As President Petro Poroshenko was crowing about a $3 billion eurobond sale on Sept. 18, the old face of corruption drowned out the good news. The resignations of the last two remaining independent supervisory board members of Naftogaz show that it’s too soon to claim the transformation of the state-owned energy monopoly is a success. Naftogaz, under Andriy Kobolev and a fine team, have made progress in stamping out intermediary schemes that robbed the nation of up to 7 percent of its gross domestic product. But it turns out that putting a stop to exiled billionaire Dmytro Firtash’s fleecing of Ukrainians, in partnership with the Kremlin, wasn’t enough.
What is going on and what is at stake here? It appears to be the same old fight behind many of Ukraine’s great fortunes. Those oligarchs who control Ukraine’s energy sector amass fortunes.
There are still opaque and likely corrupt practices under way in the energy sector. We turned to Edward Chow, an energy expert with the Center for Strategic and International Studies in Washington, D.C., for answers. Chow analyzes Ukraine’s energy sector better than almost anybody we know.
Chow reeled off several problems: Domestic production of natural gas is stuck at 20 billion cubic meters, not enough to gain energy independence. Regulations and issuance of licenses remain opaque, with insiders sitting on unused licenses. There should be a financial penalty for hoarding such licenses, issued non-transparently by the Ecology Ministry. The penalty should be something akin to a property tax that discourages real estate owners from sitting on properties for speculation.
There is also still no independent energy regulator to set fair, market-based tariffs to ensure that insiders don’t make fortunes unfairly.
Additionally, Chow said, Ukraine made a mistake by antagonizing and suing Kremlin-controlled Gazprom, Ukraine’s only customer in transiting Russian gas to European nations. Ukraine should have a strategy of setting low gas-transit tariffs to encourage the highest possible volume through its pipelines, which are capable of carrying 120 billion cubic meters. Instead, the higher the cost for transit and for upgrades of Ukraine’s aging pipelines, the more incentive Russia will have to bypass Ukraine altogether. That is happening already with pipelines to the north (Nord Stream 1 and 2) and south (Turkstream). Russia may end up sending as little as 20 billion cubic meters through Ukraine. Without Russian gas, Ukraine’s pipelines are not worth much, Chow said.
The international financial institutions are part of the problem, in Chow’s view, to the extent that they view the government and not the Ukrainian people as their clients.
The biggest problem, Chow said, is that Ukraine’s tycoons are busy carving up the existing energy pie rather than seeking to enlarge it. Ukraine needs policies to take full advantage of the global energy revolution under way, tapping its reserves of oil and natural gas, exploiting renewables, taking advantage of electric cars and adopting the latest advancements in conservation.
