000-employee state enterprise with a reputation for poor customer service, allegiance to the then-monopoly Ukraine International Airlines, and baggage handlers who frequently pilfered the luggage of passengers.
When Iryna Mudra five years ago joined Oschadbank, where she now serves as chief compliance officer, the state-owned financial institution with 30,000 employees was reeling from bad loans and needed a state bailout. Oschadbank was part of the disastrous orgy of bank fraud, poor business practices and unfortunate circumstances that cost taxpayers $20 billion before regulators closed half of the nation’s banks. For instance, Oschadbank lost an Hr 20 billion — $750 million — loan portfolio when Russia illegally seized Crimea in 2014.
Integrity, ethics needed
All three state businesses provide vivid illustrations of how corruption and stealing thrive without ethics, adherence to law or best practices.
Kravtsov, Riabikin, and Mudra were part of the May 22 CEO Debates sponsored by the Ukrainian Network of Integrity and Compliance. The event was organized by the Kyiv Post and held at the office of SigmaBleyzer private equity firm in Kyiv.
The two-year-old Ukrainian Network of Integrity and Compliance has more than 50 companies that pledge to work transparently. The initiative got its start from the Business Ombudsman Council, European Bank for Reconstruction and Development and the Organization for Economic Cooperation and Development. The event was part of Business Integrity Week.
Public, private panels
The talk was divided into two panels. Hlib Bakalov, chief compliance officer for Ukrenergo, joined the leaders of Ukrzaliznytsia, Kyiv Boryspil International Airport and Oschadbank on the panel of leaders of government-owned businesses. Ukrenergo supplies electricity to shady regional distribution companies known as oblenergos, most owned by oligarchs.
The other panel featured leaders of private-sector companies. That discussion was moderated by Iryna Nikolayevska, head of compliance at Kinstellar law firm. The speakers were Andreas Flodstrom, CEO of Beetroot; Guilhem Granier, Sanofi Ukraine country director; Alessandro Zanelli, CEO of Nestle Ukraine & Moldova; Dmytro Kyselov, Procter & Gamble country manager; and Olena Rybak, managing director of iC consulenten Ukraine.
Granier said that international companies have advantages because they operate with well-defined practices for legal and ethical compliance. The French pharmaceutical firm is “not afraid of operating in countries that might have high risk.” Sanofi believes that transparency and ethics “are key drivers of prosperity,” he said, a counter to Ukraine’s pharmaceutical industry, which is known for corruption and kickbacks.
Zanelli of Nestle said that “compliance is what you have to do, while ethics is what is the right thing o do.” It’s not easy, he said, amid Ukraine’s gray economy.
Compliance costs
Flodstrom of Beetroot, an information technology firm, is Swedish. He said that the “cost of being compliant is much higher in Ukraine than many other countries,” and that sometimes lawyers in Ukraine tell him that the legal way of doing business is riskier than illegal ways.
Kyselev of Procter & Gamble said that Ukraine’s laws can be “very ambiguous,” and that the international household products firm is at a competitive disadvantage because rule of law is “not for everyone yet,” with some firms evading taxes. While the cost of compliance can be high, he said the payoff is in high public trust of such companie as P&G.
Rybak, the managing director of the consulting firm iC consulenten Ukraine, cautioned to be very careful about choosing partners. The wrong ones can harm reputation and cause financial losses.
Ending Soviet mentality
The leaders of the state-owned firms said they are making inroads in shedding the Soviet legacy.
Kravtsov said he has: centralized management of Ukrzaliznytsia; reduced the number of units of procurement, from 200 to 35; introduced competitive bidding procedures through ProZorro in spending $1.1 billion annually; clamped down on ticket brokers; and raised rental of freight wagons to market rates. Moreover, Ukrzaliznytsia is buying new locomotives from U.S.-based General Electric.
These moves have saved money and improved efficiency, enabling the railways, for example, to reduce the workforce by 10 percent in the last year. Still, Ukrzaliznytsia estimates that it may have to lay off another 100,000 employees, even though — as Kravtsov said — entire cities are dependent on the railways.
The steps have also saved $260 million in one year alone, said Kravtsov.
“This money previously was in the pockets of intermediaries or clients, not for the purpose of railways,” he said.
There is still much to do for the ubiquitous railways that half the nation uses frequently. Ukrainian Railways also moves 60 percent of all cargo in the country.
He said the corporatization underway has consolidated 50 enterprises into one joint-stock company with a supervisory board. Corruption and fraud are battled with internal compliance, procurement and anti-corruption managers working with law enforcement agencies. But he admitted it’s difficult to ensure that policies set in Kyiv are followed at every local train depot.
Fighting corruption
Riabikin said “we are trying to make the same rules for all airlines.” Now, he said, 40 airlines are serving 90 destinations from Boryspil with passenger traffic expected to reach a record 15 million this year.
He also described the airport as “a Soviet system in a market economy; it changed very, very slowly.”
Evgen Kravtsov, CEO of Ukrainian Railways, speaks at CEO Debates on May 22, 2019 at the SigmaBleyzer office in Kyiv. (Oleg Petrasiuk)
Among his anti-corruption measures, he said, has been the firing of 300 employees suspected of stealing from passengers’ luggage. Before he came, he said, only three people had been fired.
He also fights state micromanagement, including a recent Cabinet of Ministers requirement that the airport give 90 percent of its net profit to the state budget, rather than investing most of it in operations and development.
Mudra of Oschadbank said that the banking sector got a boost from a post‑2014 crackdown by the National Bank of Ukraine on unethical practices. As a consequence, she said, the bank’s portfolio of non-performing or bad loans has dropped from 50 percent to less than 1 percent.
“The biggest corruption in state banks is, of course, in lending,” she said. But the central bank has imposed prohibitions against related-party lending and conflicts of interest, among other stringent regulations to avoid a repeat of the crisis that forced a $20 billion taxpayer bailout.
Banking improvements
“If we do not observe ethical conduct, huge sanctions will be imposed by the central bank,” Mydra said.
She said ethics “starts at the top.” She said her position of chief compliance officer should be as independent as possible so that employees feel encouraged to be whistleblowers without fear of retribution or job loss.
“I’m not going to say everything is going right, but senior management and the board of directors understand that rules should be observed and followed,” she said.
Oschadbank, with 2,000 branches, is one of the big three state-owned banks along with Ukreximbank and PrivatBank.
The representatives of the state firms said that paying market salaries is essential to attracting honest and qualified employees, but admitted that their companies pay market salaries mainly to the top managers. Public and private companies are struggling with the proper wage differential between the highest-paid and lowest-paid employees. In general, American corporate culture rewards CEOs more lavishly than European ones, while Ukraine is trying to find the right balance. The issue of proper compensation is more difficult for state-owned companies, since many of them are monopolies with no competition whatsoever.
“My main concern is salaries,” said Bakalov of Ukrenergo. “There is no way you will get qualified employees without market salaries.”
