State hegemony or a course for development: Naftogaz takes more control over Firtash's gas distribution companies
What does the Security Service of Ukraine suspect the RGC top managers of, how to rid the Ukrainian gas distribution of russian influence, and what does BlackRock have to do with it?
The Security Service of Ukraine (SBU) has announced suspicions against sanctioned oligarch Dmytro Firtash and the top management of his companies, who embezzled state-owned gas worth billions of hryvnias. The focus of law enforcement agencies is on the leaders of the Regional Gas Company (in fact, it controls 20 city and regional gas distribution companies, which account for 70% of all gas distribution networks in the country) and its affiliated trader Je Energy.
Mind has looked into the details of this resonant story and its potential consequences for the domestic gas market.
What are the officials of the Regional Gas Company accused of? According to judicial-economic expertise, the illegal activities of the case's participants alone caused state losses of over 4.2 billion hryvnias in 2021. And the total amount of damage, according to preliminary estimates, from 2016 to 2022, could exceed 18 billion hryvnias.
As the investigation materials indicate, officials of Firtash's gas distribution companies embezzled over 70% of the funds intended for gas procurement. "Essentially, this involves misappropriation of money from ordinary Ukrainians who were paying utility bills," the SBU emphasises.
According to investigators, how exactly did the embezzlement scheme unfold? The scheme involved Firtash's gas distribution companies 'purchasing' fuel from a company under his control. However, they received no more than 30% of the paid volume of gas. The deficit was covered by using gas, which belonged to the state. The gas distribution companies took the 'undelivered' fuel from Ukraine's gas transmission system and paid the TSO around 30% of the total value of the resource, citing "a lack of funds." Subsequently, the individuals involved funnelled the money 'into the shadows' through a network of Dmytro Firtash-controlled commercial structures.
Who specifically are the suspects? As part of the criminal investigation, law enforcement officers "searched the offices and residences of the organisers of the criminal scheme." Based on the collected evidence, Dmytro Firtash, two executives of the Regional Gas Company, the head of the Je Energy trader, and five heads of gas distribution companies were served with charges.
They are accused of misappropriation of property through abuse of official position, organising a criminal group, and money laundering obtained through criminal means. "Five suspects have been notified of suspicions in absentia as they are evading justice abroad. The question of declaring an international wanted status for them is currently being resolved," the SBU press service stated.
When and why did Firtash's gas distribution companies come under suspicion? The process of transferring 26 regional gas distribution companies, 20 of which were controlled by Dmytro Firtash's Regional Gas Company, to the management of NJSC Naftogaz of Ukraine commenced on May 25, 2022.
At that time, the Pechersky District Court transferred the 26 regional gas distribution system operators to the control of the National Agency of Ukraine for Finding, Tracing And Management of Assets Derived from Corruption And Other Crimes (ARMA). The decision was based on a case by the State Bureau of Investigation regarding the collection of rent payments from gas distribution companies for the right to use gas networks. The state estimated the losses at 1.5 billion hryvnias.
"From now on, the state will control the supply of natural gas to consumers. It is a matter of national security, especially in the face of russian aggression," explained the State Bureau of Investigation.
How did Naftogaz proceed and how did RGK react to it? In September 2022, Naftogaz created the LLC Gas Distribution Networks of Ukraine (GDN). Dmytro Firtash's managers declared the illegality of this decision and challenged it in court.
By the end of 2022, RGK maintained control over the assets. However, in January 2023, Naftogaz resumed its activity by announcing the integration of Dniprogaz, Kharkivgaz, Kharkivcitygaz, and Kryvyriggaz into its structure. Additionally, Naftogaz replaced the management of the regional gas distribution companies. These actions were referred to as "an attempt at raiding the critical infrastructure enterprises, which may lead to destabilisation in the frontline regions," by RGK.
Gas Distribution Networks of Ukraine LLC rejected these explanations and stated that their "strategic goal is to prevent the risk of emergencies in the energy sector," and that "after the consolidation of regional gas distribution companies, all gas consumers will have equal access to high-quality uninterrupted supply." Furthermore, they mentioned that "additional investments will ensure the modernization of the gas infrastructure and quality gas accounting."
"The integration of regional gas distribution companies is taking place in a planned manner and in compliance with all legal requirements," added Naftogaz.
Dmytro Firtash refers to this process as "nationalisation" as the audio materials of the SBU reveal. In response to the SBU's suspicions, Group DF stated that they categorically reject all accusations and "will defend their rightfulness in Ukrainian and international courts."
"Group DF absolutely refutes all accusations made by the SBU and Economic Security Bureau of Ukraine against our businesses, top managers, and shareholder Dmytro Firtash. The series of searches at Group's enterprises, criminal cases, suspicions, and unfounded accusations reported by the SBU lack legal grounds and are part of corrupt pressure on the Group's business," the press release states.
How did Dmytro Firtash come to possess such a large number of city and regional gas companies? In 2011, the Antimonopoly Committee allowed Vijaya Universal Limited (British Virgin Islands) to acquire gas supply companies Kharkivgaz, Kharkivcitygaz, Dniprogaz, Kryvyriggaz, and Donetskcitygaz from the structure of russian oligarch and owner of the Renova group, Viktor Vekselberg.
At that time, russian media reported that Viktor Vekselberg planned to sell these five Ukrainian regional gas companies to Gazprom, which he had acquired from russian state duma member Aleksandr Babakov in 2006. However, it later became known that these mentioned regional gas companies ended up in the hands of Dmytro Firtash, known for his longstanding business ties with the russian gas monopoly, particularly through the RosUkrEnergo scheme.
What will happen next with Firtash's regional gas companies? Currently, the history of gas distribution networks can deviate from the pro-russian scenario.
An interlocutor from Naftogaz informed Mind that the goal of consolidating the regional gas companies is to attract foreign investors. It is highly likely that the development funding will be provided by BlackRock, Larry Fink's world's largest asset management company.
President Volodymyr Zelensky and Deputy Head of the Presidential Office Rostyslav Shurma have already discussed investment attraction for Ukraine with Larry Fink on multiple occasions. Moreover, last week, the Ministry of Economy of Ukraine signed an agreement with BlackRock to support the Development Fund of Ukraine. Its purpose is to attract private and public capital for the implementation of large-scale business projects in Ukraine.
In 2021, a consortium of investors led by BlackRock acquired a 49% stake in Aramco Gas Pipelines, which manages the gas networks of Saudi Arabia (it was a rent and leaseback agreement). The consortium included Keppel Infrastructure Trust, Silk Road Fund, China Merchants Capital, and Saudi Arabia's state-owned company, Hassana Investment.
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