State-owned gas utility Naftogaz and Ukrnafta, the country’s leading oil and gas producer, have announced a pending Hr 30 billion ($1.2 billion) legal settlement, the cost of which may be borne by Ukraine’s taxpayers.
While Naftogaz owns 50% plus one share of Ukrnafta, enterprises connected to the beleaguered oligarch Ihor Kolomoisky control more than 42% of the company, under whom it accumulated tax debt that accounts for almost a fifth of the national total.
Naftogaz executive director Yuriy Vitrenko announced the deal on Facebook at the beginning of February, with Naftogaz agreeing to pay Ukrnafta Hr 15 billion (about $600 million) for 2.06 billion cubic meters of gas as well as Hr 14.6 billion for another 2 billion cubic meters. According to the Vitrenko, the Cabinet of Ministers is supposed to compensate Naftogaz for the total amount.
If that happens, experts and officials point out that only one stakeholder – the government – will bear the financial burden, effectively paying for Ukrnafta’s debts through the state budget.
Besides clearing Naftogaz’s debt, the deal will let Ukrnafta pay off its own massive tax debt to the state, which has been reported to be over Hr 16 billion and in excess of Hr 30 billion with interest and penalties, according to State Fiscal Service information reported by state news service Ukrinform.
“There are two main shareholders [at Ukrnafta] – Privat and Naftogaz,” said Sergey Kuyun, the director of energy consulting firm A-95. “Why is only the government taking on this burden?”
More galling still, the debt itself is tied to alleged fraud and tax evasion. Anticorruption officials are currently investigating the minority stakeholder for allegedly transferring billions from Ukrnafta to offshore companies tied to Kolomoisky in 2014 and 2015.
For a significant portion of that period, Ukrnafta also failed to pay taxes, with interest and penalties causing the company’s debt to swell dramatically.
Timeframe
The dispute arose after the government forced Naftogaz to sell Ukrnafta’s gas below market rates. The diminished profits applied to Ukrnafta gas produced between 2006 and 2012.
Ukrnafta insisted on being paid market rates and challenged Naftogaz in the courts, which have consistently ruled in Ukrnafta’s favor.
An earlier version of the settlement reached last spring determined that Naftogaz would pay Ukrnafta for 2 billion cubic meters of gas at March 2019 rates (approximately $300 per 1,000 cubic meters). But the agreement was delayed when Cabinet of Ministers under Petro Poroshenko said the deal required its approval.
The new cabinet dropped the hold last month, and the settlement was finalized and approved by the Kyiv Economic Court at the end of January.
According to Vitrenko’s announcement, Naftogaz should be compensated by the Cabinet of Ministers. But if that compensation isn’t received by April 1, Naftogaz would instead repay Ukrnafta with 2.06 billion cubic meters of gas.
Vitrenko from Naftogaz told the Kyiv Post on Feb. 20 that it’s unlikely the compensation will come in time.
If that is the case, he added, it will significantly limit Ukrnafta’s ability to repay its tax debt.
Shadow over settlement
Experts told the Kyiv Post that while clearing Naftogaz’s debt to Ukrnafta and helping Ukrnafta repay outstanding taxes would be a great thing, there are significant questions regarding the deal.
According to Vitrenko, the amount Naftogaz has to pay is based on the price of gas in March 2019, when the original settlement was reached.
The value was calculated using an import parity formula and confirmed by the auditor KPMG, Vitrenko said.
The problem is, the cost of gas has fallen significantly since March 2019. According to Naftogaz, gas prices for March 2020 will be less than $200 per 1000 cubic meters, compared to $300 per 1000 cubic meters a year earlier.
This price difference casts a shadow over the settlement, critics say. As Dennis Sakva, an energy analyst with Dragon Capital noted, the government does not have funds to spare. The state budget already hit a 25% deficit in January, as some officials pointed out.
“From the point of view of the government,” said Sakva, “It makes sense to return this gas now in the form of commodities,” said Sakva. “As opposed to paying it off for $300 per 1000 cubic meters.”
Moreover, the market prices for Ukrnafta’s gas sales to Naftogaz were lower in 2006 than the March 2019 rate established in the settlement.
Vitrenko however, defended the decision to base the settlement on March 2019 prices. Yet he admitted that if the Cabinet of Ministers doesn’t provide compensation and Naftogaz pays with gas, the state company will not buy this gas back at the March 2019 rate.
Kolomoisky gets his way
An even more controversial issue is that roughly Hr 14 billion ($570 million) of Ukrnafta’s debt was allegedly cashed out through Kolomoisky-related companies, according to the National Anti-Corruption Bureau.
Naftogaz said that Ukrnafta’s tax debt mainly consists of unpaid taxes from that period.
“From a pragmatic point of view, the deal looks beneficial for all sides,” wrote Alexander Paraschiy, an analyst with Concorde Capital. “But from a political standpoint, the deal looks questionable as taxpayers are left footing the bill for Ukrnafta’s tax debt, which was generated by the odious oligarch Kolomoisky.”
Sakva agreed, saying that the deal was tantamount to the government paying Kolomoisky’s debts. But he added that the state has little choice if it ever wants Ukrnafta to climb out of its massive tax hole.
