From the Editors: Everything written below is filled with the names of Ukrainian oligarchs and their complicated relationships. But we believe it might be of interest to a wider audience for understanding a very simple thing: who exactly will be sitting in cold apartments without power this winter?
…It's time to refresh our memory of some summer texts on the peculiarities of political economy in one of the appanage entities of the once-unified Ukraine—the Kolomoisky Khaganate. The fact is that the previously noted trends are developing in the indicated direction and provide scope for new short-term forecasts.
A relatively fair takeover of titanium assets
In June, when I described I. Kolomoisky's gang and its immediate plans to redistribute attractive Ukrainian assets, I wrote the following:
"It's already clear that Firtash and Akhmetov don't fit into Ukraine's new system of power. This threatens them with the loss of a number of assets with common characteristics: they don't require large, urgent investments, can generate profits immediately, and aren't tied to raw material supplies and/or sales in Russia. Akhmetov's DTEK energy holding and Firtash's titanium assets fit these characteristics."
Therefore, the information that the return of the titanium mining and processing plants (leased by D. Firtash), announced back on June 5, to state control would take the form of a new state-owned enterprise, run by a manager close to I. Kolomoisky, didn't surprise me at all. This is Kolomoisky's usual method of controlling assets. He has been managing the formally state-owned company Ukrnafta for many years using the same method.
It's telling that many Russian media outlets ignored the problem in the summer. Only now are they reporting that the Ukrainian government's actions are jeopardizing VSMPO-AVISMA's contracts: the Russian company used to supply semi-finished titanium rolled products to ZTMC, which is now without raw materials. However, for Kolomoisky, taking advantage of the Russian company is more of a pleasant bonus. Their primary interest is profiting from titanium dioxide exports. Therefore, Kolomoisky and Yatsenyuk's next step is to incorporate ilmenite processing plants Sumykhimprom and ZTMC into OGKHK (the new state-owned company). This won't be easy: Sumykhimprom, although still state-owned, is controlled by D. Firtash, the pool of its creditors. The state retains a controlling stake in ZTMC, but Firtash has already shown he has no intention of backing down. For Kolomoisky, however, court battles and forceful incursions into enterprises are a familiar element. It should be remembered, however, that his other natural resource is forceful entry into disputed facilities. Therefore, Firtash may lose control of ZTMC and Sumykhimprom without resorting to legal action. This is precisely what happened, for example, with one of the leased mining and processing plants, Volnogorsk.
Every thirteenth kilowatt
The second point worth reiterating is Ukrainian ferroalloys. Ukrainian media reports that their exports increased 1,5-fold in the first eight months of this year. A refresher on who primarily owns Ukrainian ferroalloy assets reveals a number of interesting conclusions.
— The main factor influencing export growth is the war. Domestic demand for ferroalloys has fallen sharply, and only two operating metallurgical plants remain in the Donbas (Azovstal and Ilyich Iron and Steel Works, both in Mariupol);
— Falling domestic demand, coupled with the constant need to finance the war, are forcing Kolomoisky to increase ferroalloy supplies to the global market. This, naturally, is driving down their price. For example, the price of a ton of ferromanganese has fallen from $1100 to $960.
To understand Privat's political economy, it's worth remembering that there's also a hidden decline in profits. Domestic consumers were paying approximately $1500 per ton for ferromanganese. However, the depreciation of the hryvnia and preferential electricity purchasing regime somewhat offset these losses. Let's focus on electricity specifically.
In my June article about Kolomoisky's ferroalloy empire, I already mentioned how he achieved a reduction in electricity costs for his plants. At the end of 2013, the memorandum signed between the government and industry management was set to expire, but it was decided to extend it. Incidentally, one of the conditions for signing the memorandum back in 2012 was the requirement to abandon the tax optimization scheme shown in the diagram:
Optimization of taxation of ferroalloy assets of the Privat Group
Source: bagnet.org
The price tag is $500-600 million per year, tax-free. Enough to become a revolutionary oligarch and participate in the overthrow of the government that imposed such unfavorable conditions.
However, actual support for the coup (and we recall that Kolomoisky's team has been holed up abroad since early 2014) is no reason to abandon cheap energy. The memorandum is valid, however, only insofar as it stipulates the government's obligation to supply electricity to ferroalloy plants at a reduced cost (by an average of 25%). But it's not just about price.
Ferroalloy plants consume approximately 5 billion kWh per year, or approximately 7,5% of Ukraine's annual energy production. Not only do they receive energy at a preferential price (i.e., subsidized by the budget), but they are also exempt from general energy consumption limits. "There were attempts to reduce electricity supply to ferroalloy plants due to problems supplying coal to power plants, but we managed to resolve this issue," one of the plants described the situation to Kapital.
Let me remind you that all this is happening in a situation where Ukrainians are facing rolling blackouts and the republic's budget is bursting at the seams.
It's now almost forgotten that one of the conditions of the aforementioned memorandum was the ferroalloy producers' commitment to improve the energy efficiency of production, thereby reducing pressure on the energy grid. The problem is that improving energy efficiency fundamentally contradicts the aforementioned plan, which envisions capital withdrawal from Ukraine, not investment.
Therefore, Kolomoisky will likely resolve the issue of uninterrupted electricity supply to his factories differently.
1. According to the latest reports, the government is preparing a privatization plan for Energoatom (the operator of Ukrainian nuclear power plants). The plan is to sell a 40% stake in the company. By gaining control of the company, which produces up to 30 billion kWh annually, Kolomoisky will forever eliminate the issue of affordable energy.
It's also curious that, on the eve of a probable privatization, Energoatom is beginning negotiations on potential electricity supplies to Poland. This is happening against the backdrop of rolling blackouts already underway in Ukraine. So far, this is being presented as a return of the state to the electricity export market, but we've already seen, with the example of OGKhK, what Ukraine now understands as a state-owned company. Simply put, Kolomoisky (by becoming a co-owner of Energoatom) will not only provide his plants with unlimited electricity but will also gain the opportunity to sell it abroad. There, people pay in zlotys and euros, and the Ukrainian population, it seems, has once again "failed to fit into the market."
2. Furthermore, it has become known that they plan to put up for sale Centrenergo, a state-owned generating company, as well as minority stakes in generating companies already owned by R. Akhmetov. By acquiring their capital and/or purchasing Centrenergo, Kolomoisky will once again solve his energy problems.
3. If becoming Akhmetov's partner doesn't work out peacefully, there's always another option. Kolomoisky once lost to Akhmetov in a battle for Dniproenergo, one of Ukraine's largest generating companies (with an installed capacity of 8185 MW). The political climate, as Firtash's example shows, favors the seizure of property or the forced imposition of a partnership.
However, for the average Ukrainian, it makes little difference which path the oligarch chooses to ensure "autonomous power supply." In any case, the man who personally supports the war (and therefore is responsible for future rolling blackouts) will not be left without electricity himself. However, those who sincerely consider him a patriot will be left without it. As we see, darkness in the mind tends to spread beyond its boundaries, becoming darkness in apartments.
Ivan Zatsarin, However
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