Dmytro Marunych worked from 2004 to June 2010 as deputy head of the press office of state-run energy monopoly, Naftogaz Ukraine.
Working at the state oil and gas company under various presidents and governments, he had a unique inside view on what he describes as the murky dealings at play: how officials and their business backers put personal gain ahead of national interests, driving what was once a big taxpayer into a big burden. The 34-year old Kyiv native recently founded the Institute of Energy Research, a non-profit organization devoted to studying energy issues involving Ukraine and other former Soviet states. The Kyiv Post sat down with him on Dec. 1. All government officials and gas traders named have denied any wrongdoing and repeatedly refused to discuss the isssues in depth.
KP: How do you explain how Naftogaz, which in the early 2000s was regarded to be profitable and a big contributor to the state budget, today finds itself on the verge of bankruptcy?
There is a very simple answer. The first reason is the increase in natural gas import prices by Russia over the last five years.
The second reason is the inability, or lack of desire, of Naftogaz and top Ukrainian officials to work in the interests of Ukraine, that is, to negotiate the purchase of natural gas supplies directly with Gazprom, without intermediaries.
Rather than making their way to Naftogaz or state coffers, most of the profits derived from natural gas imported from Central Asia during the early 2000s were deposited in offshore accounts of intermediaries involved in the deals.
Natural gas during the early 2000s from countries in Central Asia could be purchased for around $40 per 1,000 cubic meters. European countries, meanwhile, were paying around $150. Profits [made by Naftogaz] on the price margin were used to subsidize gas prices on the domestic market.
The margin disappeared after Russia’s state-run energy company Gazprom prevented Ukraine from importing gas from Central Asia, forcing Naftogaz to pay the market price while continuing to subsidize domestic gas consumers. As a result, Naftogaz sought loans and wound up a debtor.
The departure of former President Leonid Kuchma in late 2004, and the arrival of a pro-western leadership, coincided with the end of cheap gas for Ukraine.
KP: Were intermediary energy companies – in a way – sucking profits away from Naftogaz?
Yes. This was obvious to everyone. Permission for them to enter the [natural gas] market was granted by the highest of government officials.
For example, Kuchma allowed Eural Trans Gas (an energy trading company registered in Budapest whose ownership remained a mystery until Ukrainian billionaire Dmytro Firtash came out years later claiming to be the owner] to enter the market.
These deals were cut instead by top government officials in Ukraine.
In a 2004 photo, current Ukrainian Energy Minister Yuriy Boyko (L) and his close ally, Dmytro Firtash, the billionaire co-owner of shady gas-trading intermediary RosUkrEnergo. (Courtesy)
KP: And with their Russian counterparts?
I’m less familiar with the political situation in Russia, but the facts speak for themselves.
For example, if we take Eural Trans Gas and its successor, [Swiss-registered] RosUkrEnergo (50 percent owned by Russia’s Gazprom, with 50 percent owned by Ukrainian billionaire Dmytro Firtash along with a partner), we see that it is a joint venture half-owned by Russian state controlled companies.
KP: Would Naftogaz have performed better if such intermediaries had not been allowed to enter the market?
Of course. If there had been no intermediaries, Naftogaz would not be in the untenable position it finds itself in today - forced to return 12 billion cubic meters of gas to RosUkrEnergo.
KP: Would you say that such middlemen, which earned hundreds of millions of dollars annually, acted as parasites by feeding on profits that could, or should, arguably have been Gazprom’s, and perhaps also Naftogaz’s as part of a joint business?
Yes, of course.
KP: Let’s go back to 2003 and 2004. How profitable was Naftogaz then and how much did the monopoly contribute to the state budget?
Naftogaz was then one of the most profitable companies on the market, contributing 8-9 percent of the total state budget revenues.
The reason, again, is because of the relatively low price for gas from Central Asia.
At the time, there was no reason for the monopoly to seek outside funding.
But the sudden increase in price for imported gas starting in 2005, combined with the policy of continuing to subsidize natural gas in Ukraine and the involvement of intermediaries over time, have brought the monopoly to the brink of bankruptcy. The last three years have been particularly difficult.
It’s difficult to get an accurate picture of where Naftogaz stands today because 2011 financial plan for the monopoly, which has reportedly been approved by the government, has not been made public. This is Ukrainian reality: the state’s energy monopoly is being managed personally by top government officials, but for the personal benefit of them or their close associates, not the state.
KP: Who, namely, contributed the most to the demise of Naftogaz?
Our non-profit [organization] is primarily focused on examining the energy sector, rather than assigning personal responsibility for failure. The financial situation of Naftogaz has continued to decline steadily since 2003, in part because former President Viktor Yushchenko’s refusal to do away with intermediaries, namely RosUkrEnergo.
Former Prime Minister Yulia Tymoshenko’s temporary elimination of intermediaries in 2009 was a positive step, making Naftogaz the sole importer of natural gas with at least a realistic financial plan. If she had stayed in the driver’s seat, the monopoly’s prospects would have been better than they are today.
Yushchenko and today [President Viktor] Yanukovych, who reportedly received material benefits from intermediaries, certainly must share the blame.
KP: What do you think about RosUkrEnergo?
Without any sizeable assets, RosUkrEnergo came out of nowhere in 2006 and made hundreds of millions of dollars in profit.
I don’t know for sure, but rumors circulated in 2006 that “payoffs” were a motivating factor for Yushchenko and top aides to use RosUkrEnergo as an intermediary for supplying gas to Ukraine.
KP: Did you ever see RosUkrEnergo founder Dmytro Firtash or company officials in the Naftogaz building?
Yes. I have a photo from 2004 of him standing in the office in front of a map with then Naftogaz head Yuriy Boyko (Boyko is currently Energy Minister and is seen as close to Firtash. He served on RosUkrEnergo’s board in prior years).
I also saw Yushchenko’s brother, Petro Yushchenko, after his brother became president in 2005.
KP: What do you think Gazprom’s objective has been vis-a-vis Ukraine since 2000?
Their overriding objective has been to control Ukraine’s gas transportation system. Pipelines that would bypass Ukraine, such as South Stream, are extremely expensive projects.
In the long run, it would be much more cost effective to renovate the Ukraine’s natural gas pipeline system.
Gazprom and Russian political leaders these days doing little to conceal their goal, that is to gain control over Ukraine’s pipeline. And due to the policies of top Ukrainian officials, as I have described them, Gazprom is today much closer to attaining control of Ukraine’s gas transportation system than ever before.
KP: Why is that?
Because Naftogaz has never been weaker than it is today. The monopoly needs a large injection of fresh money – billions of dollars - to refurbish its pipelines.
KP: Do you think Yanukovych and his inner circle – including top officials that are close to RosUkrEnergo’s Ukrainian co-owner Dmytro Firtash, work more on behalf of RosUkrEnergo’s interests, then than national interests and Naftogaz?
I don’t think it’s a secret that Firtash became a political ally of Viktor Yanukovych before the 2010 presidential elections. I think that Yanukovych and his allies are simply seeking economic gain from their dealings with the intermediary. After all, it’s clear that money has made its way to Yanukovych’s political campaigns, and to this Party of Regions.
KP: Do you think the objective of Ukraine’s current leadership is the total destruction of Naftogaz, and to play into Russia’s interests this way?
One scenario is for Naftogaz to be broken up into separate state holding companies, but the problem that will remain is what to do about Ukraine’s gas transportation network. This will allow Gazprom to further consolidate its influence over gas transit to Europe. I don’t think that Yanukovych will take any decisions to change the situation fundamentally. We can expect RosUkrEnergo to gradually reassert itself as an intermediary as the plight of Naftogaz continues to worsen.
KP: Do you think the nation’s current leaders will act in the interests of Ukraine?
I think Boyko will act in the interests of RosUkrEnergo, as he has already demonstrated. Yanukovych, on the other hand, will go back and forth between supporting RosUkrEnergo and defending national interests. He’s the president, after all.
KP: Are there risks for Europe if Naftogaz folds, allowing Gazprom to take control over Ukraine’s gas pipeline?
Of course, but what can the Europeans do? Naftogaz hasn’t floated any viable programs seeking funding assistance from international lending institutions, such as the World Bank and European Bank for Reconstruction and Development, or the European Union.
No one at Naftogaz has formulated, much less proposed with an honest intent for success, any joint program with Europe to lure investment and refurbish the gas transportation system. In the short term, Europe may find it easier to ignore the problem and deal with Russia directly.
It’s in Europe’s long-term interests, of course, for Ukraine to follow the same rules and procedures for purchasing gas followed by European Union members. But I don’t think you can find any influential group in Europe today that is eager to become involved in our country’s murky and messy energy sector games.
KP: Give us your 10-year forecast.
Russia and Gazprom will control Ukraine’s gas transportation system. Gas distribution within Ukraine, meanwhile, will be privatized and a gas trading market will evolve. RosUkrEnergo, which is today firmly entrenched, will be a big player.
KP: Do you think the involvement of gas trading intermediary companies represents high-level corruption?
Yes. This is obvious. Yushchenko’s associates filled the bribe-taking vacuum left following the departure of Kuchma in 2004. I don’t think Yushchenko personally received bribes, but sources have told me that his closest associates did.
KP: Do you think you will be harassed or face repression for talking openly about what you have observed at Naftogaz for all of these years?
: No, I certainly hope not.
I am a Ukrainian citizen who has spent years working in the gas industry. I have every right to express my views about the energy sector openly as an expert.
Kyiv Post staff writer Peter Byrne can be reached at firstname.lastname@example.org.