For Ukraine’s richest and most powerful tycoons, monopolies are not enough.
They still angle to manipulate government institutions to work on their behalf and not in the public interest.
“They have many ways of protecting their business,” said Dmytro Yablonovsky, a researcher at Kyiv’s Center for Economic Strategy. “They create entry barriers, additional duties for the competitors, either at the borders or internally in some cases.”
Ukraine’s National Energy Regulator Commission is at the epicenter of efforts by the country’s oligarch clans to work for them.
The commission oversees solar plants, electricity tariffs and new power supplies — making control of the regulator a flashpoint in the battle over energy in Ukraine.
Powerful monopolies
Dmytro Firtash, the former gas intermediary fighting extradition to U.S. bribery charges from exile in Austria, made a fortune by manipulating government-to-government contracts with Russia on international gas deliveries and internal pricing. Control of the gas market allows cheap prices for fertilizer and chemical production, two lucrative sectors for Firtash.
Another billionaire oligarch, Ihor Kolomoisky, has been able to rely on his 42 percent stake in Ukrnafta — a state oil producer — to supply his Kremenchuk refinery with cheap oil.
The richest billionaire oligarch, Rinat Akhmetov, maintains dominance in coal production and heating generation by controlling 70 percent of the country’s heating plants, while Russian-Ukrainian oligarch Kostyantyn Grygoryshyn makes a steady profit from control over power distribution companies.
All stand to gain or lose significant profits from the National Energy Regulator’s work.
Vested oligarch interests have been working to capture the National Energy Regulatory Council in a bid to secure profitable tariffs for their energy companies.
Narcing on NERC
Tthe National Energy Regulatory Commission, refashioned in 2014 as an independent agency with a mandate to set tariffs in the interest of Ukrainian consumers, has turned out to be an attractive target for control.
“Basically, when you capture the regulator it implies that you can have favorable tariffs,” said Yablonovsky.
Take the example of the current debate to implement so-called RAB tariffs on electricity in Ukraine.
The tariff system allows electricity distributors to raise their rates as a prerequisite for further investment. NERC passed the regulation in January, allowing individual regional power distributors — oblenergos — to decide whether or not to switch to the system.
But according to Andriy Gerus, a former NERC commissioner who now heads the Association of Energy and Utilities Consumers, the plan is a money-making attempt by a group of powerful businesspeople, some tied to President Petro Poroshenko, himself a billionaire oligarch.
“It is a way for these people to give themselves super-profits,” Gerus told the Kyiv Post, estimating Hr 30 billion ($1.14 billion) in increased annual tariffs at participating oblenergos from the arrangement.
But it’s not profitable for everyone.
Gerus’ opinion coincided with the position of Victor Pinchuk, another billionaire oligarch.
Pinchuk’s Interpipe requires large amounts of electricity to operate. If he pays higher rates, he could end up with losses.
“RAB tariffs are a typical disorder: fraud with an investment component,” said Interpipe finance director Denis Morozov in a March 7 statement to Ukrainian media. “Some people on some sort of paper make incomprehensible calculations without an audit, without checks and on the foundation of this significantly raise the tariff.”
Fighting for control of the regulator has come down to who is able to stack the NERC’s board with favorable commissioners.
2017 saw Poroshenko battle for control through bureaucratic maneuvering. Starting in May, he refused to appoint additional regulators. By November, the body was unable to reach a quorum after one commissioner called in sick for six weeks straight. The commissioner was linked in the Ukrainian press to Kostyantyn Grygoryshyn.
The impasse has stopped hundreds of millions of dollars in energy-related investment, with power plant operators needing the commission to first set tariffs.
Pressure from the afflicted investors resulted in a game of chicken over the regulator, until parliament voted to give Poroshenko temporary authority to stack the members of a selection body to choose NERC commissioners. That move has given Poroshenko de facto control of NERC.
No market, no crime
The Rotterdam+ coal benchmark price has provided the biggest target for muckraking Ukrainian journalists interested in tracking the country’s oligarchy.
The formula was set by NERC Commissioner Dmytro Vovk in 2015. Vovk’s former fund, Investment Capital Ukraine, known for failing to sell Poroshenko’s Roshen confectionary, bought eurobonds of DTEK before the formula went into effect.
The Rotterdam+ benchmark, which indexes Ukrainian coal to its price in the Netherlands, plus cost of transportation to and from Rotterdam, has earned DTEK huge dividends, tripling the value of its eurobonds.
Critics say that it’s essentially an insider trading scheme operated by NERC.
But the coal price is set for trading on Ukraine’s commodities exchanges, which, in the words of Timur Khromaev, head of Ukraine’s securities regulator, are “captive things right now.”
“There’s no requirement right now for avoiding conflict of interest or making sure the transaction actually takes place to be sure of settlement,” Khromaev said in an interview with the Kyiv Post.
Khromaev argued that proving insider trading is impossible because the public securities market is so underdeveloped and legislation is ill-defined.
“You should understand what the ability of the Ukrainian market participants is to mislead the public market in setting the price for a particular financial asset,” Khromaev said “If we haven’t set the rules, that means you and I are arguing about things that we haven’t actually defined.”
