According to various estimates, the illegal fuel market in Ukraine accounts for 10-15% of the total petroleum products market, and the state loses tens of billions of hryvnias every year.
March 2021 marked almost a month since the authorities launched their latest crusade against illegal fuel. Law enforcement officials had already boasted initial results in the form of a 200 million ruble case against the Glusco gas station chain, while the fuel market had barely recovered from the shock of a major supplier leaving Ukraine.
The case against Glusco is certainly high-profile, but many see political motives behind the security forces' actions against the company and the upcoming events. Furthermore, Glusco hasn't been the primary target of accusations of selling counterfeit and low-quality fuel, a common theme in the market and among experts. All of this casts doubt on the Glusco gas station chain's primary culpability being tax evasion. The authorities have questions for them, but they're unlikely to be limited to the amount of taxes paid and the quality of the gasoline.
Meanwhile, the problem of illegal fuel in Ukraine remains. It's a fairly broad issue, encompassing smuggling, illegal gas stations, and low-quality fuel from mini-refineries (the so-called "badyaga").
Many people suffer from this problem, too. Businesses operating legally lose out to the competition due to lower prices from illegal sellers, the state loses tens of billions of hryvnias in budget revenue, and Ukrainian drivers can damage their cars with the help of poor-quality "badyagi."
There's also an environmental problem, as vehicle emissions are the primary environmental hazard in cities. Because of this, since the late 80s, the European Union has introduced standards regulating the content of harmful substances in exhaust gases. Illegal fuel sellers, however, are unable to confirm that their products comply with Euro 5 and Euro 6 standards.
Delo.ua We explored how the illegal fuel market operates in Ukraine, how it impacts the legal market, and how the authorities are combating it.
Fuel smuggling
Smuggling petroleum products into Ukraine has a rich history. According to Oleksandr Sirenko, editor-in-chief of the industry publication "NafteRynok," there have been instances where the volumes of illegal imports have been astonishing in scale.
The organizer of one such scheme was the notorious oligarch Serhiy Kurchenko. His companies imported petroleum products into Ukraine, ostensibly in transit, without customs clearance or duties, and then "lost" them en route. This fuel was later sold quite readily at Ukrainian gas stations. Kurchenko's companies not only transported petroleum products by rail from Russia and Belarus but also managed to import them via tankers.
After the Revolution of Dignity, the confiscated fuel from Kurchenko was transferred by court order to UkrOilProduct, a company owned by Serhiy Tyshchenko (the media reported him as a friend of Verkhovna Rada deputy Serhiy Pashinsky). Also in 2014-2015, there was a significant increase in fuel supplies to southern Ukraine. It was transported by ship through small ports.
"During the navigation season, according to market participants, it reached 10-15 tons per month. How was this monitored? By market offers. Offers appeared that were 2 hryvnias lower than the average market price. And if the fuel was purchased in cash, additional bonuses were provided," says Sirenko.
When the political situation more or less stabilized, the authorities attempted to combat smuggling, but from approximately 2017 until recently, illegal fuel began to be imported again through small ports.
"A barge enters the port waters, anchors well away from the pier, and shuts down navigation. This fuel is then delivered to shore in small batches and distributed throughout southern Ukraine. We can also track this through market prices. When a 30-ton tanker docks in Odesa, it can't sell the fuel because nearby, similar 'importers' are selling smaller batches for 1-1,5 UAH cheaper. The SBU, border guards, and all those responsible for monitoring this are aware of this. But we believe they benefit from these schemes just as much as the smugglers," the expert says.
On March 12, 2021, the SBU and customs finally stopped such a scheme at a Danube transshipment point in Izmail. Investigators estimate that the estimated tax evasion for 2019-2020 amounts to 240 million hryvnias. The publication "NefteRynok" also identified the tanker "Django," which had been involved in illegal operations since Kurchenko's time, at the transshipment point.
Mini-refinery
Another aspect of the illegal market can be considered the activities of small oil refineries or mini-refineries. However, classifying them as illegal is rather tentative, as the activities of such enterprises are entirely legal. They are officially registered and even pay taxes.
According to Serhiy Kuyun, director of the A-95 consulting group, such companies are primarily registered as producers of various fractions, paint and varnish components, and solvents. However, in reality, they produce 300 tons of fuel annually tax-free. Meanwhile, the state budget loses approximately 4 billion hryvnias from such activities.
According to him, such refineries produce Euro-3 (an environmental standard introduced in 1999, similar to Euro-4) and Euro-4 petroleum products, which are sold to retail gas stations under false product codes under the guise of non-excisable products (solvents, paint components, and washer fluids), and are subsequently sold to end consumers. According to the A-95 consulting group, 24 such enterprises were operating in Ukraine in 2020, with varying levels of efficiency.
According to Kuyun, if the total shadow gasoline market is 488 thousand tons, then 335 thousand tons of this is gasoline production at mini-refineries.
Overall, Kuyun estimates that state budget losses from unpaid taxes and excise duties in the shadow market have decreased from UAH 20,6 billion to UAH 18,8 billion. Moreover, this decrease was due specifically to lower gasoline prices. The greatest abuses are in the VAT area. Given the upward price trend this year, it is logical to assume that state budget losses will also be greater than last year.
Budget losses
State budget losses from the shadow fuel market, as well as the shadow market's share in various fuel market sectors. Infographics by the A-95 Consulting Group.
This is most clearly demonstrated by the case of the Kirovohrad Oil Company, which law enforcement officials accused of tax evasion totaling 8,4 million hryvnias. The company had a license to produce motor fuel, but it preferred to produce commercial petroleum products of Euro-3 and Euro-4 standards, which it labeled as excise-free. Incidentally, the company is still in operation.
According to Sirenko, private oil companies are the main suppliers of feedstock for mini-refineries. They produce approximately 30-35 tons of gas condensate per month, which is used to produce gasoline. Unlike large producers like the Kremenchuk or Shebelynka refineries, mini-refineries lack expensive equipment, so their output is low-octane components. This component can be converted into gasoline by adding the necessary additives or other components and mixing them correctly (at the right temperature and pressure).
Map of mini-refineries in Ukraine. Infographic by A-95 Consulting Group
To increase the octane number of mini-refineries, they often use a mixture of octane-boosting components—methyl tert-butyl ether, methanol, and other alcohols. According to A-95, a new trend in the illegal fuel market is the importation of a mixture of these components as solvents for the paint and varnish industry. Individually, these components are subject to the maximum excise tax for gasoline—€213 per 1 liters—but mixtures disguised as solvents enter the country excise-free.
"In 2020, Ukraine imported 77,4 thousand tons of solvents, a 15% increase compared to 2019, when imports totaled 67,3 thousand tons. The majority of these imports came from Russia and Belarus. In January-February 2021, imports continued to grow: 9,2 thousand tons compared to 8 thousand tons (+15%) in the same period last year," A-95 reports.
Importers of such raw materials are primarily companies directly linked to gas station networks and mini-refineries. Specifically, A-95 directly names two players in the fuel retail market as major suppliers of such solvents.
Specifically, in January and February, Katma Group, an importer of petroleum products for BRSM-Nafta, purchased 2,2 tons of solvent directly from Belarus, with an additional 700 tons imported through Planeta 2000. The supplies were delivered to BRSM's oil depots in the Kyiv and Khmelnytskyi regions.
Another 1,8 tons were imported by PromKhim, which supplied this product to Alternative Energy Sources Company. This company, in turn, was named in the National Police investigation as the owner of a mini-refinery in the city of Merefa (Kharkiv Oblast). The same investigation also established that the recipient of fuel from this mini-refinery was the Motto gas station chain.
Sirenko, in turn, says there are mini-refineries that are truly skilled at producing gasoline. They blend gasolines in specific proportions according to GOST standards, add components and the right additives, and the resulting gasoline is virtually indistinguishable from that produced at a large refinery. Meanwhile, the lowest-quality gasoline from mini-refineries ends up in the fields, not at gas stations. Ukraine has many agricultural enterprises with older equipment that can consume very low-quality gasoline, and, what's more, it's extremely profitable for them to buy fuel for cash.
"We're talking about a very large volume of these petroleum products per month. That's 25-30 tons per month (10-15% of the market). If the fuel quality were that bad, there would probably be some consequences, complaints, and appeals. And our vehicle fleet is old, too; not everyone can afford a factory-new car. But we haven't heard any widespread complaints either. So, they've learned how to do it," the expert says.
At the same time, Sirenko considers BRSM and Motto to be low-cost players rather than players in the illegal gasoline market.
"Why does everyone hate BRSM? They charge rock-bottom markups, but their stores are huge. This isn't an oil business anymore; it's retail. It's like, roughly speaking, buying a bread truck full of bread and selling it in 8 hours. The oil industry wouldn't understand that; they count everything in liters, while there, they count in hot dogs and buns. BRSM already owns eight supermarkets," the expert notes.
"Barrels"
The third component of the illegal petroleum product market is illegal gas stations. These are often simple, archaic structures that, while capable of refueling cars, bear little resemblance to modern gas stations. This is why they are often called "barrel stations." These stations also often operate without permits, fail to observe safety measures, and evade taxes.
According to the Oil and Gas Association of Ukraine, more than 1,5 gas stations operated illegally in the country in 2018, and their number was constantly growing. Fuel sales through these stations in 2018 exceeded 1,2 million tons. The shadow market then accounted for 30–50%, depending on the region and fuel type, and this percentage was growing rapidly.
"Illegal retail outlets were located and operated without proper land use registration or permits for hazardous facilities; they sold fuel without using cash registers, which created large volumes of unaccounted cash that was used for corruption; they operated without formal employment contracts with employees, distorting fair competition in the market and posing a threat to the public. Fires, oil product spills, and liquefied gas spills were repeatedly recorded at illegal gas stations," the association explains.
The association decided to highlight the scale of the problem and, in December 2018, launched an interactive map that allowed consumers to notify authorities of illegal gas stations. Also in 2019, the licensing of petroleum product production, wholesale, retail, and storage activities for the fuel market was introduced, along with the modernization of the Fuel and Energy Regulations (SERT), and monitoring of actual fuel turnover in the country.
Thus, the necessary legal grounds emerged for the effective and rapid elimination of the illegal fuel market in the country. And in early 2020, the authorities launched an active campaign against illegal gas stations and refineries. As a result, of the 862 gas stations listed on the map as "illegal," only 65 remained.
However, with the introduction of quarantine, the illegal segment flourished in a slightly modified form of its illegal activity.
Currently, Ukraine is experiencing a rapid expansion of the shadow market, manifested both in growing production volumes at mini-refineries and in fuel trade in gross violation of the law.
Forty percent of gas stations sell fuel without registering it through a cash register, accumulating large amounts of unaccounted cash, which they use to purchase illegal fuel from mini-refineries or "sell" fuel documents to the real economy to minimize VAT. Estimates of state budget losses from such fraud range from 10,9 to 14,6 billion UAH.
"According to the latest interactive map monitoring, 103 fuel retail outlets continue to operate in the country, operating in gross violation of the law, posing potential risks to the lives and health of people and the surrounding infrastructure. Furthermore, over 600 gas stations licensed for retail fuel sales continue to operate in the market, but they are operating in gross violation of urban planning and other laws," the association states.
Crusade
In early March, at the behest of the Prime Minister, efforts to combat the illegal petroleum product market resumed in all regions of Ukraine.
In each region, commissions were created, including representatives of the State Emergency Service, the State Labor Service, the State Service for Food Safety and Consumer Protection, the State Environmental Inspectorate, the State Tax Service, the State Fiscal Service, and other government agencies, whose task was to verify compliance with the law by fuel market participants.
The State Environmental Inspectorate is responsible for verifying fuel quality. This responsibility was transferred to the agency from the State Service for Food Safety and Consumer Protection in 2019. In an exclusive interview with Delo.ua, the head of the State Environmental Inspectorate, Denys Malevany, said that last year the agency managed to dismantle hundreds of illegal gas stations across Ukraine. However, it was only this year that it received the funds to conduct laboratory testing.
In 2020, the State Environmental Inspectorate conducted 848 inspections. 979 decisions were made to impose restrictive measures, 233 orders were issued to impose administrative and economic sanctions, and environmental damages were calculated at UAH 7,57 million. Compared to 2019, 313 inspections were conducted, 424 decisions were made, and damages were calculated at UAH 1,65 million.
"So, statistically, our performance has increased by 359%. I wouldn't say there's more counterfeiting. We've probably worked more intensively and efficiently in this area," says the head of the State Environmental Inspectorate.
Since the beginning of the year, the State Environmental Inspectorate has conducted 121 inspections and imposed 2 million fines. Overall, approximately 500 oil refining facilities are scheduled for inspection this year. This includes mini-refineries, which are among the top polluters.
Until laboratory services are purchased, inspectors' work consists of document verification. However, the agency plans to purchase laboratory services and become fully operational in April.
However, even at the document management level, gas station networks are experiencing problems. The Agency is currently preparing a lawsuit against AMIC Energy, and since last year, a lawsuit has been ongoing regarding denial of access to inspections at facilities associated with the BRSM trademark.
"Every region, without exception, has statistics on violations. We inspect national networks—BRSM, Motto, Glusco, SOCAR, Klo—and all the others. Small, illegal gas stations, which often lack documentation or exhibit clear violations, are also subject to prompt dismantling. This is probably the main task the government's leadership sets for interagency working groups: to combat illegal small networks and isolated gas stations," says Malevany.
He also notes that the agency has questions for literally every network. Although the State Environmental Inspectorate plans to inspect over 500 facilities, this plan may be revised upward. The head of the State Environmental Inspectorate plans to present the results of laboratory analysis of gasoline from these networks to the public. This is undoubtedly important, given that the quality of fuel affects the quality of exhaust gases. After all, vehicle emissions are often the main pollutants of the air we breathe.
Stepan Kryoka, specially for Delo.ua
Photo source: Depositphotos
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