KYIV – While other significant developments have dominated the news in recent weeks, such as the responses to the COVID-19 pandemic, or the much-awaited release of new financial support for Ukraine by the International Monetary Fund, the enduring saga of competition among stakeholders and profiteers within and around Ukraine’s lucrative energy sector also merits attention.
Even a cursory overview of this complex subject shows that extraordinary things have been happening.
Since the spring, a struggle for influence and control in this vital area has intensified among the oligarchic stakeholders, Ihor Kolomoisky, Rinat Akhmetov and others, including perhaps interested parties in President Volodymyr Zelenskyy’s political entourage. Government posts have been reshuffled. Imports of electricity from Russia have been renewed and the production of nuclear energy reduced in favor of a greater temporary reliance on coal.
These maneuvers are having an impact not only on industry and the domestic consumer but also the already severely strained state budget. Given Moscow’s direct interest in how Ukraine handles its strategic policy aimed at consolidating sovereignty and security in the energy sector, there are other far-reaching implications.
First, some background and information on the key players. Naftogaz, as Ukraine’s main state company dealing with the transportation, extraction and refinement of natural gas and crude oil, was created in 1998, towards the end of a decade in which this entire area had become a magnet for unscrupulous and corrupt businessmen and politicians. This was the era, as the Kyiv Post put it recently, of “crony capitalism, rent-seeking, rigged privatizations and assassinations.”
Among those who profited from the murky gas and oil deals in the 1990s were former Prime Minister Pavlo Lazarenko, his associate who later also became prime minister, Yulia Tymoshenko, tycoon Dmytro Firtash and his close associate turned pro-Russian politician Yuriy Boyko, who headed Naftogaz from 2002 to 2005.
Mr. Kolomoisky, together with his partners in the business group called Privat, also obtained considerable assets in the energy sector. The most valuable are Ukrnafta, the country’s largest oil-producing company, the controlling stake in which is owned by the state via Naftogaz, and Ukrnafta’s Kremenchuk Refinery, which provides about 50 percent of gasoline on the fuel market.
With Russia using gas as a political weapon, shady deals were made in 2009-2010 between Kyiv and Moscow, which were damaging to Ukraine’s interests but were profitable for those involved on both sides.
After the Revolution of Dignity in 2014 and the ouster of pro-Russian President Viktor Yanukovych, under the new leadership of Andriy Kobolyev and his associate, the troubleshooting and Western-educated maverick Yuriy Vitrenko, Naftogaz was revamped and cleaned up.
Ukraine’s dependence on Russian gas was terminated thanks to alternate sources found via the country’s Western neighbors, secured through “reverse flows” utilizing the existing pipeline network through which Russia had continued to supply gas to Europe.
The new management of Naftogaz also took on the Russian colossus Gazprom in international arbitration in Stockholm – a hugely risky venture. Moscow, in the meantime, prepared to deal Ukraine a devatating economic blow by rerouting its supply of natural gas to Europe through new pipelines that circumvented Ukraine: the Nord Stream 2 pipeline to Germany under the Baltic Sea and the TurkStream pipeline to Turkey.
Under President Petro Poroshenko, corruption in different areas of the energy market continued. The most notorious example was the Rotterdam Plus scheme, whereby coal ostensibly bought in Rotterdam, because of Russia’s occupation of coal-producing areas of the Donbas, was “imported” at inflated prices. In fact it originated from within Ukraine, the occupied territories or Russia itself. The main beneficiary was the secretive Mr. Akhmetov, the country’s richest oligarch, and his energy company DTEK.
This scam was exposed and by the time Mr. Zelenskyy replaced Mr. Poroshenko as president in April 2019 was being investigated by the National Anti-Corruption Bureau (NABU). Rotterdam Plus was stopped the following month, and a new energy market model was implemented that restricted the regulator’s role in fixing pricing elements.
As a result, the competition between Messrs. Kolomoisky and Akhmetov heated up. Mr. Kolomoisky wanted cheap electricity for his ferroalloy plants through imports from Russia and Belarus. Mr. Akhmetov, who dominates thermal generation, was interested in selling electricity at high prices and opposed this move.
In September 2019 the Verkhovna Rada approved a proposal from National Deputy Andriy Gerus to allow the purchase of electricity from countries not belonging to the European Energy Commission. This opened the way for the resumption on October 1, 2019, of the commercial import of electricity from Russia that had been stopped in 2015.
Mr. Kolomoisky’s structure supplied this coal to Centrenergo, an important state-owned energy company. Mr. Akhmetov’s mines suffered losses. Mr. Kolomoisky also challenged him in “green energy” generation, where Mr. Akhmetov owns a large share of renewable energy assets.
All this was temporarily overshadowed by Naftogaz’s historic successes in the Stockholm arbitration in 2017-2018 and especially when, as a result, at the end of December 2019, a new Russian-Ukrainian gas deal was finally concluded. Moscow agreed to supply Europe for at least another five years via Ukraine and to pay a $2.9 billion settlement.
Following this critical breakthrough, it seemed that Ukraine could breathe again on the energy front and that it was time to put more of its own house in order. But not all were happy with this victory, as it threatened to cut out the middlemen who had been profiting from the previous system.
Observers, preoccupied with Mr. Kolomoisky’s attempts to regain ownership of the country’s largest bank, PrivatBank, after it was nationalized at the end of 2016 following large-scale fraud, apparently missed the fact that the rogue tycoon was simultaneously seeking massive compensation in the energy sphere.
Since 2015, Mr. Kolomoisky’s Privat company had been demanding in a Stockholm court that Ukraine pay $4.7 billion due to the loss of dividends, fines and the decline in the value of Ukrnafta’s shares.
In January of this year, Naftogaz reached an amicable agreement with Ukrnafta, which entailed the state covering part – an estimated $1.2 billion – of the compensation owed by the former to the latter.
This appeared to be a mutually convenient settlement. Naftogaz settled its debt, and Ukrnafta was to use the proceeds to pay off its own massive tax debt to the state. Nevertheless, taxpayers were to be left footing the bill for Ukrnafta’s tax debt. Apparently, Mr. Kolomoisky was unhappy that the compensation was not to go to him directly, and it still apparently has not been paid out.
On March 4 Prime Minister Oleksiy Honcharuk was suddenly replaced by Denys Shmyhal, a former manager for Mr. Akhmetov, and most of the ministers also were dismissed. Justifying the change, President Zelenskyy told Parliament that the Honcharuk-led government had not been able to cope with the economic challenges facing the country and its mandate to reduce utility bills.
At the end of March, Ukraine’s largest private producer of electricity and coal, Mr. Akhmetov’s DTEK, announced it was defaulting. Yet, in 2019 the company had restructured its debts and received a net profit of 2.55 billion hrv ($89 million U.S.).
This occurred exactly at the time when a new minister of energy and the environment was to be appointed. Informed sources noted that the choice was between candidates representing either Mr. Kolomoisky or Mr. Akhmetov.
President Zelenskyy and his office settled on Olha Buslavets, a veteran from inside the ministry, which indicated a further buttressing of Mr. Akhmetov’s influence. But on the day of the vote in the Verkhovna Rada to confirm the appointment, March 30, it was clear that Mr. Kolomoisky’s supporters would be able to block it. So the president abruptly suspended her nomination.
On April 16, during an emergency session of the Cabinet of Ministers, Ms. Buslavets was quietly appointed acting minister, thereby circumventing the need for the Parliament’s endorsement. She acknowledged at the time that, “At this moment, we’re living through one of the biggest crises in all of Ukraine’s history, and the crisis in the energy sector is an integral part of that.”
In mid-May, Mr. Vitrenko, a chief executive at Naftogaz, who had spearheaded the fight against Gazprom and introduced major internal reforms, was abruptly informed that his post was being cut.
He told the Kyiv Post: “The real reason for my firing is [that] this fight with Gazprom is not a priority for the government as well as the fight against corruption and some reforms.” Mr. Vitrenko added: “The oligarchs never left. They feel much more comfortable… When you start fighting powerful people and powerful vested interests, they will fight back.”
On May 29, the State Property Fund, which owns 78.3 percent of Centrenergo, appointed Oleksandr Korchynsky as general director to block Mr. Kolomoisky’s continuing influence.
On June 8 the Bihus.info investigative news outlet reported that since 2017 Mr. Kolomoisky had allegedly engaged in selling coal from Russia and Russian-occupied territories of eastern Ukraine to Centrenergo, which provides 15 percent of Ukraine’s energy needs.
Interestingly, on June 15 the government registered a bill on amendments to the law on the electricity market that proposes once again to restrict imports of electrical energy from Russia and Belarus.
Also in June, after nine months of negotiations, a compromise deal has been reached concerning the “green tariffs,” feed-in incentives that are so important for investors in Ukraine’s growing “clean” energy sector. On June 10, the Cabinet of Ministers agreed to cut wind tariffs by 7.5 percent and solar tariffs by 15 percent, and to pay out the $500 million debt owed to green power producers. According to the Ukraine Business News, a 15 percent tariff cut entails a 50 percent cut in profits, which would deprive Ukraine of 250-300 million euros (about $281-$337 million U.S.) in annual taxes.
Significantly, one of the first actions of the controversial new acting minister has been to reduce the output of electricity from the country’s atomic power stations.
The acting president of national nuclear-generating company Energoatom, Petro Kotin, declared on May 27: “the restrictions imposed on us by the government in electricity generation have fallen to historic lows, namely, to 6.63 GW from 9.49 GW available.”
Lawmaker Serhii Nahorniak from Mr. Zelenskyy’s Servant of the People party has demanded that the controversial Ms. Buslavets be summoned to answer before the Parliament. “Why is the cheaper nuclear power generation limited, but the thermal – expensive and non-environmentally friendly generation [using coal] – increasing? As of June 1, 10 out of 15 [atomic] power units are operating, five of which operate with restrictions,” he says.
Despite these concerns and increasing calls for Ms. Bulavets to be replaced because she is allegedly promoting Mr. Akhmetov’s interests, on June 17 the Cabinet of Ministers formally stipulated that the use of coal be given priority in electricity generation at thermal power plants.
What to make of all this? The dust needs to settle. But the obvious question is: Are the president and the government in charge, or are the oligarchs calling the shots?