Unless President Volodymyr Zelensky finds another 40 votes in parliament, Yuriy Vitrenko will be finished as acting energy minister on Jan. 21 — exactly one month after he started, the new legal limit imposed to prevent “permanent” acting ministers who serve for years.
As it is, acting ministers have no clout. They can legally give no orders nor make appointments. And, counting the winter holidays and a 17-day COVID-19 lockdown ending Jan. 25, most of Vitrenko’s acting tenure will have been spent while Ukrainians were celebrating or staying home to curb the coronavirus. The Verkhovna Rada, Ukraine’s parliament, meanwhile won’t meet until Jan. 26.
Vitrenko’s appointment won only 186 votes in parliament on Dec. 17. Analyses of the votes show that lawmakers with ties to the three oligarchs who control Ukraine’s energy sector — Rinat Akhmetov, Dmytro Firtash and Ihor Kolomoisky — weren’t in favor of installing the reformist firebrand.
Moreover, Vitrenko, 44, is seen as a future president or prime minister — political ambitions that he disavows. But nonetheless, the talk may have threatened Prime Minister Denys Shmyhal and Verkhovna Rada Speaker Dmytro Razumkov, who were unwilling or unable to secure the required 226-member majority in parliament.
In the seven years since the EuroMaidan Revolution sent Kremlin-backed Viktor Yanukovych fleeing to Russia, Ukraine has had just as many energy ministers or acting energy ministers. In a sector where changes in policy can take years to bear fruit, the revolving door has predictably led to intractable problems.
There are two reasons for this frequency, Vitrenko said: Oligarchs who don’t want to surrender their economic privileges and thus need pliant energy ministers, and, secondly, ministers full of hubris who think they are experts on all energy matters and can manually control the sector.
He says he fits neither category.
“To some extent, my appointment is like a political experiment,” he said of whether he will get the job on a permanent basis. “It will be a big test for parliament and people in power if they’re serious to do real reforms.”
Energy & national security
People don’t need to worry about Vitrenko, who has become a millionaire in private business and during his six-year tenure as a top executive of Naftogaz, the state-owned oil and gas company with more than $10 billion in annual revenue. In 2019, the company said it paid more than $4 billion in taxes and dividends.
But Ukraine and its friends abroad do need to worry about the future of Ukraine’s dysfunctional and outdated energy sector, which is antithetical in many ways to competitive market principles and wise government regulation.
Without energy independence and security, Ukraine “will never have national security,” Vitrenko said of his guiding philosophy. As long as he serves the public, Vitrenko — a married father of three children who has a home in Munich, Germany — pledges to speak out about what he thinks is wrong and how to make it right.
In an extensive Christmas Day interview with the Kyiv Post, Vitrenko outlined his prescription for the sector, from nuclear power to the energy transmission grid, from the rise of renewable energy to the future of oil and natural gas.
Here are some interview highlights:
Why did Zelensky appoint him?
After a year in which many pro-Western reformers fled or were driven from high posts in the Zelensky administration, the Vitrenko appointment stood out as an oddity.
His reformist credentials in post-revolution Naftogaz are indisputable: The company went from losing a half-billion dollars monthly to consistent profitability while sharply reducing Ukraine’s dependence on Russian natural gas supplies and diversifying sources.
Vitrenko led the charge to sue Kremlin-controlled Gazprom in the Stockholm arbitration court, leading to a $3 billion victory for Ukraine.
He continued to push for Ukraine to take Russia to court for its theft of Crimean assets and abuse of competition rules. He has, much less successfully, also pushed for legal action against RosUkrEnergo — a gas trading intermediary jointly owned by Gazprom and Firtash seen as costing Ukrainians billions of dollars for the sole purpose of enriching private insiders.
Moreover, while serving as one of Naftogaz’s top strategists, Vitrenko also won an agreement from Kolomoisky in which the tainted billionaire oligarch gave up his right to appoint the CEO of Ukrnafta. Despite Naftogaz’s majority stake, minority shareholder Kolomoisky — under a privilege put in place while Yulia Tymoshenko was prime minister more than a decade ago — effectively controlled the state oil company to the detriment of the nation.
However, after a Naftogaz supervisory board switched sides, Ukrnafta stayed with the Kolomoisky-favored CEO, who remains on the job. After confronting his erstwhile ally, Nafgotaz CEO Andriy Kobolyev over the issue, Vitrenko said he was ousted from the company in May. And it’s just as well. “I cannot work in a company and pretend I am a reformer when one of our major subsidiaries is controlled by a minority shareholder.”
Vitrenko’s acumen for complicated financial transactions also led to the settlement of a longstanding dispute over debts among Naftogaz, Ukrnafta and Ukrenergo, the state electrical grid operator. Out of the debt swap, Naftogaz emerged with a $1.2 billion payment that could mean the difference between profit and loss for the company in 2020, he said. And to top it off, Vitrenko helped in 2019 to secure a five-year natural gas transit agreement from the Kremlin that pays Ukraine at least $7.2 billion over the course of the contract — irrespective of whether the stalled Russian-German Nord Stream 2 pipeline goes online.
Of course, he didn’t accomplish everything alone. But his ability to bring much-needed revenue to the state, and to solve crises — “put out fires,” as he says — is the chief reason he believes that Zelensky persuaded him to take the job. The pitch came by phone and on a walk through the woods of Feofania state hospital while the president was recovering from COVID-19 in November.
“I’m one of the few if not the only one who really brought a lot of money to the country and current people in government in a big, transparent, civilized way,” Vitrenko said.
Market cures
Vitrenko’s simple strategy: Eliminate oligarch preferences and other distortions preventing the establishment of a free and competitive market. It is, of course, easier said than done.
“Every oligarch wants some preferences for himself,” Vitrenko said. “But sometimes they understand it’s not sustainable. I hope some oligarchs are in favor of a level playing field and proper integration in the Western world. We have to test this theory. It’s a big question if our oligarchs can survive in a civilized, more open society.”
He got a signal that at least one oligarch, billionaire Rinat Akhmetov, is willing to change. His DTEK company, the largest private energy producer in the nation, has pledged to phase out fossil fuels and become carbon neutral by 2040. While hopeful, Vitrenko said, “if their plan is to keep preferential treatment for their assets until 2040, it’s not a good way for the country.”
Vitrenko also said that consumers need to pay market prices for their energy. Especially in electricity but also historically in natural gas, Ukrainian consumers have had subsidized rates. More than any government-financed energy efficiency programs to modernize Ukraine’s aging infrastructure, Vitrenko said that simply charging market prices leads to the greatest successes in reducing consumption and improving energy efficiency.
He strongly believes in Ukraine’s adherence to the European Union’s “third energy package,” the main tenets of which are: unbundling, or the separation of energy supply from the transmission; an independent regulator; cross-border cooperation; and open and fair retail markets.
Ukraine went partly down the market road in the natural gas sector, with the creation of an independent company to manage the nation’s vast pipelines that have transported enormous amounts of natural gas from Russia to Europe, earning Ukraine billions of dollars yearly in transit fees.
The nation has also diversified its wholesale natural gas sector, he said, but has made no progress in the retail gas trade. There, he said, Firtash dominates the segment and is able to make exorbitant profits. The solution, he said, is to either regulate the prices that Firtash charges consumers or create a competitive market for retail gas sales.
Firtash still enjoys preferences — and a monopoly on regional gas distribution companies — while owing Naftogaz more than $1 billion for unpaid gas supplies, putting a lie to the perception that the company is battling the oligarch, Vitrenko said.
Ukraine’s electricity sector is also in dire need of market competition, he said. This means connecting Ukraine’s grid to the European Union as soon as possible, rather than allowing domestic producers to continue to keep a stranglehold on supply.
His vision is one of decentralized electricity supplies because “the most efficient way is to produce and consume energy on the spot.” Eventually, he said, that will mean private homes will be able to store their own electricity. “The future of energy is smart grids,” he said.
Climate change
Ukraine will soon be forced to reduce its reliance on fossil fuels — oil and coal-fired electricity — as the world tries to reduce greenhouse gas emissions that are warming the planet, potentially with catastrophic results, if decisive action isn’t taken by 2050.
That’s the year that the European Union has set its goal for becoming carbon neutral. Other nations, including the biggest polluter, China, have made similar pledges. The United States, the world’s No. 2 polluter, is also expected to accelerate its transition to climate-neutral energy sources after Joe Biden becomes president on Jan. 20.
For Ukraine, the EU is likely to start penalizing the nation, through trade and fines, for continued use of fossil fuels. Vitrenko concedes that Ukraine is behind the green curve, noting that, to see results in energy policy, “you need to start something five years in advance.”
But he said Ukraine has some clear advantages and is showing progress in the following ways:
- Renewable energy sources are going to become so cheap and plentiful (if the storage problem is solved) in the next decade that government subsidies will no longer be required; Ukraine’s abundant solar and wind potential, now accounting for about 8% of Ukraine’s energy supply, will position it well to capitalize on the switch;
- Ukraine’s underutilized gas transit pipelines can also be used to export hydrogen, a chemical used to store electrical power;
- The government has reduced subsidies to coal mines from a high of $8 billion yearly to less than $500 million yearly;
- New technologies may allow Ukraine’s nuclear power plants — which generate up to half of the nation’s electricity — to keep operating more cheaply, safely and with less radioactive waste;
- The Stockholm arbitration award of $3 billion against Gazprom showed that, when Ukraine’s laws or rights are violated, the nation should be more aggressive in pursuing legal challenges against those who transgress.
“The future is with renewable energy,” he said. “The problem is how to get to the future.” Among the challenges in the next decade:
- Ukraine needs a financially sustainable solution to the $1 billion in payments that the government owes renewable energy providers in order to attract future investors to the sector;
- Investment will have to be made in modernizing Ukraine’s nuclear reactors;
- DTEK and other private players will have to be part of the solution in phasing out electricity generated from fossil fuels, including coal, which will require helping the nation’s coal miners to find other work;
- Naftogaz will have to be overhauled — privatized or turned over partly to strategic investors — because it “has no real business model” and will lose money; and
- Ukraine must figure out how to attract investment into domestic oil and gas production, which has been flat or declining since independence nearly 30 years ago.
“It’s not science fiction,” Vitrenko said of the advancements that could make Ukraine energy independent and environmentally friendly. But Ukraine has to become “much more serious” about devising a sustainable energy policy, “otherwise there’s no future.”
Pro-nuclear power
While nuclear energy is now seen as a dangerous, expensive and wasteful way to generate electricity, Vitrenko has a different view. He is not alone. Business luminaries such as billionaire Bill Gates, who founded Terrapower, are promoting advancements in nuclear power technology that will generate electricity that is safe, abundant and carbon-free. He talked about his ideas in the Netflix documentary “Inside Bill’s Brain: Decoding Bill Gates.” The gist of Gates’ pitch is that most nuclear power plants are running on outdated, decades-old technologies that gave rise to such disasters as Ukraine’s Chornobyl in 1986 and Japan’s Fukushima in 2011.
In contrast to such nations as Germany that are phasing out nuclear power, Vitrenko said that nuclear power should be utilized more in the nation’s energy grid, at the expense of fossil fuel-generated electricity.
“We cannot live without nuclear energy if we want to achieve de-carbonization,” Vitrenko said. “Nuclear power will generate half of the electricity in this country; it’s the backbone of our energy consumption. We should not be planning any decommission of nuclear power plants in the nearest future.”
Besides, he said, renewable energy is not yet reliable. Sometimes solar and wind power cannot be generated when it is needed. Conversely, at other times, “they produce energy that nobody needs.” Until better technologies are invented to store such energy, renewables cannot reliably power energy grids, he said.”
Unlike his parents
Vitrenko’s parents were creatures of the Soviet Union. His famous mother, Nataliya, who will be 70 this year, finished in fourth place in the 1999 presidential election with 11% of the vote during a campaign in which she was wounded when assailants threw hand grenades in a crowd during one of her rallies. She ran on an anti-Western platform. His father, Yuriy, a noted economist, worked for the State Planning Committee, known as Gosplan, which exercised centralized control over the economy.
Their son, one of three children, is committed to Ukraine’s democratic, European future. He has a master’s of business administration from INSEAD, and worked for PwC and as an investment banker for Merrill Lynch in the London office before starting his own firm, AYA Capital.
If he does get the energy minister’s job for good, he won’t try to manually control the sector the way that Soviet planners tried — and ultimately failed — with the economy.
“I cannot replace the market. Nobody can replace the market,” Vitrenko said. “My role is to remove these distortions” that hamper Ukraine’s development of a market economy, he said.
Properly regulated competition will end situations such as Rotterdam+, in which DTEK was accused of benefiting from a government pricing formula for coal-generated electricity that investigators and energy experts say needlessly cost Ukrainians $1.4 billion before it was abandoned.
“Ukraine cannot win this game against Ukrainian oligarchs, corrupt prosecutors, judges, and politicians,” Vitrenko said. “I will focus on a new game, which is to integrate with the European market. The only way is to physically connect with the European energy grid as soon as possible, within half a year, ideally, and a maximum of two years. That will allow for exports and imports of electricity to and from Europe.” Full European integration is the best way to “clean the Augean stables,” he said.
The West has and can be helpful, he said, citing many examples — including President-elect Joe Biden’s involvement (as U.S. vice president) in getting Slovakia to supply Ukraine with large amounts of natural gas and with supporting the establishment of independent boards of directors for corporate governance. But “to save Ukraine should be the problem of Ukrainians.”
Ukraine needs to specifically and explicitly describe what assistance it requires. Such definition was useful when Ukraine outlined the vulnerabilities of Russia’s Nord Stream 2 pipeline in a way that led to U.S. sanctions that have stalled the completion of the project that will double existing transit capacity to 110 billion cubic meters annually bypassing Ukraine.
He envisions developing concrete proposals to get the Biden administration to help Ukraine integrate into the European electricity market.
And what does the West want from Ukraine?
“They need Ukraine to be part of the free world because it makes the free world stronger. But the West needs Ukraine to contribute to the strength of the free world, not make it weaker.”
