As energy re­form sput­ters, Fir­tash said to get bil­lions

Kyiv Post - - Business - BY JOSH KOVENSKY AND MATTHEW KUPFER [email protected] [email protected] (Ukrafoto)

Since 2014, help­ing Ukraine pre­vail in Rus­sia's war has been a pri­or­ity of Western gov­ern­ments and in­ter­na­tional or­ga­ni­za­tions.

But what if some of the aid is go­ing to one of its more du­bi­ous oli­garchs in­stead of the coun­try it­self?

Olek­sandr Kharchenko, the di­rec­tor of Ukraine’s Energy In­dus­try Re­search Cen­ter, claims that that is just what’s hap­pen­ing in a provoca­tive new opin­ion for the At­lantic Coun­cil’s UkraineAle­rt blog. Kharchenko al­leges that $2 bil­lion — in­clud­ing a World Bank loan and In­ter­na­tional Mon­e­tary Fund as­sis­tance to help pro­vide nat­u­ral gas to Ukraine’s vul­ner­a­ble pop­u­la­tion — have not reached their in­tended tar­gets.

In­stead, they may have fallen into the pocket of oli­garch Dmytro Fir­tash, cur­rently un­der house ar­rest in Vi­enna and fight­ing ex­tra­di­tion to the United States on cor­rup­tion charges that he de­nies.

The rea­son is Fir­tash’s ex­ten­sive net­work of po­lit­i­cal con­nec­tions and his con­trol of over 75 per­cent of re­gional gas dis­tri­bu­tion com­pa­nies (known in Ukrainian as “obl­gazes”).

Kharchenko says the logic of his ac­cu­sa­tion is sim­ple: Ukrainian tax­pay­ers pay into the state bud­get. The bud­get then pays out sub­sides us­ing World Bank and IMF money in­tended to help fund gas pur­chases and sub­si­dize gas for the coun­try’s poor­est res­i­dents. That money goes to the obl­gazes. But thanks to re­cent reg­u­la­tory changes, they never pay it on­ward to Naftogaz, the coun­try’s state-owned gas com­pany, which pro­vides them with the gas they dis­trib­ute.

“Where does this money go to? No­body knows,” Kharchenko says. “It’s a pri­vate com­pany with­out any pub­lic re­port­ing.”

Kharchenko be­lieves that Fir­tash and his as­so­ciates have moved the money out­side the coun­try us­ing opaque schemes. And they can get away with it through tacit con­nec­tions to the Ukrainian gov­ern­ment, which has largely put the brakes on energy sec­tor re­form.

Group DF did not re­ply to a re­quest for com­ment.

Re­form no more?

Ukraine’s gas mar­ket is di­vided into two seg­ments: in­dus­trial and house­hold. Nat­u­ral gas for in­dus­trial us­age rep­re­sents roughly 55 per­cent of all con­sump­tion

Dur­ing the rule of Pres­i­dent Vik­tor Yanukovych, Fir­tash took con­trol of the ma­jor­ity of Ukraine’s obl­gazes through a se­ries of pri­va­ti­za­tion auc­tions will lit­tle com­pe­ti­tion. All th­ese re­gional firms were con­cen­trated into Re­gional Gas Com­pany, owned by Fir­tash and Op­po­si­tion Bloc MPs Ser­hiy Ly­ovochkin and Ivan Fursin.

Today, thanks to re­forms, in­dus­trial gas is now sold on a com­pet­i­tive mar­ket pop­u­lated by gas traders

Oli­garch Dmytro Fir­tash, cur­rently un­der house ar­rest in Vi­enna and fight­ing ex­tra­di­tion to the United States on cor­rup­tion charges that he de­nies, al­legedly con­trols over 75 per­cent of re­gional gas dis­tri­bu­tion com­pa­nies. from around the world. But house­hold gas re­mains highly reg­u­lated by the gov­ern­ment.

In 2015, the Verkhovna Rada passed a law that os­ten­si­bly tried to lib­er­al­ize the coun­try’s gas mar­ket. The new legislatio­n at­tempted to break Fir­tash’s mo­nop­oly by man­dat­ing that the own­ers of gas trans­port and sale firms be sep­a­rate.

The obl­gazes have fol­lowed the let­ter of the law, but not its spirit.

“The law only stip­u­lates that the same le­gal en­tity can­not be in­volved in both busi­nesses,” says Olek­sandr Paraschiy, an an­a­lyst at Con­corde Cap­i­tal.

Ef­fec­tively, this al­lows the same busi­ness con­glom­er­ates to re­tain con­trol over the sys­tem by form­ing a sec­ond com­pany for sales. In some cases, th­ese com­pa­nies are off­shores.

Back in the ‘90s

Since then, Ukraine has fallen off the energy sec­tor re­form wagon. With the ar­rival of Prime Min­is­ter Volodymyr Groys­man’s gov­ern­ment in 2016, Fir­tash’s gas firms en­coun­tered a po­ten­tially will­ing part­ner in the Cabi­net of Min­is­ters, Kharchenko says.

Groys­man ap­pointed Volodymyr Kis­tion as deputy prime min­is­ter for energy is­sues, and he brought for­mer Re­gional Gas Com­pany Reg­u­la­tory Pol­icy Di­rec­tor My­roslav Bod­nar on as an ad­vi­sor.

For years, Ukraine had forced its obl­gaz com­pa­nies to pay Naftogaz via spe­cial­ized gov­ern­ment-con­trolled ac­counts with au­to­matic pay­ment-upon-de­liv­ery. The pol­icy was in­sti­tuted af­ter a pe­riod in the 1990s when dis­tri­bu­tion firms would fail to pay whole­sale gas and energy providers for what they re­ceived, dump­ing huge debts on the gov­ern­ment.

Groys­man’s team did away with the reg­u­la­tion in April 2017, al­low­ing obl­gaz firms to once again de­lay pay­ment to Naftogaz.

At the same time, the Cabi­net of Min­is­ters or­dered Naftogaz to sup­ply gas to the obl­gazes as de­manded at a price set by the gov­ern­ment. The move served to de­crease mar­ket com­pe­ti­tion and but­tress Fir­tash’s mo­nop­oly.

Ad­di­tion­ally, since the obl­gazes and sales com­pa­nies are now sep­a­rate, Naftogaz has no idea how much peo­ple are pay­ing for its gas.

The state-owned hy­dro­car­bon firm is, how­ever, aware of how much the obl­gaz com­pa­nies owe it. Olek­siy Kha­batiuk, deputy head of Naftogaz’s energy ef­fi­ciency depart­ment, es­ti­mated that his com­pany has lost Hr 30 bil­lion ($1.13 bil­lion) to non-pay­ment from the scheme.

“A sit­u­a­tion has emerged where money comes, but no mar­ket par­tic­i­pant other than the gas de­liv­er­ers sees how much money the pop­u­la­tion is pay­ing, so it’s im­pos­si­ble to pro­por­tion­ally con­trol how much gas is given out,” says Kha­batiuk.

Paraschiy says that this prob­lem marks a re­turn “to the sit­u­a­tion of the mid-nineties,” with obl­gazes again de­lay­ing pay­ment.

Murky wa­ters

Part of the prob­lem stems from how Ukraine tab­u­lates sub­si­dies — the money does not go di­rectly to im­pov­er­ished cit­i­zens who need the cash, but rather to the obl­gaz firms, which then sup­ply gas at lower rates to des­ig­nated con­sumers.

New legislatio­n that went into ef­fect at the start of 2018 man­dates that obl­gaz firms sup­ply sub­si­dized in­di­vid­u­als with gas de­liv­ered from Naftogaz. At the same time, the new rules al­low the obl­gaz com­pa­nies to skim 12.5 per­cent of gas pay­ments for them­selves, mean­ing that the firms can use money ob­tained from cus­tomers to pay com­pa­nies other than Naftogaz.

Naftogaz says that the obl­gaz firms abuse the sys­tem to pay other com­pa­nies for gas that it de­liv­ered.

“Ac­cord­ing to the new rules, we are ob­li­gated to de­liver gas, but the de­liv­ery-trans­mis­sion com­pa­nies can use money re­ceived for gas to per­form trans­ac­tions with other com­pa­nies,” said Naftogaz CEO An­driy Kobolev in a state­ment. “This is not mon­e­ti­za­tion, but the cre­ation of an op­por­tu­nity to siphon money from Naftogaz, and from the state bud­get of Ukraine.”

How­ever, Kis­tion, the deputy prime min­is­ter re­spon­si­ble for the pol­icy, dis­agrees with Kharchenko and Naftogaz that the is­sue is one of cor­rup­tion. He sent the Kyiv Post a bevy of sta­tis­tics, and said that obl­gaz com­pa­nies are no more or less in debt than the com­pa­nies “con­trolled by Naftogaz.”

He blames the prob­lem of debt on the pop­u­la­tion.

“Non-pay­ers are those who do not re­ceive sub­si­dies and be­long to the self-suf­fi­cient sec­tion of the pop­u­la­tion,” Kis­tion wrote in a state­ment. “If some are able to buy a yacht, but don’t pay for gas prop­erly, then they should be held re­spon­si­ble.”

Em­ploy­ees work­ing at Nezhukhov, a gas dis­tri­bu­tion com­pany, in Lviv Oblast on Feb. 16, 2017.

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