Past corruption overshadows Ukraine’s oil and gas industry

When Ukrainian President Volodymyr Zelensky – a comedian who entered politics in 2019 after playing the role of Ukrainian president in the popular political satirical sitcom “Servants of the People” – met President Joe Biden in White on August 31 House meets, jokes can be few and far apart. Both leaders will have many complaints.

Biden will have one overwhelming grievance that pervades all US efforts to help Ukraine: the epic corruption in the country that turned it from heroic status to problematic status after the fall of communism. Politicians around the world raise their hands in frustration as they discuss the scale and depth of corruption in Ukraine, a resource-rich country that should attract but repel foreign investment.

However, that does not make Ukraine irrelevant, nor does it make its predicament as a neighbor of a contentious Russia unreal for the US and Europe. Its location and size are critical, and it is at the forefront of continued pressure from Russia, which captured Crimea in 2014 and supports separatist rebels fighting in the Donbas, Ukraine’s eastern industrial heartland. Russia also uses gas as a weapon against Ukraine and beyond in Eastern Europe through the Ukrainian pipeline system.

Russia controls the gas supply that flows through the Ukrainian Gas Transport System (GTS). Gas transit is an important part of the Ukrainian economy and is severely affected. Annual gas transit revenues will decrease by approximately $ 2 billion with the commissioning of the Nord Stream 2 pipeline, which delivers gas directly from Russia to Germany. This pipeline, which runs 764 miles on the seabed of the Baltic Sea, was approved by Biden after years of US opposition in a joint statement with outgoing German Chancellor Angela Merkel on July 15, which heightened Ukraine’s concerns about the reliability of the US .

Another point of Ukraine’s frustration with the United States is its desperate desire to become a full member of the North Atlantic Treaty Organization. This is not supported by the United States and will certainly be brought up at the Biden-Zelensky meeting.

Everything is threatened with corruption

Corruption across Ukraine threatens everything. Foreign investment in a country that should be filled with opportunity for global business has dropped to zero. Ukraine is rich in mineral resources (including iron ore, coal, manganese, gas, petroleum, graphite, uranium, chromium, nickel and rare earths) and foreign companies should compete for entry. Instead, for fear of massive investment losses, they stay in a country with a compromised judicial system and systemic corruption that infects every industry and especially energy.

As president, Biden made his thoughts on corruption perfectly clear, saying, “Corruption is a cancer: a cancer that eats up a citizen’s belief in democracy, diminishes the instinct for innovation and creativity; already strained national budgets that crowd out important national investments. It wastes generations of talent. It discourages investment and jobs. â€He and Foreign Minister Antony Blinken both spoke out on corruption in Ukraine; and Blinken even went so far as to issue a five-point roadmap on how to go about it.

A colleague who worked in Ukraine told me: “The system is not as corrupt as corruption is the system.”

Zelenskyi’s list of allegations is likely to begin with the Biden government’s U-turn on the Nord Stream 2 pipeline. A previous pipeline, Nord Stream 1, started operations in 2011.

Biden’s contact person for dealing with Nord Stream 2 and the resulting political consequences is the former advisor Amos Hochstein, who was appointed special envoy for the Ministry of Foreign Affairs and coordinator for international energy matters and whose knowledge of Ukraine and the pipeline issues is in-depth and personal. He was on an advisory board to Naftogaz, the state-owned oil and gas company that operates GTS. He resigned in 2020 because of the political support in the upper echelons of Kiev for fraudulent activities in the company.

Much of the corruption involved dealings between Naftogaz and private companies, including payments with government funds for fraudulent purchases.

Managers signed the deal

Naftogaz managers were reportedly involved in a nefarious affair. Last November, the state-owned Ukrtransgaz, which transports and stores gas and is a subsidiary of Naftogaz, signed a contract that delivered 305 million cubic meters of state gas worth around $ 80 million to a fictitious company absolutely free of charge. By the beginning of this year, I was told by a knowledgeable source that Ukrtransgaz accounted for 50 percent of all Russian gas transit to Europe.

According to reports, the gas was extracted from a private company through an intricate scheme. First, a lawsuit relating to a previous debt by Ukrtransgaz against Ukrenergozbut, a private company, was dusted off. In late 1999, Ukrenergozbut turned over 418 million cubic meters of gas to Ukrtransgaz for delivery to its customers. But they never got their gas. And for 20 years, Ukrtransgaz refused to acknowledge and repay this debt.

In 2019, a group of stakeholders planned to seize corporate rights to Ukrenergozbut, which owned that debt. The nominal owners were changed several times in order to make it as difficult as possible for the previous owners to regain the assets. The new owners transferred the rights to the debt to other companies, with whom the management of Naftogaz very quickly reached an amicable settlement and gave them the gas.

It took almost two years for the real owners of Ukrenenergozbut to prove the fraudulent confiscation of their company shares in court. But by the time the Supreme Court of Ukraine ruled in Ukrenenergozbut’s favor, the gas had already been given to other companies and quickly sold on the market.

Top Naftogaz executives have reportedly facilitated a settlement agreement with the schemers. Andriy Kobolev, the then chairman of the board of Naftogaz, signed the decision to transfer the gas from Naftogaz to Ukrtransgaz, it is said.

Kobolev took over the leadership of Naftogaz in 2014 after the Revolution of Dignity, also known as EuroMaidan. Ukraine’s supporters in the west had high hopes that Kobolev and his team would be professional managers ready to challenge Russian giant Gazprom.

Ukrainian law enforcement agencies are currently investigating several criminal cases related to this gas theft. Sergiy Pereloma, first deputy head of Naftogaz, signed the amicable settlement on behalf of the state company. He has been working with Kobolev since 2014 and has been investigated by the National Anti-Corruption Bureau of Ukraine in two high-profile corruption cases.

Yuri Vitrenko, the new head of Naftogaz, has international support.

Oligarch’s shadow hangs over deals

Above it hovers the figure of the Ukrainian oligarch Igor Kolomoisky, who at times seems to be the beneficiary of irregular practices. According to reports, in November 2020 changes to the state budget legalized one of the biggest scams in the gas market in the interests of Kolomoisky: transfers of billions of Ukrainian hryvnia between the state budget, Naftogaz and Ukrnafta, 42 percent of which are owned by Kolomoisky companies. This year and in previous years, Ukrnafta sold gas to companies from the oligarch’s holdings at prices well below market prices.

According to sources, corruption has allowed more than 32 billion hryvnia ($ 1.2 billion) of Ukrnafta’s accumulated debt to be repaid at the expense of the state budget and taxpayers. Naftogaz will also have to pay Ukrnafta for more than 2 billion cubic meters of gas produced in 2006 at current prices 30 times higher than the original price – again at the expense of the state budget and taxpayers.

In addition, according to sources, Naftogaz has already paid 7 billion hryvnia ($ 262.7 million) to Ukrnafta for future gas production. Essentially, this is an interest-free loan from Naftogaz to an oligarch. It is likely, sources say, that this payment will be “lost” in the wake of Ukrnafta’s proposed split into oil and gas companies.

When Hochstein stepped down from the Naftogaz advisory board, he justified this in a column for the Kiev Post: “The company had to spend an infinite amount of time fighting against political pressure and the attempts of the oligarchs to enrich themselves through various dubious businesses . “He himself was against Nord Stream 2, but he knows that the real problem with helping Ukrainians besides Russia is the growing corruption.