Page 44 - bne_Magazine_April_2018

44 I Eastern Europe bne April 2018
After a first price rise in 2016, the Ukrai- nian government reneged on a promise to the IMF to boost household gas tar- iffs in October last year, just as the heat- ing season got under way, arguing that higher prices would hit poor Ukrainians first and foremost.
President Petro Poroshenko had already seen his popularity plummet and the government calculated that the political cost of hiking gas tariffs was too high. However, the tariff increase is a key plank of the IMF imposed reforms.
"There are no plans to increase the gas prices," the ukrinform.net online outlet quoted Energy Minister Ihor Nasalyk as saying on October 2. "The prime minister has clearly stated that there are no economic justifications for this [gas price increase], and the ministry can confirm this."
Vitrenko argues however that this defence of low gas prices is due to “resistance from vested interests.” “Surgery can be scary,” he added.
Western backers have also been critical of the way the Ukrainian government still tries to make Naftogaz pay for public service obligations, the complex system of subsidies still in place despite demands by Naftogaz to abolish it. “The government should pay for those, not Naftogaz,” an EBRD senior executive told bne IntelliNews, which has also played a crucial role in funding the company. In October 2015, Kyiv secured a $300mn loan from the EBRD to buy gas on the European market to cover the country’s heating needs during
that winter.
But in April 2017 the bank’s president Sir Suma Chakrabarti lambasted the government for foot-dragging over reforms to the management of the com- pany, especially a failure to introduce a corporate governance code, which had prompted several of its independent directors to resign.
“Naftogaz also need to become, as origi- nally agreed, an entity of private law,” Chakrabarti said in a strongly worded letter to the prime minister. “I am asking
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you to do all that is necessary to have Naftogaz’s new charter and necessary enabling legislation in place before the end of this month [April].”
The conflict between Naftogaz and Ukrainian authorities only grew stronger in 2017, as the independent supervisory board appointed the previous year com- plained of increased political meddling.
In April, Ihor Prokopiv was appointed deputy energy minister. The announce- ment was interpreted as a particularly poor signal, as the man now effectively in charge of supervising Naftogaz had been fired from the company only
a few months earlier for alleged misap- propriation of funds. One member
of the board resigned immediately in protest, and two more in September, citing the “dismantling of reform by the government”.
realise it means they are out of business, because their business model is not
to be competitive but to steal from
the government.”
The shadow of Dmytro Firtash
Corruption also remains a concern for a company that used to be one of Ukraini- an elites’ main channel for dirty money: in 2014, a Reuters investigation found out that Ukrainian oligarch Dmytro Firtash might have made up to $3b by buying gas from Gazprom “well below market prices” and selling it Naftogaz.
By most accounts, such corrupt deals have now all but ceased, and Vitrenko claims the company also dealt with one of the main sources of internal corrup- tion in the procurement of equipment.
But Firtash, who is currently in Austria fighting a US extradition request, alleg-
“Ukrainian elites are afraid of this reform because they realise it means they are out of business”
“The reform process was quite successful at the beginning, but it’s now in a dead- lock.” Wojciech Kononczuk, a specialist on energy policy in Central and East-
ern Europe for the Centre for Eastern Studies, a Polish think-tank, told bne IntelliNews.
The unbundling of Naftogaz, the other key provision of the law on gas reform, has been another major point of contention. The law plans for the separation of Naftogaz’s transmission service from production and supply activities to put it in line with the EU Third Energy Package, but showed “insufficient progress”, according to the EBRD senior executive.
Some observers have warned that the overall reform plan could be effectively frozen until the next presidential elec- tion in 2019.
The backlash hasn’t surprised Vitrenko, who argued it was a logical consequence of the reform: “Ukrainian elites are afraid of this reform because they
edly still controls a majority of Ukraine’s regional distribution companies, which act as intermediary between Naftogaz and the final customers. Naftogaz claims regional gas companies have accumu- lated UAH20.4bn ($714.8 million) of debts in 2017, and maintain an opaque system which encourages corruption. “We don’t need these intermediaries. They say they sell gas to households, but we cannot check, it’s all very murky,” according to Vitrenko. But the govern- ment remains reluctant to write off the debt as that would in effect put money into an oligarch’s pocket.
In September 2017, Naftogaz denounced a so-called “dead souls” scheme, in which a regional gas company in the Khirovograd region allegedly sold 9.8 million cubic meters of gas to more than 300 fictional addresses, while pocketing the subsidies.
“We quickly realised that internal fights against vested interests can be more difficult than dealing with Gazprom or external powers,” Vitrenko says.