As the Sept. 30 parliamentary elections draw closer, the state of affairs in the Ukrainian Russian gas supply labyrinth has again become a hotly disputed topic between the president’s administration, representing the Our Ukraine bloc, and the Cabinet of Ministers, a lobby for the Regions of Ukraine party.
Unfortunately, the debate is a fake one. Both sides are engaging in posturing and have no intention of changing anything in the current murky gas schemes for the simple reason that their opaqueness suits all parties in Ukraine today.
The exchange of accusations began when President Viktor Yushchenko announced in July that he intends to tell Russian President Vladimir Putin that the services of the Swiss-based middleman company RosUkrEnergo (RUE) be terminated and that Ukraine and Russia deal directly on Central Asian gas supplies to Ukraine.
This announcement immediately elicited a flood of angry statements and warnings from Yuriy Boyko, the Minister of Fuel and Energy, and from the leadership of Naftogaz Ukrainy.
Boyko warned the president not to “politicize” the gas business, while the head of Naftogaz, Yevhen Bakulin, who does not utter a word without Boyko’s approval, made the dire forecast that unless RUE remains in place, Ukraine will wind up paying European prices for gas. This would destroy the Ukrainian economy, Bakulin solemnly stated.
But the truth is that Ukraine has lost all of its ability to be a sovereign purchaser of natural gas from Russia or anywhere else, where Boyko, Bakulin, Dmytro Firtash and a host of other shadowy figures are allowed to operate.
In January 2006, shortly after Yushchenko became president, Ukraine signed a contract giving RosUkrEnergo a monopoly on supplying Ukraine with Russian and Central Asian gas. By doing so, Ukraine, under the leadership of Yushchenko, voluntarily, or under duress, gave up the right to negotiate directly with Turkmenistan for critically needed gas supplies.
Why the newly elected president allowed this sovereign right of a state to be handed over to an obscure trader from Chernivtsi and his friends at Gazprom has never been explained by the president or his representatives.
Spokesmen for Naftogaz are quick to point out that Gazprom had purchased all of Turkmenistan’s gas production and this left Ukraine with no choice but to deal with RUE. But this answer, like most answers from Naftogaz and its overseers Boyko and Bakulin, is only half true. Iran buys gas from Turkmenistan and does so without the services of an obscure middleman.
But the most convincing argument why Ukraine should not deal with RUE is that Ukraine always has the option of dealing directly with Gazprom in matters concerning Turkmen gas. However, Gazprom, with Vladimir Putin’s approval, decided in 2002 that they did not want this and insisted that a middleman be present. Why?
One of the reasons is the huge compensation Ukraine pays RUE for its dubious services. Ukraine gives RUE almost 13 billion cubic meters of the Central Asian gas it purchases at $135 per 1,000 cubic meters.
This is the same amount Ukraine paid to the “Hungarian” Eural Trans Gas (ETG), the discredited energy middleman created by Gazprom (with Putin’s approval) and Dmytro Firtash, with former Ukrainian President Leonid Kuchma’s okay and Boyko’s willing support in 2002.
In 2004, Putin and Kuchma were forced to dump ETG due to the bad publicity it was generating and replaced it with RUE in 2004.
RUE then sells this huge volume of gas to various European customers at the market price of some $250 per 1,000 cubic meters. The profits are enormous.
One of RUE’s gas customers is a Hungarian company called Empesz KFT, an off-shoot of ETG, which is owned by a Cypriot company named Mabofi Holdings, which, in turn, is owned by none other than Firtash, one of the principles of RUE.
Thus, Firtash, who was paid $365 million in 2006 as his share of RUE profits – $363 million more then Alexei Miller gets as CEO of Gazprom – sells RUE’s gas to his own company in Hungary in what is clearly a conflict of interest.
It is important to recall that Boyko lobbied to sell electricity produced in Ukraine to Empesz this spring at below wholesale prices. He did so most likely to keep his more than cozy relationship with Firtash intact.
It is also worth mentioning that Firtash signed a power of attorney that gives Boyko the legal right to handle all his financial affairs in case of an emergency. This private arrangement also smacks of a conflict of interest – but it was never investigated or even questioned by the Ukrainian prosecutor’s office.
January 2006 also saw the emergence of yet another opaque entity in the Firtash-Gazprom-Boyko labyrinth of mirrors – UkrGazEnergo. What the rationale for creating this entity was has also never been explained.
UkrGazEnergo was meant to be a 50-50 percent gas distribution joint venture between Naftogaz Ukrayina and RUE. UkrGazEnergo, according to the scheme, would sell gas, which it bought from RUE, directly to Ukrainian consumers, a function that Naftogaz did admirably without Firtash’s or Gazprom’s help for years.
Naftogaz’s function in the new joint venture was to sell gas to Ukrainian domestic consumers, a losing business by all accounts, while RUE sold to powerful and wealthy industrial users.
As a consequence of this decision, Naftogaz voluntarily handed over to Firtash and Gazprom millions of dollars in lost profits annually, while its employees went unpaid for months.
UkrGazEnergo’s appearance on the Ukrainian market also allowed Gazprom to get its first toehold in the Ukrainian gas distribution market, something that Gazprom CEO Miller and Putin had dreamed of doing for years.
But RUE was not satisfied with such a meager role, and recently Naftogaz announced that UkrGazEnergo would participate in developing an offshore gas field in the vicinity of Odessa. How this fits into UkrGazEnergo’s brief was not explained. One possible reason is that Naftogaz has become so impoverished that it cannot attempt anything of this magnitude on its own.
Part of the ongoing pre-election dispute concerns the amount of gas stored in Ukraine’s underground gas storage facilities. Boyko recently announced with great fanfare that the underground facilities contained 26.5 billion cubic meters (bcm) of gas, thereby insuring Ukraine’s needs for the coming fall and winter heating season. What Boyko failed to mention, due to his peculiar habit of obscuring facts, is who owned this stored gas.
The presidential administration responded by saying that most of the gas belonged not to Naftogaz but to RUE and UkrGazEnergo, and that Naftogaz only owned 2.2 billion cubic meters of stored gas.
Naftogaz then circulated an angry open letter to the administration hotly disputing the figures given by the president’s men. The open letter claimed that 5.5 billion cubic meters of the stored gas directly belonged to Naftogaz – far less then the 26.5 bcm Boyko falsely claimed and twice as much as the president’s administration stated.
In fact, the real amount belonging to Naftogaz is unclear. Considering that 13 bcm of the stored gas belongs to UkrGazEnergo, in which Naftogaz has only a 50 percent share, Naftogaz’s share of this stored gas could be anywhere from 100 percent to nothing, but Naftogaz did not bother to specify the exact amount belonging to them, instead, they placed all of UkrGazEnergo’s stored gas on their own books to strengthen pre-election arguments. The balance of the remaining stored gas, some 7 bcm, belongs to RUE, which is part of the compensation Ukraine pays to RUE.
Who is responsible for this labyrinth of deceptions and half-truths?
The original blame falls squarely on presidents Putin and Kuchma, who were directly involved – and responsible – for creating both Eural Trans Gas and RosUkrEnergo. They conspired to deny the Ukrainian public the honest services due them from their elected officials and laid the groundwork for a scheme that relies on deception and fraud for its very existence.
A great deal of the blame lies with Gazprom management for perfecting the opaque scheme and choosing to do business with Firtash, a relatively unknown smalltime businessman who was probably deemed pliable enough to bend to Gazprom’s wishes. Why else would the world’s largest gas company enter into a partnership with a smalltime former alcohol trader in Moldova and pay him hundreds of millions of dollars?
A large part of the blame can be placed on the shoulders of Yushchenko, who was unable or unwilling to end the RUE scheme when he had a chance to do so. Why he refused to defend Ukrainian national interests – which he insists is his main motivation – remains a dark mystery.
Ukrainian Prime Minister Viktor Yanukovych shares a large part of the blame by making Boyko Minister of Fuel and Energy and by appointing Serhiy Lyovochkin his chief of staff. This can be seen as aiding and abetting a conspiracy to defraud the nation, and Yanukovych must answer for his role in it.
As long as the current power structure in Ukraine remains unchanged – from the president on down – the RUE scam will function and the Ukrainian people will continue to be the ultimate victims.
All the fiery pre-election polemics we are witnessing today are as meaningless as the promises to clean up corruption that Yushchenko and his team pledged during the Orange Revolution, not to mention Yanukovych’s recent tongue-in-cheek promise to “rid the nation” of corruption.
Roman Kupchinsky is the former director of the Ukrainian Service of Radio Free Europe/Radio Liberty.
