Past corruption overshadows Ukraine’s oil and gas industry

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When Ukrainian President Volodymyr Zelensky – a comedian who entered politics in 2019, after playing the role of Ukrainian president in a popular political satire sitcom “Servant of the People” – meets President Joe Biden at the White House on August 31 , jokes can be few and far from each other. The two leaders will have a lot of criticism.

Biden will have one overriding reproach, which informs all American efforts to help Ukraine: the epic corruption in the country that reduced him from hero status, after the fall of communism, to troubled status. Leaders around the world raise their hands in frustration when discussing the extent and scale of corruption in Ukraine, a resource-rich country that is expected to attract foreign investment, but repels it on the contrary.

However, that does not make Ukraine irrelevant or its predicament, as a neighbor of a cantankerous, unreal Russia to the United States and Europe. Its location and size are critical, and it is at the forefront of continued pressure from Russia, which seized Crimea in 2014 and backs separatist rebels fighting in Donbass, the eastern industrial center of Russia. Ukraine. Russia is also using gas as a weapon against Ukraine and further into Eastern Europe, via Ukraine’s pipeline system.

Russia controls the gas supply which passes through the Ukrainian gas transmission network (GTS). Gas transit is a vital part of the Ukrainian economy, and it is about to be seriously affected. Annual gas transit revenues will decline by around $ 2 billion with the start of the Nord Stream 2 pipeline, bringing gas directly from Russia to Germany. This pipeline, running 764 miles on the seabed of the Baltic Sea, was endorsed by Biden, after years of US opposition, in a joint statement with outgoing German Chancellor Angela Merkel, released on July 15, which added to Ukraine’s concerns about the reliability of the United States. .

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 raised at the Biden-Zelensky meeting.

Everything is threatened by corruption

Corruption all over Ukraine threatens everything. Foreign investment, in what should be a country rich in opportunities for global companies, has fallen to zero. Ukraine is rich in natural resources (including iron ore, coal, manganese, gas, petroleum, graphite, uranium, chromium, nickel and rare earths) and is expected to have businesses foreigners vying to enter. investment losses in a country with a compromised judicial system and systemic corruption, infecting all industries and in particular energy.

As president, Biden made his thoughts on corruption clear, stating: “Corruption is a cancer: a cancer that eats away at a citizen’s faith in democracy, diminishes the instinct for innovation and creativity; national budgets already tight, crowding out large national investments. It wastes the talent of entire generations. It scares away investments and jobs. He and Secretary of State Antony Blinken both weighed in on corruption in Ukraine; and Blinken has gone so far as to publish a five-point roadmap on how to tackle it.

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

Zelensky’s list of complaints will likely begin with the Biden administration’s flip-flop on the Nord Stream 2 pipeline. A former pipeline, Nord Stream 1, began operations in 2011.

Biden’s key man in dealing with Nord Stream 2 and its political fallout is former adviser Amos Hochstein, who has been appointed State Department Special Envoy and Coordinator for International Energy Affairs, and whose knowledge of Ukraine and pipeline issues is deep and personal. . He served on the advisory board of Naftogaz, the state oil and gas company that runs GTS. He resigned in 2020 due to political support in the upper echelons of Kiev for fraudulent activities in the company.

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

Managers signed the deal

Naftogaz executives have been implicated in an infamous affair, according to reports. Last November, the state-owned company Ukrtransgaz, which transports and stores gas and is a subsidiary of Naftogaz, signed an agreement under which 305 million cubic meters of state gas, worth around 80 million dollars, were transferred to a shell company absolutely free of charge. Until the start of this year, I was told from an informed source, Ukrtransgaz accounted for 50% of all Russian gas transits to Europe.

The gas was taken from a private company, through a complicated plan, according to reports. First, a lawsuit for a former debt of Ukrtransgaz to Ukrenergozbut, a private company, was dusted off. At the end of 1999, Ukrenergozbut transferred 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 recognize and repay this debt.

Then, in 2019, a group of stakeholders plotted to seize the social rights of Ukrenergozbut, who held this debt. The nominal owners have been changed several times to make it as difficult as possible for the previous owners to recover the asset. The new owners transferred the rights to the debt to other companies with which the management of Naftogaz very quickly agreed to reach an amicable settlement and gave them the gas.

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

Senior Naftogaz executives facilitated a settlement deal with the lobbyists, according to reports. Andriy Kobolev, then chairman of the board of Naftogaz, signed the decision to transfer gas from Naftogaz to Ukrtransgaz, according to reports.

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

Currently, the Ukrainian security forces are investigating several criminal cases related to this gas theft. Sergiy Pereloma, first deputy director of Naftogaz, signed the out-of-court agreement on behalf of the state-owned company. He has worked with Kobolev since 2014 and has been investigated by Ukraine’s National Anti-Corruption Office in two high-profile corruption cases.

Yuri Vitrenko, the new boss of Naftogaz, enjoys international support.

The shadow of the oligarch hangs over the offers

Above is the figure of the Ukrainian oligarch Igor Kolomoisky who at times appeared to be the beneficiary of irregular practices. In November 2020, according to reports, amendments to the state budget legalized one of the biggest scams in the gas market in the interests of Kolomoisky: transfers of billions of Ukrainian hryvnias between the budget of the State, Naftogaz and Ukrnafta, of which 42% are owned by the Kolomoisky companies. This year and in previous years, Ukrnafta sold gas to companies of the oligarch’s holdings at prices significantly below market prices.

Sources claim that the corruption has allowed the repayment of more than 32 billion hryvnia ($ 1.2 billion) of the accumulated debt of Ukrnafta at the expense of the state budget and taxpayers. Naftogaz also has to pay Ukrnafta over 2 billion cubic meters of gas produced in 2006 at current prices, 30 times 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. In essence, this is an interest-free loan from Naftogaz to an oligarch. It is likely, according to sources, that this payment will be “lost” in the process of Ukrnafta’s planned split into oil and gas companies.

When Hochstein resigned from Naftogaz’s advisory board, he explained why he had done so in a column for the Kyiv Post: “The company was forced to spend endless time fighting political pressure and the attempts of the oligarchs. to get rich thanks to various dubious agreements. “He himself opposed Nord Stream 2, but he knows that the real problem in helping Ukrainians, besides Russia, is the corruption that is taking hold.

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