It’s one of the most notorious alleged corruption schemes in modern Ukraine: “Rotterdam+,” a coal pricing formula that has allegedly cost Ukrainian energy consumers Hr 19 billion ($750 million) from 2016 through 2017.
But energy expert Andriy Gerus, President Volodymyr Zelensky’s representative to the Cabinet of Ministers, says the real total amount lost is closer to Hr 30 billion ($1.2 billion).
Now, after two and a half years, the National Anti-Corruption Bureau’s investigation of the controversial formula has reached its first milestone last week: Six suspects were charged with abuse of office and two were arrested, before being released on bail. The four others are not currently in Ukraine.
The suspects include Volodymyr Yevdokimov, director of the state-run energy enterprise Market Operator, which manages electricity purchases and sales. Another suspect is Dmytro Vovk, former chief of the National Energy and Utilities Regulation Commission (NEURC) and a protégé of former President Petro Poroshenko. Vovk denied the allegations in a Facebook statement and criticized the case as politically motivated.
Two more suspects are said to be employees of DTEK, the country’s largest vertically integrated coal mining and thermal energy generation company, which creates more than 20 percent of all electricity that is used in Ukraine. DTEK wrote that it considers the accusations “unjustified and baseless.”
The case is one of the most visible corruption investigations in Ukraine. Seeing it through to the end would go a long way toward fighting corruption in the energy sector, say analysts. Some, who have previous spoken to NABU detectives, say that this case is high on the bureau’s priority list.
NABU declined to provide additional information, only saying the investigation is ongoing. But last week’s charges mean it is getting closer to resolving why NEURC decided to adopt the formula and whether someone may have pressured the regulator into doing so.
“It’s hard to believe that the head of some NEURC department came up with this formula,” said Gerus.
But anti-corruption crusaders have a different set of questions. Why did the investigation take more than two years to get to this point? Why were the charges only announced now, after the elections? And, if the case continues, will any big players truly go down for the count?
War and coal
When Russia invaded Ukraine’s eastern Donbas region in 2014, it did more than destroy the region and its economy. It also threatened Ukraine’s coal supply, which largely came from the region.
Coal accounts for about 30 percent of Ukraine’s electricity and much of its heat generation. Securing coal in external markets, such as the city of Rotterdam in the Netherlands, pushed Ukraine toward raising prices to international levels.
The Rotterdam+ formula, adopted by NEURC in May 2016, set Ukrainian coal prices by averaging an international coal index used in the coal hub of Rotterdam. The “plus” refers to the added cost of the coal’s delivery from Rotterdam to Ukraine.
The formula satisfied international financial institutions’ requirements that Ukraine create import parity pricing on coal, say Rotterdam+ supporters. They claim that the formula is transparent, superior to the government’s subjective price-setting, and prevents corruption.
Supporters also say that the formula was needed to pave the way for energy market liberalization. The reformed energy market launched in July, meaning that the Rotterdam+ formula no longer applies.
“Whether this is a good policy or not can be a subject for legitimate policy debate,” wrote economist Edward Chow, who is a member of DTEK’s advisory council. “Critics of the policy are basically against the principle behind import parity, that market forces should determine pricing.”
However, the many critics of Rotterdam+, like outgoing lawmaker Viktoria Voytsitska, beg to differ. They say all the formula did was force Ukrainian consumers to pay Rotterdam prices for coal, most of which comes from eastern Ukraine and Russia. This coal is inferior and should cost less than the coal sold in the Rotterdam hub. Also, the cost of supposed delivery from Rotterdam is higher than the cost of delivery from the rest of Eastern Europe.
“You have to compare apples and apples,” said Voytsitska.
If there had been abuse of public office and illegal pressure and collusion from the private sector, these alleged crimes cannot be defended with macroeconomic statements, say experts.
DTEK’s income greatly increased under Rotterdam+. For example, DTEK’s operating income before taxes was some $684 million in 2016. The next year, it had already reached $885 million, according to the Nashi Groshi investigative journalism project.
DTEK’s eurobonds, which had been undervalued, also soared after the formula’s adoption. The investment bank ICU, which had purchased the bonds in advance, reaped a huge profit. That prompted suspicions. Vovk, one of the suspects, worked at ICU, and the bank was also linked to former president Petro Poroshenko. NABU searched ICU’s offices last month.
DTEK spokespeople and Rotterdam+ supporters claim that the company’s revenue and securities grew because of improving market conditions and not because of wrongdoing.
Artem Sytnyk, director of the National Anti-Corruption Bureau of Ukraine. (Volodymyr Petrov)
Dragging their feet?
The investigation into Rotterdam+ started in March 2017, driven by investigative reports and requests from the watchdog Anticorruption Action Centre (ANTAC).
Gerus, who once worked at NEURC, said that this is a very complicated corruption scheme and putting together a solid case requires a great deal of work.
However, lawyer Vitaliy Tytych, a member of the Public Integrity Council judicial watchdog, disagrees. He says that economic crimes are not that complicated because the underlying flows of money and the motives of unjust enrichment are apparent and easy to support with documents.
“These cases are very simple to investigate,” said Tytych.
Besides Tytych, the Kyiv Post spoke with ANTAC legal expert Olena Scherban, outgoing lawmaker and investigative journalist Sergii Leshchenko, and political analyst Volodymyr Fesenko, all of whom said that the biggest delay likely came from government experts being prevented from preparing testimony.
“(NABU Director Artem) Sytnyk told me that the main limiting factor was Poroshenko,” said Fesenko. A NABU spokeswoman declined to comment on the investigation because it is still under way.
Poroshenko has previously denied wrongdoing in the multiple corruption investigations against him. He claims that the investigations are politically motivated.
Because of the complicated concepts at play in the Rotterdam+ case, the investigators need expert witness committees to explain the alleged economic harm caused by the formula.
A parliamentary amendment to the country’s criminal procedure code passed the Verkhovna Rada in 2017. This amendment required expert evaluation to be approved by a judge and ruled that expert witnesses have to be affiliated with the government, excluding private experts.
This change is called “Lozovyi’s Amendment,” named after the outgoing Radical Party lawmaker Andriy Lozovyi. NABU officials had previously complained that the amendment made their work more difficult.
Scherban and Leshchenko told the Kyiv Post that multiple government institutions empowered to act as economic experts delayed responding to requests to analyze the Rotterdam+ case before the presidential elections in April. It’s likely that they were being pressured from above.
“Government experts simply refused to perform the evaluations,” said Scherban. “Only after elections did the consenting responses start coming in.”
This timing could not have been a coincidence, multiple analysts told the Kyiv Post.
Tytych added that it’s strange that he had not seen any action from NABU until recently. Blocked expert testimony does not mean that NABU could not move forward in other areas, such as questioning existing suspects. He said it’s possible that the bureau had been using the blocked experts as an excuse for its own failures.
“What were they doing for two years?” he asked.
Despite the high hopes pinned on this investigation, Fesenko and Tytych are not optimistic that those who are allegedly responsible will be convicted or punished.
“I was talking to one of the new directors of our law enforcement bodies,” said Fesenko. “He said that in our system, to jail someone for participating in corruption is almost impossible.”
