Ukraine’s energy sector has long been uncompetitive, undercapitalized and corrupt. It was that way by design. Since Ukraine’s independence, the energy market has benefited insiders who profited extravagantly at the expense of the nation.
The industry appears heading towards a brighter future. Steps are being taken to break the grip of rent-seekers and to boost competition to attract investment, with the goal of energy self-sufficiency and less reliance on Russia.
President Petro Poroshenko said the nation will bust up energy monopolies.
“I guarantee that nobody will enter the Forbes list again taking the plum from state monopolies and the traditionally corrupt environment in the gas sector. The state will not be a milking cow anymore. Wild capitalism in this sphere should come to an end,” Poroshenko told a meeting of the National Security and Defense Council.
Oil & gas
In March, lawmakers went after billionaire Igor Kolomoisky by adopting legislation that threatens to strip his decade-long control over management and cash flow at majority state-owned Ukrnafta, the nation’s largest oil producer.
As Poroshenko fired Kolomoisky as governor of Dnipropetrovsk Oblast, authorities also moved to remove his associates from management at state oil transportation company Ukrtransnafta.
Later, in April, the coalition majority targeted Dmytro Firtash, a former partner of Russia’s Gazprom in the multibillion-dollar business of supplying Ukraine with natural gas. Prime Minister Arseniy Yatsenyuk publicly accused Firtash and his partner, Serhiy Lyovochkhin, of “feeding like vampires upon Naftogaz for decades, embezzling billions.”
Firtash, who is fighting U.S. criminal bribery charges, has long insisted he has played an honest and essential role as broker between Ukraine and Russia in gas deals.
New laws aim to boost competition by bringing gas market rules in line with the European Union’s Third Energy Package.
In last-minute amendments, legislators also imposed fees for usage of state regional gas supply networks on companies holding monopolies in regional distribution, which they claim are largely controlled by Firtash.
Days before an Austrian court turned down U.S. extradition charges on Firtash on alleged corruption charges, a Kyiv court upheld government requests to seize 500 million cubic meters of stockpiled gas belonging to Firtash’s Ostchem chemical holding on embezzlement charges. The state alleges that Firtash cost $250 million in losses to state-owned gas company Naftogaz.
“This parliament is breaking the oligarchs’ hold. . .Let’s continue the offensive on the oligarchs,” said Yury Lutsenko, head of the pro-presidential faction in Parliament.
After natural gas, the next target is the allegedly monopolistic position over the electricity sector that government officials say is held by Rinat Akhmetov, the billionaire and longtime backer of Yanukovych.
Dmytro Firtash, one of Ukraine’s most influential oligarchs, attends a court hearing on April 30 in Vienna. A judge refused the U.S. government’s attempt to have him sent to America and stand trial on bribery charges. Firtash says the allegations are politically motivated.
Electricity
Yatsenyuk on May 20 urged the Energy Ministry to table a bill similar to that of the natural gas legislation that would implement European standards and “break up the monopoly” on the electricity market.
In April, prosecutors announced they would seek to cancel three allegedly rigged privatizations of electricity utilities conducted under Yanukovych, who fled during last year’s EuroMaidan Revolution.
In one of the transactions, Akhmetov’s DTEK power holding acquired a controlling stake in Dniproenergo, one of the country’s largest thermoelectric generators, allegedly without competition and at a firesale price, costing massive losses to the state budget.
Akhmetov’s business holding has insisted the acquisition was fair; he has threatened to uphold his property rights in courts.
“Any move towards re-privatization would lead to further uncertainty and untransparency in the already troubled Ukrainian economy and would undermine a return to stability and investor confidence, and by doing so, delay the nation’s recovery which both government and business recognize is the priority,” System Capital Management added.
Ukraine plans to eliminate the deficit of state-owned oil and gas conglomerate Naftogaz by 2017, raising prices to market levels, according to the government’s February letter of intent to the International Monetary Fund.
As rival oligarchs mount pressure upon Akhmetov by challenging DTEK’s past acquisitions through courts, pro-presidential lawmakers, starting with former investigative journalist Serhiy Leshchenko, are calling for Ukraine’s anti-trust agency to jump into action. They want regulators to bust DTEK’s monopoly position in thermoelectricity generation and distribution sectors, forcing him to sell off some of the assets to other parties.
Others such as Kolomoisky, a rival to Akhmetov, want authorities to expropriate the electricity assets from Akhmetov. In testimony given in parliament earlier this year, Kolomoisky claimed the electricity sector and other privatizations conducted under Yanukovych’s rule as prime minister back in 2004 and president 2010-2014 were rigged, and incurred billions of dollars in losses to the state. All the assets, he said, should be returned to the state without compensation.
It’s not yet clear which approach authorities will finally settle on and possibly succeed with.
