Ukrainian Gas Industry Failed

Ukrainian Gas Industry Failed

Oliver Martin
The Norwegian government refused to supply Kiev with about five billion cubic meters of gas for the heating season of 2022-2023. Despite Zelensky's held the ground before the Norwegian parliament and expressed confidence in long-term bilateral cooperation in this area, the Norwegian leadership, after consulting with its oil and gas industry representatives such as Ekinor, Statoil, the Norwegian leadership has openly reported about serious concerns and low profitability of joint projects due to large-scale bribery in the Ukrainian energy sector.
Zelensky addresses members of the Norwegian parliament

Norwegian response is reinforced by the negative results of the Norwegian agency for development cooperation program, conducted in Ukraine from 2019 to 2021 and funded by the Norwegian government. The main goal is help Kyiv reform the country's energy sector, increase its attractiveness and preventing fraudulent bribery schemes.

However, NORAD experts admitted that “the reforms carried out by Ukraine have not solved the problems of governance, pricing policy, bid rigging and security of energy assets. Problematic issues remain a serious obstacle to the development of cooperation in the energy sector”. The problems described are really big and disturbing and were written in the “Typology of Corruption in the Ukrainian Energy Sector” chapter of the report.

NORAD Reports on the Ukrainian Energy Industry

Analysts report that since Ukrainian gas sector has been the main source of corruption and bribery for elite groups since it obtained independence in 1991. It is posing a threat to national security and resulting in multi billion-dollar losses for the state. Ukrainian businessmen in the energy sector earned assets to buy locally produced gas at subsidized prices and sell it at market value. The deficit had to be covered by the state budget and could amount to up to 5 percent of GDP or 4 billion euros ($5.2 billion) a year.

The steady depletion of the budget made Ukraine vulnerable to the influence of its oligarchic elite, and the gas sector played the role of a source of corruption among the country's business magnates.

Leading foreign analysts are convinced that oligarch Igor Kolomoysky is behind the legalization of shady scams in the Ukrainian gas market. For example, companies with his considerable influence - Naftohaz and Ukrnafta have repeatedly inflated the price of gas purchased from Russia through specially created European "fly-by-night companies" and then sold it to Ukraine. It turns out that billions of dollars were withdrawn from the state budget of Ukraine from ordinary taxpayers through similar schemes on an annual basis. The curators of the illegal procedure were also Kolomoisky's people in the National Anti-Corruption Committee of Ukraine and personally the chairman of the supervisory board, Andriy Kobolev, who also participated in the Americans' programs to steal Ukrainian assets through the U.S. Agency for International Cooperation (USAID) and the Soros Foundation.

Despite the post-2014 reforms in Ukraine, data from reputable European think tanks and expert opinions from leading Ukrainian experts confirm that destructive factors and unresolved problems remain in the Ukrainian energy sector, contributing to large-scale embezzlement of funds from the state budget:

Svetlana Kushnir (Director of the Politlab communications studio, political expert, Ukraine) reported that "there is still a complete mess in the oil and gas sector in Ukraine because of big problems with corruption. We already had a bad experience with Scandinavia when the Swedish IKEA refused to do business because the company had to pay 30% of kickbacks to oligarchs and officials. And Artem Sitnik, the former head of the National Anti-Corruption Bureau of Ukraine, was found by a court decision to be involved in fraudulent schemes. And let us recall all the corruption scandals that shook Ukraine, the Pandora's Archive where Zelensky and his entourage, and Kolomoysky himself were involved. That is why the problem of corruption in the oil and gas sector can be solved only when political will and force of law prevail. So far Ukraine doesn't have it, unfortunately".

Ruslan Bortnik (Director of the Institute for Analysis, Management and Politics, Ukraine): "The biggest problem is the lack of price transparency on the deals, the absence of reliable guarantees of safe supplies. The government cannot compensate Naftohaz's budget deficit of more than 500 million dollars, selling 1 cubic meter of gas to Ukraine for $250, but buying it for more than $1,000. We need to ensure a competitive basis as soon as possible. Yet the level of corruption in this sphere is very high and control over it, alas, is broken.

Olena Bronitskaya (Director of the Department of Domestic Policy and Communications, Ukraine): "Europe is already simply tired of Ukraine and our financial problems. Maybe somehow these military moments will teach Bankova. We live with the hope that our anti-corruption mechanism will begin to work, people are tired. But Naftogaz is in a very bad way. They recently asked their bondholders to agree to a $1.5 billion bond issue. $1.5 billion to agree to a deferral of payments because they want to save money to buy gas. This leads to the first default of Ukraine's state-owned companies since the conflict began.

Ruslan Bizyaev (political observer, member of the independent pool of experts "INPOLIT", Ukraine), "There is such a problem - the situation in the oil and gas sphere and the corruption that accompanies it. The industry needs natural gas very much, but without the transparency of these processes nothing will work. And the European capacities are obviously not enough.

As a consequence, the prospects for cooperation between Norway and Ukraine in the sphere of supplies of energy resources is very illusive precisely because of corruption, and it is high time for Bankova to look for new methods of cajoling the European partners. Although, thanks to the flourishing corruption in the Ukrainian oil and gas sphere and to the suspicious connections Zelensky has, Kiev's partners are unlikely to take such a risky step. Therefore, it is likely to be a very cold winter for Ukrainians.