You're reading: Court grants windfall to Firtash

Ukrainians may lose gas worth billions.

Ukraine could come out the loser once again in a billion-dollar battle fought behind the scenes. At stake is the ultimate economic trophy: control of the nation’s lucrative natural gas trade.

The Kremlin looks destined to tighten its grip on this trade, with a few well-heeled Ukrainian oligarchs being handsomely rewarded for their troubles. As for ordinary Ukrainians, they could again be left with the short end of the stick.

“The upshot of all this is that the Ukrainian taxpayers will have to foot the bill for the appetite of greedy oligarchs and corrupt officials,” said Mykhailo Gonchar, head of energy programs at Ukraine’s Nomos Center.

The latest development came with a ruling by the Arbitration Institute of the Stockholm Chamber of Commerce. The organization may sound innocuous enough, but on June 8 it made a blockbuster ruling to transfer natural gas worth $2.6 billion from Ukraine’s state gas company, Naftogaz, to a private firm controlled by two individuals and Russia’s gas giant Gazprom.

The Stockholm court’s judges are said to have supported a claim against Naftogaz by Swiss-registered RosUkrEnergo, the former monopoly importer of gas from Russia and Central Asia to Ukraine.

RosUkrEnergo is 50 percent owned by Russian gas giant Gazprom and 50 percent belongs to a controversial pair of Ukrainian businessmen named Dmytro Firtash (45 percent) and Ivan Fursin (5 percent) through their company Centragas. It was a statement issued by Centragas on June 8 that broke news about the Stockholm arbitration ruling in its favor.
The Ukrainian businessmen behind Centragas demanded the return of 11 billion cubic meters of gas seized by the former Ukrainian government led by Prime Minister Yulia Tymoshenko, who was defeated by President Viktor Yanukovych in the Feb. 7 election.

Centragas said the Stockholm arbitrators awarded an additional 1.1 billion cubic meters of gas as compensation.

Peter Keller, senior equity analyst at Troika Dialog investment bank in Kyiv, said the current monetary value of this gas is $2.6 billion. So its transfer from public to private hands would mean a huge shift in wealth. By comparison, Ukraine paid $8 billion for all the gas it imported last year.

The arbitration ruling follows an earlier damage awarded on March 30 by the same court, also in favor of RosUkrEnergo against Ukraine for $200 million in compensation for contractual violations.

Tymoshenko has branded Firtash as one of the state’s biggest enemies. But now, under the government of her successor, Prime Minister Mykola Azarov, Naftogaz and the Ukrainian Energy Ministry are headed by people with close ties to RosUkrEnergo.

Energy Minister Yuriy Boyko, for instance, headed Naftogaz from 2002-2005 and later served as energy minister in 2006-2007. Boyko brokered contracts to Firtash-associated intermediary companies that put them at the center of the multi-billion-dollar business of supplying Ukraine and European Union states with gas from Russia and Central Asia.

The first was the Firtash-owned and Hungarian-registered Eural Trans Gas, followed, in 2004, by RosUkrEnergo. Boyko was additionally identified as a member of RosUkrEnergo’s coordinating council in 2004.

Responding to journalists’ inquiries on June 9, Boyko pledged to defend Ukrainian interests.

“As regards to the current situation, I can tell you that whatever happens, there will be no crazy turnover of resources at the expense of consumers and national interests, because it is impossible to just turn over 11 billion cubic meters of natural gas from Naftogaz Ukraine,” Boyko said.

Boyko said his ministry would look into appealing the arbitration court decision.

Back in early 2009, just after Tymoshenko had seized the gas from RosUkrEnergo, another Firtash associate, Valery Khoroshkovsky, was made deputy head of Ukraine’s State Security Service (SBU) and promptly raided the offices of Naftogaz.

At the time, Tymoshenko’s team accused Khoroshkovsky of seeking the paperwork for a new deal agreed to between Tymoshenko and her Russian counterpart, Vladimir Putin, which cut RosUkrEnergo out of the lucrative bilateral gas trade. Putin claimed the Ukrainian side had used the intermediary companies to channel funds to Ukrainian political leaders. He said: “They had to have a middleman so they could receive dividends, and finance their political campaigns.”

Energy analyst Gonchar, although acknowledging the benefit for Ukraine of removing intermediary companies from Ukraine’s gas import business, said the corruption is not limited to any political camp.

“One can blame Tymoshenko for illegally taking the gas from [RosUkrEnergo], but then you have to ask yourself how RosUkrEnergo appeared in the first place, or why, when President Yanukovych was prime minister the first time (under President Leonid Kuchma), Ukraine lost its access to direct gas supplies from Central Asia,” Gonchar said. “Ukraine’s gas sector is the milk cow of Ukraine’s oligarchs, allowing them to make the kind of super profits they wouldn’t otherwise be able to make.”

Under Yanukovych, whose team controls parliament, the government and arguably the judicial branch as well, deals have become streamlined – even though not all of them are apparent. “Transparency in Ukraine’s gas sector, which has never been good, has gotten even worse in the last half year,” Gonchar said.

So what lies ahead?

According to Gonchar and others, a lengthy process of legal changes and court decisions may end up with the Kremlin realizing a long-held ambition: control over Ukraine’s gas pipelines, which supply 80 percent of Russian gas exports to Europe. “They [the authorities in Kyiv] will simply say: we cannot pay [the arbitration award] in gas or cash, so we have to settle in assets.”

Ukrainian Deputy Prime Minister Sergiy Tigipko already made the first part of this admission during statements made to journalists on June 9. “There is nothing in the [state] budget [for this]. So we cannot talk about returning such a sum [of money, gas],” he said.

Valentyn Zemlyanskiy, a former Naftogaz spokesperson turned independent analyst, said it could be a year before Ukraine concedes to some kind of compensation. But in the meantime, the arbitration ruling “could become a trading tool between Moscow and Kyiv,” Zemlyanskiy said.

Earlier this year, Russian Gazprom chief executive officer Alexey Miller, following a meeting with Boyko in Moscow, called for the creation of a 50-50 joint venture with Naftogaz in late May. Putin had proposed a merger of Naftogaz, which includes Ukraine’s pipeline system as well as its coveted underground gas storage facilities, a month earlier.

Other scenarios have been reported, analyzing how the multi-billion-dollar dispute could play out. The Russian business daily Vedomosti reported on June 10 that Firtash had recently discussed with Gazprom the possibility of buying up their stake in RosUkrEnergo. But the deal could only happen after RosUkrEnergo reclaimed the 11 billion cubic meters of gas from Ukraine, and sells it back to Gazprom. Gazprom’s motivation for such a move would be to fill Ukraine’s strategically important underground storage facilities with as much of its own gas as possible, giving it leverage against Ukraine in case of a repeat energy standoff.

A spokesperson for RosUkrEnergo did not respond to a request for comment. A representative for the Stockholm arbitration court said they observed a strict policy of not even acknowledging the cases under arbitration, much less confirming results or revealing criteria behind rulings. Naftogaz’s press service said they were as much in the dark about decisions being taken as everyone else.

Yuriy Prodan, former energy minister under Prime Minister Yulia Tymoshenko, said he had been confident that Naftogaz’s case was strong enough to win the arbitration dispute. “I am naturally surprised at the decision, as this could pose a serious threat to the company [Naftogaz] and Ukraine’s national interests,” he said.


Kyiv Post staff writer John Marone can be reached at [email protected]