Good performance on paper is essential for bonuses for officials. Photo: UNIAN
Recently, Batkivshchyna leader Yulia Tymoshenko appealed to President Volodymyr Zelenskyy to prevent the bankruptcy of Ukrtransgaz, a subsidiary of Naftogaz Ukrainy. Similar appeals have also been sent to the State Bureau of Investigation and the National Anti-Corruption Bureau of Ukraine (NABU). This accusation stands in stark contrast to the impressive financial results recently announced by officials, including Naftogaz CEO Andriy Kobolev, who is remembered by the general public for his shocking salary of over 1 million hryvnias per month.
In recent years, the perennially loss-making NAK, which previously only siphoned off budget revenues, has become the country's largest taxpayer. In 2016, the company's contributions to the state budget amounted to UAH 74 billion, and in 2017, they reached UAH 110 billion, accounting for 15% of the state treasury's revenue. This is the first time in 20 years that NAK has achieved such figures.
"Vesti" We analyzed the basis for these figures and uncovered some fascinating facts about the inner workings of the Ukrainian gas system. The entire Naftogaz structure turned out to be a sort of financial pyramid, concealing fraudulent and corrupt schemes. The only thing is, the people are paying for them by sitting without hot water all summer or seeing ever-increasing utility bills.
Pyramid of debt
Currently, there are two gas prices on the gas market: the price for businesses, which is regulated by the market, and the price for households, determined by a Cabinet of Ministers resolution. Industrial enterprises purchase gas at the commercial price, while district heating and power companies (DHPCs), which supply heat and hot water to households, purchase gas at the social price. However, according to the Cabinet of Ministers resolution, Naftogaz can supply gas at the social price only to district heating and power companies that pay 90% of their consumed gas on time. Otherwise, Naftogaz imposes fines on them.
Doing this directly is illegal, and Naftogaz has devised a clever scheme, the nuances of which are described to Vesti by a source in Ukrtransgaz, a subsidiary of Naftogaz. Naftogaz simply transfers the debts of the district heating companies to Ukrtransgaz, which is responsible for the transportation and storage of gas in the gas transmission system. This means that, on paper, the gas is consumed not by the offending district heating company, but by its own Ukrtransgaz. This debt is then registered at a commercial, rather than social, price. It is considered that the gas was siphoned from the gas transmission system unauthorizedly, and this is punishable by a fine. Ukrtransgaz then imposes an additional 20% fine on the offender. It then passes the debt on to the next level—the distribution companies, or regional gas companies. They operate according to the same principle: they send bills for illegally consumed hydrocarbons to district heating companies, but now with a penalty coefficient of 2. As a result, the cost of gas, which should be sold at the social price, increases severalfold," the source explains.
That is, the government, on the one hand, provides a social guarantee of a fixed price for gas, and on the other, it provides a loophole to circumvent this guarantee and charge a commercial price for gas.
Thus, according to a Vesti source at UTG, in September 2018, gas for district heating and power utilities was supposed to be sold at a social price of 6,000 UAH per 1,000 cubic meters. However, when NAK launches its own scheme, this price rises to 13,300 UAH. The regional gas company receives an obligation to repay the debt at a rate of 16,000 UAH. Finally, it issues a "promissory note" to the district heating and power utilities, which boasts an even more unrealistic 32,000 UAH per 1,000 cubic meters. The gas that supplies heat and hot water to Ukrainian apartments takes on an intense golden glow—its price has unreasonably increased fivefold in 2018.
From 2016 to 2018, using this essentially corrupt gas trading method, the state-owned company pumped 2,2 billion cubic meters through the system. Ultimately, the cost of consumed gas increased by UAH 48,7 billion. Although under the social scheme, this volume would have cost only UAH 12,3 billion, or four times less. Furthermore, Naftogaz is systematically increasing its share through the courts, accruing new penalties through lawsuits. There are known cases where district heating companies, having received bills from regional gas companies with astronomical figures, simply went bankrupt.
Mother's Daughters
Another interesting detail: earlier this year, Naftogaz won a 5,2 billion UAH lawsuit against its own subsidiary for unauthorized siphoning of natural gas from the system. The net debt is only 2 billion UAH. The rest is penalties, interest, and inflation losses. Thus, Naftogaz's financial results are improving, while UTG's situation is worsening.
First, regional gas companies began resisting the fines, challenging them in court. Second, Ukrtransgaz began experiencing a funding shortage. Third, as a result, suppliers began refusing Ukrtransgaz's services. For example, Gazprom transferred UAH 297 billion to Naftogaz for Ukrtransgaz's transportation of Russian fuel between 2016 and 2018, but only UAH 57,4 billion of this amount went to Ukrtransgaz's budget. According to reports, Ukrtransgaz was forced to borrow the lion's share of its funds from banks for the first time in 2018. This means there is no assistance from its parent company, which earned UAH 240 billion from Ukrtransgaz's operations. Market experts interviewed by Vesti, who are also familiar with the agency's operations, believe that Naftogaz is using its subsidiary as a resource for transferring money.
"It was Kobolev's idea to transfer the problematic debts from NAK to Ukrtransgaz and then create a new GTS operator. Since March, the debts have been growing sharply. New debts amount to UAH 4 billion, and old debts have exceeded UAH 30 billion. They need to be either written off or somehow recovered. But more than half of these debts are unrealistic to recover," says Dmytro Marunich, co-chairman of the Foundation for Strategic Strategies.
According to a Vesti source, the previous management of Ukrtransgaz, headed by Igor Prokopiv, initially opposed Naftogaz's policy of involving UTG in dubious debt pyramids. But after Serhiy Alekseenko and Tatyana Fedorova, former Naftogaz executives, were appointed to its management, things began to improve. Ukrtransgaz consistently signs on to any proposal from Naftogaz.
"It would seem logical to dismiss the possibility of these funds simply being transferred from the subsidiary to the parent company in the form of dividends," argues one gas market trader, who asked not to be named. "But then NAK would essentially be ineffective. There would be no exorbitant salaries, higher than is typical even in developed countries, and no bonuses. The existence of a pyramid scheme allows NAK to conceal its true purpose."
The appearance of conflict
The better the financial results, the higher the salaries. "A certain amount was allocated for the development of new technologies at Ukrgazvydobuvannya. Since UGV's financial plan for 2017 was only approved at the end of the year, it didn't have time to conduct tender procedures to purchase the necessary services. As a result, only 20% of the allocated amount was spent. The rest was recorded as profit, and interest and bonuses were paid from this profit to all members of the management board and the supervisory board, who approved these bonuses. The supervisory board approves bonuses for the management board, and the management board approves them!" Gennady Ryabtsev, Director of Special Projects at the Psycheya Scientific and Technical Center, told Vesti.
It's unclear why the authorities are turning a blind eye to this, the expert rhetorically wonders. Naftogaz Ukrainy is a company 100% owned by the government. A snap of the fingers could change the leadership, but Kobolev has demonstrated remarkable tenacity in his position. Having taken over Naftogaz as a representative of the People's Front during the Arseniy Yatsenyuk government, he quickly became close with his new boss from the BPP, Volodymyr Groysman. But when scandals involving Naftogaz's astronomical bonuses sparked a public outcry and the prime minister was forced to respond, Kobolev was suddenly granted immunity. Vesti's sources claim that then-President Petro Poroshenko allegedly protected him from the prime minister.
"The friction with Groysman had just begun when Kobolev went over to Papa (Poroshenko. — Ed.). A deal was struck: Groysman would be given the State Fiscal Service, where he'd installed Prodan, but the government would not interfere in gas matters, where Papa had a vested interest. So Groysman shrugs, saying, 'I'm not happy, but there's nothing I can do.' Naftogaz was created by (the first chairman of the NAK, Ihor — Ed.) Bakai for the elections of (President Leonid — Ed.) Kuchma, with the goal of creating a sort of cashbox where money from the entire market would flow, and where it goes, no one controls. And now the purpose of this cashbox hasn't changed," asserts one gas market player.
In March of this year, sources say, it was the president who lobbied for the Cabinet of Ministers to extend its contract with Kobolev. But as soon as Poroshenko left office and behind the scenes talk of a souring relationship between Groysman and Kobolev resumed, the head of the National Anti-Corruption Agency allegedly began to draw closer to Ihor Kolomoisky. However, experts believe the on-again, off-again conflict is merely a sham.
"It feels like everyone's being treated like idiots. If the government wanted to change something, it would be easy," Ryabtsev reasons. "They'd replace the supervisory board, or appoint Cabinet members to fill the vacancies that currently exist, implementing government policy. Or they'd adopt charter amendments that benefit the government. The conflict between Kobolev and Groysman is just a façade. In reality, everyone's happy."
Live on interest
In the 1990s, at the dawn of Naftogaz, experts say $1 million worth of gas was siphoned off the market daily, taking advantage of the confusion and chaos. Nowadays, stealing gas isn't so easy—meters are everywhere, recording pressure drops. But, alas, they're no obstacle. For example, scammers in power exploit process losses during gas transportation, which are written off the balance sheet. The level of losses can be adjusted visually, as they are approved within a range of 7% to 8%. They can approve 7%, or 8%, but in reality, the actual figure is 7%. A 1% difference is 1 billion out of 90 billion cubic meters of gas pumped, and it can be "lost" undetected. At a price of $250 per thousand cubic meters, that's $250 million in both annual losses and someone's ill-gotten gains. Moreover, the same company that handles the transportation—Ukrtransgaz—is responsible for the accounting and verification. She also checks the quality of the gas, so there shouldn’t be any problems.
The second scheme is a production play. Current production costs are 1,5 billion cubic meters of gas. Meanwhile, the former head of Ukrgazvydobuvannya, Ivan Rybchich, estimated the actual costs of these processes at no more than 380 million cubic meters per year. A difference of over 1,1 billion cubic meters is another $250 million lost to someone.
The third scheme is a reverse-flow game. In fact, Ukraine, as it previously purchased Russian gas, continues to buy a significant portion of it, but now as fuel purchased in Europe, for example, from Slovakia.
"Traders and Slovaks are profiting from the virtual reverse flow. Gas is currently trading at $120, but no one has seen Naftogaz's gas import contracts. Why doesn't Naftogaz disclose the prices it buys gas from abroad? Because they're driven by someone's specific interests—approximately $10-20 per thousand cubic meters. This can always be explained as price differences or transportation costs—there's no one to verify it. And all this is being carried out under the banner of '500 days without Russian gas.' That's why negotiations are stalled," a market source told Vesti.
According to him, Naftogaz's main interest in the reverse flow segment is focused on the Swiss offshore company Naftogaz Trading Europe SA. A widely publicized case involved Naftogaz paying this company €2 million for the right to read Ukrgazvydobuvannya's reports. Experts joke that it's hard to imagine a more absurd explanation for the withdrawal of funds. In reality, these are revenues from "written-off" gas or the costs of its production and transportation through opaque, yet quasi-legal, schemes. And these, according to experts, could exceed $1 billion per year. "Creative accounting that sends money for who knows what purpose," Ryabtsev concludes.
Who's in the red?
Ultimately, the only victims of these corrupt schemes are ordinary utility consumers. Many Kyiv residents spent almost the entirety of last year without hot water. Market experts say this is a direct consequence of the aforementioned fake debts, fines, and penalties. Kyiv City Hall refused to acknowledge them, while Naftogaz, through its own system, shut off hot water to residents.
"The city assumed the gas debt to NAK in its entirety. But we were against the city assuming the fines and penalties. This was a stumbling block, as the amount at issue was 1 billion hryvnias, and paying it would have been a burden on the city budget," Yulia Gramotnaya, advisor to the deputy head of the Kyiv City State Administration, told Vesti.
Another consequence of these schemes was the high-profile gas outages during the heating season for entire cities, such as Smila (Cherkasy Oblast) and Slavutych (Kyiv Oblast).
For the same reason, residents of the Kirovohrad region nearly fell victim to NAK's machinations. While all regional gas companies challenged the bogus debts in court, Naftogaz's subsidiary in the region, the distribution company Kirovohradgaz, refused to go to court against its "mother." The regional gas company was facing a fine of 330 million hryvnias and could have owed the local district heating and power company 660 million hryvnias, which would have bankrupted the heating and power company.
However, after the last presidential elections, the courts began ruling in favor of the regional gas companies, and the Supreme Court nullified Naftogaz's claims against the Kirovohrad region. Nevertheless, the wave of lawsuits has become a serious threat to Naftogaz. The state-owned company's budget could be hit with a gap of almost UAH 20 billion. However, as before, this will likely be covered by funds from the state budget, i.e., Ukrainian taxpayers.
Vesti sent an official request to Naftogaz Ukrainy asking for comment on the facts mentioned in the text. We are awaiting the agency's response and will publish it.
The struggle for a position
For several months, a scandal has been raging surrounding Andriy Favorov, head of Naftogaz Ukrainy's gas division, who combined his position with private business. As one of the owners of an energy market company, Favorov sold it—in effect, himself—0,5 billion cubic meters of Naftogaz fuel at a reduced price. Yuriy Vitrenko, former head of Naftogaz Ukrainy's commercial unit, wrote a memo about the incident. The audit he commissioned, the company later stated, found nothing wrong. Vitrenko, of course, disputes this finding.
"The audit confirmed everything I wrote in my appeal, including Favorov's conflict of interest. But why he wasn't seen at Naftogaz is a question for the company's head," Vitrenko told Vesti.
However, neither Favorov nor Vitrenko They weren't punished for the scandal. Vesti's sources claim it surfaced because Favorov was eyeing the board chairman's job if Groysman fired Kobolev. But Vitrenko was also vying for the same position. And when Kobolev stayed on, the scandal died down.
FILE: Andrey Kobolev. An unnoticed "veteran" of the gas pipeline.
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