NAFTOHAZ UKRAINY MANAGEMENT CHANGE INDICATES TURN TO RUSSIA

2010/04/16

NAFTOHAZ UKRAINY MANAGEMENT CHANGE INDICATES TURN TO RUSSIA

by Vladimir Socor

On March 22, the new Ukrainian government completed the formation of the senior management team at Naftohaz Ukrainy, the state oil and gas company (Interfax-Ukraine, UNIAN, March 22; Kommersant, March 23). This team is directly answerable to Fuel and Energy Minister Yuriy Boyko and, equally but informally, to RosUkrEnergo gas trader Dmytro Firtash, an industrial tycoon in his own right, closely allied with Boyko.

Boyko’s appointment as minister was widely expected; and apprehensively so, outside the government’s orbit. He had served in both previous governments headed by the newly elected Ukrainian President Viktor Yanukovych. In the new government, an informal division of spheres has placed Boyko in charge of the oil and gas sectors, allowing interest groups associated with First Deputy Prime Minister Andriy Klyuyev to control the electricity and nuclear sectors (Ukraiynska Pravda, March 13).

Boyko is regarded as “godfather” to the “supply schemes” with Gazprom’s offshoots, EuralTransGas and RosUkrEnergo, devised in 2002-2004. Boyko was first deputy minister of fuel and energy and chairman of Naftohaz Ukrainy in the first Yanukovych government at that time. He was also identified as a member of RosUkrEnergo’s coordinating council in 2004, while holding those official posts (Dzerkalo Tyzhnia, March 13). Boyko returned to government as fuel and energy minister in the second Yanukovych government during 2006-2007, by which time RosUkrEnergo was operating under then-president Viktor Yushchenko’s dispensation.

Firtash headed the Ukrainian side of EuralTransGas in 2002-2004 and RosUkrEnergo from 2006 onward. Firtash and Boyko have a close and continuing personal relationship. However, Firtash also established a temporary alliance with Yushchenko, whose energy team actually implemented the RosUkrEnergo scheme that Boyko had been instrumental in devising. Firtash owned 45 percent of RosUkrEnergo’s shares, with his Ukrainian partner Ivan Fursin owning 5 percent, and Gazprom 50 percent. Yulia Tymoshenko’s government ultimately removed RosUkrEnergo from the Russian-Ukrainian gas trade in early 2009, by agreement with Moscow.

At present, Firtash seeks compensation for 11 billion cubic meters of gas, which he claims was taken from RosUkrEnergo’s storage in Ukraine in 2009. Although removed from the inter-state gas trade, Firtash remains in control of a diversified industrial holding, Group DF (Dmytro Firtash). Furthermore, he is a major stakeholder in the Independent TV corporation, which includes Ukraine’s top-rated Inter TV channel. This has made Firtash a key player in Ukrainian elections, with influence he can leverage on the post-election government. Inter TV’s news coverage is supportive of the Party of Regions (EDM, March 18).

The new government has appointed Yevhen Bakulyn as chairman of Naftohaz Ukrainy. A protégé of Boyko throughout their careers, Bakulyn served as second in command to Boyko at the Lysychansk oil refinery, then as head of Ukraine’s gas extraction and processing company Ukrhazvydobuvannya (fully owned subsidiary of Naftohaz Ukrainy) in 2003-04 and 2006, and finally as the chairman of Naftohaz in 2007, when Boyko was a minister in the second Yanukovych government (Interfax-Ukraine, March 15; Kommersant [Kyiv], March 16).

Returning to Naftohaz in the new Yanukovych government, Bakulyn and two of his aides have published an article calling for shared control of Ukraine’s gas transit system with Gazprom in an international consortium (“2000” weekly magazine [Kyiv] cited by Interfax-Ukraine, March 19).

Ukrtranshaz, the operator of Ukraine’s vast system of transit pipelines and storage sites, will be headed by Serhiy Vinokurov under the new government. Ukrtranshaz is a fully owned subsidiary of Naftohaz Ukrainy; but it will almost certainly be separated from Naftohaz, whether in the process of Western-recommended reform or by transfer to a Gazprom-dominated consortium. Vinokurov was chief adviser to Boyko when the latter headed Naftohaz. He was recently identified as a board member of Ostchem Holding, controlled by Firtash (Interfax-Ukraine, March 22).

Yuriy Borysov is the newly appointed head of Ukrhazvydobuvannya, the gas extraction and processing subsidiary fully owned by Naftohaz. Borysov has been identified as director-general of Firtash’s Ostchem Holding and as a board member of Firtash’s Group DF (UNIAN, March 22; Kommersant, March 23).

Reflecting Boyko’s and Firtash’s political clout in the Party of Regions, each has successfully pushed through the appointment of a protégé as regional governor. The new governor of the Kyiv region is Boyko’s confidant Anatoliy Prysyazhnyuk, who had earlier headed Chornomor Naftohaz (offshore oil and gas activities) under Boyko as minister. Dismissed by the Yulia Tymoshenko government in 2009, Prysyazhnyuk was appointed as the Deputy Head of the Ukrainian Security Service (SBU) by then-president Yushchenko. In the Chernivtsi region, Firtash has managed to have his local confidant, Mykhaylo Papiyev, appointed as governor. Firtash is not a native of Chernivtsi region, but made his business debut in that region, and retains a special relationship with it (Ukraiynska Pravda, March 19).

Global Witness, the London-based NGO specializing in anti-corruption investigations, has issued a statement of concern in response to such appointments in Ukraine’s energy sector. Familiar with Ukrainian energy issues since its 2006 investigative report on RosUkrEnergo, Global Witness warns against a reversal of reforms and calls on the Yanukovych government to show that Ukraine can be an open and reliable partner to the European Union (Financial Times, March 13).

-Vladimir Socor

NEW TEAM IN KYIV SETS STAGE FOR GAS CONSORTIUM WITH RUSSIA

by Vladimir Socor

Ukraine’s new government, built around the Party of Regions, has re-empowered some key Ukrainian protagonists of gas “schemes” with Russia from past years (see Naftohaz Ukrainy Management Change Indicates Turn to Russia, EDM, March 24).

Yulia Tymoshenko‘s government succeeded in ridding Ukraine of those schemes at the beginning of 2009. The Tymoshenko government started shifting the focus of Ukraine’s energy policy from Russia to the European Union. However, the advent of President Viktor Yanukovych, with a Donetsk industry-dominated government, has restored some of Gazprom’s pre-2009 (and indeed pre-2004) allies to power and influence in Kyiv.

Fuel and Energy Minister Yuriy Boyko and the gas trader and industrialist Dmytro Firtash are leading figures in this group from the industry side, closely associated with the new Presidential Administration head, Serhiy Liovochkin, and the new Chairman of the Ukrainian Security Service (SBU), Valery Khoroshkovsky (Dzerkalo Tyzhnia, March 13).

This group seems set to play a key role in shaping Ukraine‘s relations with Russia in the energy sector under the new authorities. Sharing the Ukrainian gas transit system with Gazprom through an international consortium, in return for discounted prices on Russian gas, is a centerpiece in this policy. Yanukovych and Prime Minister Nikolai Azarov’s government have announced this objective and appointed the new team to execute this policy at the Fuel and Energy Ministry and Naftohaz Ukrainy.

Liovochkin had previously served in the presidential administration under Leonid Kuchma in 2002-2004. At that time, Liovochkin helped arrange the RosUkrEnergo scheme with Boyko and Firtash (Kyiv Post, February 25, 2010). A top-rated bureaucrat, young and fluent in English, Liovochkin is expected to be tasked with preparing Yanukovych’s visits to the West, notably the president’s hoped-for trip in April to Washington.

SBU chairman Khoroshkovsky is regarded as an ally of Boyko, Firtash, and Liovochkin in a tightly-knit group (Ukraiynska Pravda, March 13, 19). Reputed to be among the wealthiest businessmen in Ukraine, Khoroshkovsky is Firtash’s partner in the Independent TV corporation and the top-rated Inter TV channel (“Ukraine’s first button”). Yanukovych elevated Khoroshkovsky to SBU chairman after Yushchenko had appointed him deputy secretary of the National Security and Defense Council, then deputy chairman of the SBU. Khoroshkovsky and Firtash provided a connecting link in the informal alignment of Yushchenko and Yanukovych against the Yulia Tymoshenko government (Ukraiynska Pravda, March 12; Dzerkalo Tyzhnia, March 13).

Leading the opposition after her narrow loss in the presidential election, Tymoshenko has cautioned “all foreign partners” that transferring the Ukrainian gas transit system to a consortium in any form would contravene Ukrainian law, Ukraine’s interests, and its European integration goals. Noting that such a consortium would mainly benefit oligarchic interests associated with Yanukovych’s team, Tymoshenko warns that “this government is not eternal,” and a subsequent government would cancel any such consortium (Interfax-Ukraine, March 22).

Ukrainian legislation indeed precludes any form of alienation of the gas transit system. The law goes into great detail to list all possible forms of alienation, including consortium, and bans them. Tymoshenko authored this law in 2007 as opposition leader during the second Yanukovych government. The Party of Regions went along with this legislation in the Verkhovna Rada at that time (see EDM, February 7, 2007).

What has changed since that time is, first, the removal of corrupt “gas supply schemes” by the Tymoshenko government and its shift to commercial pricing in January 2009, by negotiation with Russian Prime Minister Vladimir Putin (who had earlier colluded with RosUkrEnergo). The Tymoshenko government had recognized that gas sector reform is a key to Ukrainian European integration goals. Second, the economic crisis means that Gazprom can no longer enrich favored traders in Russia and Ukraine through special pricing. And third, the cheap Turkmen gas that once enabled those schemes is no longer available.

What has remained constant, however, is the requirement of low-priced Russian gas, to sustain inefficient Ukrainian steel and chemical industries for post-crisis recovery. With neither Gazprom nor Turkmenistan available to bear the costs, these are to be downloaded on Ukraine itself, by sharing out its gas transit system with Gazprom.

Yanukovych and the government portray such a consortium as tripartite, Ukraine-Russia-Europe. In reality, there is no designated European party to such a consortium. Suppositions in the past have centered on certain German and Italian companies that are allied with Gazprom. Nor can the Boyko-Firtash team and the Party of Regions be expected to promote Ukrainian and European integration interests ahead of group interests through such a consortium. The only certainty is that Gazprom would dominate the proposed consortium, notwithstanding any European presence in it for window dressing.

–Vladimir Socor

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