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.