Sav­ing Naftogaz

Kyiv Post - - Opinion -

Naftogaz, the state mo­nop­oly with rev­enue that equals 8 per­cent of the na­tion's gross do­mes­tic prod­uct, is of­ten hailed as ev­i­dence of a "new" Ukraine that is more trans­par­ent and less cor­rupt than the "old" Ukraine be­fore the EuroMaidan Revo­lu­tion that drove the klep­to­cratic Krem­lin­backed Pres­i­dent Vik­tor Yanukovych from power five years ago.

Through opaque schemes, Naftogaz lost $8 bil­lion a year as re­cently as 2014, but now is prof­itable. The turn­around came af­ter Ukraine fi­nally started rais­ing house­hold gas prices closer to mar­ket lev­els, re­duc­ing prof­its of in­ter­me­di­aries.

But all is not well. Oli­garch Dmytro Fir­tash, long a player in the sec­tor, owns most nat­u­ral gas distri­bu­tion com­pa­nies. Naftogaz says it is re­quired by law to sell gas to these "obl­gaz" dis­trib­u­tors at sub­si­dized house­hold rates, but sus­pects that the gas is resold to com­mer­cial buy­ers at higher prices, although it has been legally de­nied data about the true cus­tomers. The "obl­gazes" aren't even forced to au­to­mat­i­cally pay Naftogaz upon de­liv­ery. In­stead, they have racked up $2.2 bil­lion in debts. Naftogaz says these ar­range­ments could be can­celled to­mor­row by gov­ern­ment de­cree.

En­ergy ex­pert Olek­sandr Kharchenko put it this way: “Obl­gazes were cre­ated to im­ple­ment cor­rupt schemes, rip off tax­pay­ers, and they do not be­long in a coun­try that as­pires to move to Western busi­ness prac­tices.” Fir­tash's Group DF de­fends its role and de­nies wrong­do­ing.

Some find no mys­tery in why these prac­tices per­sist. They trace it to the 2014 "Vi­enna Agree­ment," when Petro Poroshenko and Vi­tali Kl­itschko flew to the Aus­trian cap­i­tal, where Fir­tash is fight­ing U.S. cor­rup­tion charges that he de­nies. All deny back­room deals. But even af­ter Poroshenko be­came pres­i­dent and Kl­itschko be­came Kyiv mayor, Fir­tash's busi­nesses are still do­ing well in Ukraine, de­spite empty threats by Ukrainian au­thor­i­ties to in­ves­ti­gate him.

Naftogaz has other prob­lems. Nat­u­ral gas pro­duc­tion hov­ers at 20 bil­lion cu­bic me­ters an­nu­ally, far short of con­sump­tion. Maybe poor pro­duc­tion of UkrGasVy­dobu­van­nya is the rea­son why its CEO Oleg Prokhorenk­o got dis­missed re­cently. Naftogaz says pro­duc­tion is stalled be­cause of ex­ces­sive reg­u­la­tion by re­gional au­thor­i­ties. Many li­censes for ex­plo­ration, mean­while, are con­trolled by oli­garchs or Yanukovy­chera Ecol­ogy Min­is­ter Mykola Zlochevsky, whose job it was to ap­prove them.

Naftogaz CEO An­driy Kobolyev should have blown the whis­tle ear­lier, more loudly and more con­sis­tently. Now it looks like he's just try­ing to hold on to his job, which is in jeop­ardy. The cur­rent man­age­ment team didn't help their cause with mul­ti­mil­lion-dol­lar bonuses, based on the suc­cess of a $2.6 bil­lion Stock­holm ar­bi­tra­tion rul­ing in a price dis­pute with Rus­sia's Gazprom. The money has not been col­lected yet as the Krem­lin ap­peals. Also, it's fine for Naftogaz man­agers to ar­gue for mar­ket salaries, but Naftogaz does not de­liver mar­ket fi­nan­cial re­turns. Ev­ery­one should rec­og­nize, as Kobolyev did in a re­cent Kyiv Post in­ter­view, that Naftogaz's tran­si­tion is in­com­plete. It won't be un­til politi­cians put the na­tional in­ter­est above pri­vate vested ones.

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