This weekend, Ukrainian cities will start to run out of clean drinking water.
Since June 19, the country’s only chlorine-producing factory Dniproazot has stopped work, causing Ukraine’s supplies to dwindle.
Oligarch Ihor Kolomoisky, who owns Dniproazot with his business partner Gennadiy Boholyubov, has stopped chlorine production at the factory in a bid to “blackmail” Ukraine into giving him business concessions, as government and legal pressure on his oil and banking empire increases.
“Refusing to deliver chlorine according to the contracts in place is being taken as blackmail of water supply enterprises and pressure on critical infrastructure,” said Deputy Prime Minister Hennadiy Zubko in a statement as the crisis began.
Sources on the market contend that Kolomoisky is using his monopoly on Ukraine’s chlorine production to “blackmail” the government as he loses influence around the country.
Since Kolomoisky’s PrivatBank was nationalized in December 2016, he has been hit with a $2.5 billion asset freeze, a $500 million lawsuit from a former business partner, and lost support from his longtime ally Dnipro Mayor Borys Filatov.
“I don’t understand why we had to buy chlorine for the city’s needs, while the people who are responsible for this are blackmailing half the country,” Filatov said in a statement.
Others tie the crisis to a battle for influence over state-owned oil producer Ukrnafta. The chlorine blockade began after the company ended a scheme whereby Dniproazot received gas from Ukrnafta for processing, allowing Kolomoisky to make a hefty profit off of ammonia and chlorine produced from the gas.
The chlorine crisis has the potential to place the health of millions of Ukrainians in jeopardy, particularly those in regions affected by the ongoing war with Russian-backed militants, who have limited access to steady water supplies.
According to the Association of Ukrainian Vodokanals (water distribution companies), Kharkiv could run out of bacteria-killing chlorine, as soon as this weekend.
As public pressure has ramped up, Dniproazot has taken to claiming that it needs approval from the anti-monopoly commission before it can restart work — a claim the anti-monopoly commission denies. The commission issued a statement that it might fine Dniproazot at 10 percent of its revenue for abusing its monopoly position.
“It’s a lesson for the future, that the enterprise is a monopoly and that its owner can blackmail the whole country,” said political analyst Volodymyr Fesenko.
In 2016, as the Ukrainian government moved to nationalize PrivatBank, Kolomoisky used the bank’s monopoly position to threaten to bring down a payment system responsible for the majority of the country’s bank transfers, which would have turned Ukraine’s financial system into a smoking crater.
“[Nationalizing Dniproazot] wouldn’t be a total repeat of PrivatBank, as the government wouldn’t have to guarantee profits to an owner who is blackmailing the state,” Fesenko said.
Dniproazot makes ammonia, urea, and liquid chlorine, which is shipped around Ukraine for clean water.
Kolomoisky didn’t reply to a request for comment.
Old schemes, new fight
Ukrnafta has been a vassal of Kolomoisky’s since the early 2000s. With a 43 percent stake in the oil producer and control over the country’s only operating oil refinery in Kremenchug, Kolomoisky has been able to de facto control the company from a minority position.
In 2010, Ukrnafta cut a deal to sell gas that the company produced to Dniproazot. Ukrnafta was bound to sell gas to Naftogaz at below-market rates. A loophole in the law let Ukrnafta rent Dniproazot and send gas to the firm for processing, selling the product at competitive rates.
One estimate, from energy news outlet enkorr, placed losses from the scheme to Ukrnafta in 2017 alone at Hr 1.46 billion ($55.6 million).
“We suppose at that time it helped to monetize our gas and it was more profitable for Ukrnafta to produce ammonia from its gas than to sell gas underpriced to the state,” Ukrnafta said in a statement.
Dmitry Churin, an analyst at Eavex Capital who covers Ukrnafta, called the scheme “non-transparent,” adding that the company has moved towards selling gas “directly to consumers,” eliminating the Dniproazot scheme in the process.
An Ukrnafta spokeswoman told the Kyiv Post that the contract expired on March 31, 2017.
The move comes in a larger trend of the oil company moving away from Kolomoisky’s orbit.
Naftogaz hired KPMG in early July to conduct an audit of Ukrnafta’s activity from January 2014 to June 2018. That decision will offer a perspective independent of the firm’s longtime auditor PwC, which had its banking license revoked amid allegations that it misappraised collateral on PrivatBank’s balance sheet while Kolomoisky controlled it.
Ukrnafta itself has inched away from the oligarch. The company recently rebranded its nationwide network of gas stations, a traditional cornerstone of Kolomoisky’s business empire.
“In advertisements on TV and through loyalty cards, Ukrnafta’s filling stations were a part of the bigger Privat chain,” said Churin. “And after the new management started to separate this business from the bigger chain, we see that all other marketing activities stopped, so Ukrnafta operates by itself, not as a part of the Privat network.”
Humanitarian consequences
Cities in Ukraine’s east and those that rely on the Dnipro River have been hit the first, and hardest.
Mark Buttle, water, sanitation, and hygiene coordinator at UNICEF-Ukraine currently in the Donbas, wrote to the Kyiv Post that “smaller water companies in Luhansk Oblast are feeling the pressure and some have reported rapidly diminishing stocks of chlorine. In Lysychansk and Popasna the vodokanals (municipal water distribution companies) are taking smaller deliveries on an ad hoc, weekly basis, and they are extremely worried about the next few weeks.”
Ukraine cut a deal in August 2016 to supply treated water to non-government controlled areas in Luhansk Oblast.
“If chlorine were to run out in these sensitive locations then the water company would need to stop supplying water altogether… pipes would then need a cleaning phase afterwards with even more chlorine used to disinfect them, causing additional disruption,” Buttle wrote.
“People on both sides of the line of contact would be badly affected, and of course it would raise tensions around water supply in the conflict-affected area.”
Kyivvodokanal, which manages water supplies for the capital, has said that Kyiv will continue to be supplied with chlorinated water.
Calling it a story of “banal business interests,” political analyst Fesenko argued that the state should nationalize Dniproazot to restart chlorine deliveries, a repetition of the government’s nationalization of PrivatBank in December 2016.
“That might sound a little severe, considering the holy right to private property, but this is a national security issue,” he said. “It’s an unacceptable situation for the owner to be allowed to blackmail the whole country.”
For now, the government appears to be set on importing chlorine supplies from nearby countries like Romania and Slovakia. That approach comes with its own problems: the chlorine will be more expensive, and train transport will be limited by the different rail gauges between Ukraine and the EU.
Moreover, there will not be enough chlorine to cover the entire country even once imports begin.
“UNICEF fears the public health consequences for thousands of, already conflict affected, children in the east of Ukraine as lack of clean water would increase the risk of diarrhoea and other waterborne diseases,” Buttle wrote.
This article has been updated to reflect that energy news outlet Enkorr altered the estimated losses from the Dniproazot scheme to Hr 1.46 billion ($55.6 million).
