Since the beginning of the 1990s, intermediary companies have been operating in the sphere of natural gas purchasing between Turkmenistan, the Russian concern Gazprom, the Ukrainian side represented by Naftohaz Ukrainy company and Europe. Their background brings factor of corruption, interconnection with interest groups and more or less reiterating names into natural gas trade.
The first intermediary company to appear on the scene was Respublika in 1994, with Ihor Bakai (later head of Naftohaz Ukrainy) playing a part. Its successor became a rather well-known Itera company. Its primary goal was purchasing Russian gas and further selling to the Ukrainian side; however, it became active also in the sphere heretofore assigned for Gazprom – selling gas also to some of the former USSR countries, thus the Russian concern was losing its share on the market. This also was one of the reasons to terminate the contract and to use another company – Eural Trans Gas (ETG). The establishment of ETG was based on the initiative of Dmytro Firtash, a Ukrainian enterpriser who lives in Hungary, who had already have business activities with Itera and whose name is associated also with the successor of ETG, RosUkrEnergo company (RUE). The direct founder of ETG was Zeev Gordon, an Israeli lawyer acting for Semyon Mogilevich, wanted by the FBI for various reasons. Dmytro Firtash is mentioned as a secret owner of the company. Neither Gazprom, nor Naftohaz Ukrainy ever had any share in ETG, despite the fact that both companies made efforts to gain it. Since January 4, 2006 RUE has been the exclusive importer of Russian gas to Ukraine. 50 % of RUE is owned by Gazprom, and the other 50 % is owned by Centragas Holding company where the mentioned Dmytro Firtash owns 90 %.
A question emerges, why Gazprom itself is unable to sell its gas to the Ukrainian side, when it is the only owner of the gas pipelines in Russian territory. Turkmenian gas can be exported to foreign markets only through Russian territory. Yet intermediary companies take over lucrative orders from Gazprom, they are paid by Turkmenian gas which they subsequently sell on the Western market for multiplied original price. What is the role of these planted companies, which often emerge shortly before a contract is assigned, their registered capital is minimal, the contracts are evaluated at billions of dollars and who are the people behind them?
A certain explanation could be that while Russian and Central Asian oligarchs made a fortune on vast mineral resources, the Ukrainian ones benefit from strategic transit position of their country, which caused the emergence of intermediary companies. The most interesting one is the current RUE company; however, to get the complete view of the various interconnections in the background, we will be dealing with ETG company as well.
RUE was founded on July 22, 2004 in the Swiss Canton of Zug because of lower taxes. Similarly as in case of ETG, a question emerges concerning the owners of the company – the answer has appeared only recently. The original ownership background, i.e. the 50 % not owned by Gazprom, functioned through various groups of investors. Raiffeisen Investment, a daughter company of Austrian Raiffeisen Zentralbank and a trustee of the investors, passed itself off as the owner. Despite the controversies, in January 2006 RUE became not only the exclusive gas importer to Ukraine, but it also dominates domestic Ukrainian gas market through a joint venture with Naftohaz Ukrainy.
Function of the companies
The reason why Gazprom uses services of intermediary companies is only a list of suppositions so far. Gazprom could have found negotiations directly with the Ukrainian side difficult, because the problem of Ukrainian arrears, chronic late payments and gas vanishing from pipelines is still resonating in their relations. Therefore Gazprom could have made a decision to leave the problems to a partner, which is familiar with the home policy and background, which knows how to trade gas in Ukraine, and all of this without upsetting political relations between Russia and Ukraine. The partner in question is also RUE.
A similar explanation is that private intermediary companies, unlike the state-owned Gazprom, can more easily put pressure on Ukraine to meet their obligations following from contracts without diplomatic discords between the two countries. These entities play a buffer role between the neighboring states. A perfect example is the New Year’s conflict concerning gas price for Ukraine, when Gazprom wanted to increase the price to a level that Ukraine could not afford to pay. At that time RUE offered a solution containing purchase of more expensive Russian and cheaper Turkmenian gas, which resulted in price 95 USD per 1000 cubic meters.
January agreement between Gazprom and the Ukrainian side
The agreement was reached on January 4, 2006 and the most important role fell upon RosUkrEnergo company (RUE). RUE was supposed to buy 41 billion cubic meters of Turkmenian, 8 billion of Kazakh and 7 billion of Uzbek gas from Gazexport for a price that was not stated, and 17 billion cubic meters of Russian gas for 230 USD per 1000 cubic meters. At the same time the contract stipulated RUE to sell 34 billion cubic meters of Turkmenian gas to Ukraine for 95 USD per 1000 cubic meters, while a year before this Ukraine paid only 50 USD for gas. Thanks to the contract, RUE became a monopoly gas importer to Ukraine. Besides the price of gas, the fees for transit through Ukraine changed as well. For Gazprom they increased by 40 %, thus the fees are 1.60 USD per 1 cubic meter per 100km. The original fee was 1.09 USD, but the the new figure will remain effective until the Ukrainian side pays off the debt of 250 million USD to Gazprom.
The contract between the parties aroused a few questions. First, it meant rewriting of the existing contract between Ukraine and Turkmenistan concerning gas purchase, which was to terminate at the end of 2006. Second, it is not clear how the final price 95 USD was agreed, because Turkmenistan sells the same gas to Gazexport for 65 USD per 1000 cubic meters. The contract must have included transport expenses, but the details were not made public. It is also questionable, whether the more expensive Russian gas stays in Ukraine. Yulia Tymoshenko, at that time the Prime Minister of Ukraine, then expressed her concerns that 34 billion cubic meters of gas would not be sufficient amount to supply Ukrainian energy demand and that Russia was gaining control over the country.
On February 2, 2006 a joint venture UkrGazEnergo (UGE) was established between RUE and Naftohaz Ukrainy. UGE obtained the right to supply gas within internal Ukrainian market, it redirected the income from gas selling to the RUE company, owned by Gazprom and by Dmytro Firtash and it lowered the share of Naftohaz Ukrainy on the domestic market. Most of steel and chemical industries will purchase gas from RUE, while Naftohaz will be left with less lucrative market with households. These conditions raise doubts, whether UGE was created only for the purpose of gas supplies, because through UGE Gazprom gains direct share and influence on Ukrainian market.
Through the interconnected system of RUE and UGE companies, Gazprom gets to the Ukrainian natural gas distribution and transport system. If Ukrainian companies are unable to pay their bills for gas, Gazprom can enter the key spheres of Ukrainian industry through taking over the shares as substitute for payments.
Ukraine is important for Gazprom especially from the point of view of transit, because 80 % of its exported gas runs through Ukrainian territory. In 2005 this volume was 154 billion cubic meters of gas for the customers in Western Europe. Russia is trying to lower its dependance on a single transit country, therefore other projects of gas export to Europe are carried out. Gazprom had also been trying to gain shares in Ukrainian transit and distribution companies since the beginning of 1990s, which they managed to achieve through the interconnected system of RUE and UGE companies, where it owns shares.
50 % of shares in RUE is owned by Gazprom, the ownership structure of the second half was partly unknown until April 2006.
RUE owners and background
First Austrian Raiffeisen Zentralbank announced, that 50 % of RUE which it holds is owned by Centragas Holding company seated in Vienna. In April suppositions appeared, released by former head of Secret Service of Ukraine (SBU) Alexander Turchynov, that there are three people behind the Centragas company – former President of Ukraine Leonid Kuchma, Semyon Mogilevich, organized crime leader wanted by the FBI, and the businessman Dmytro Firtash.
Russian daily Izvestia, owned by Gazprom, wrote later on that the owners of Centragas Holding company were two Ukrainian enterprisers – Dmytro Firtash, owning 90 % and Ivan Fursin, owning 10 % of the enterprise. This means that the ownership structure of RUE is following: Gazprom 50 %, Firtash 45 %, Fursin 5 % and Naftohaz Ukrainy has been left out.
The names and companies appearing in the ownership structure were also behind Eural Trans Gas company, which supplied gas before RUE. The first connection is DEG Handels- und Unternehmensberatung GmBH company, one of the shareholders of ETG seated on the same address as Centragas Holding. Another connection is Oleg Palchikov, current RUE managing director, who was managing Muscovite branch of ETG in 2003. There are also three names of British citizens appearing in the untransparent structure of the two companies: Robert Shelter-Jones, David Brown and Howard Wilson. The fourth connection is the very person of Dmytro Firtash, who initiated the foundation of ETG company, who was most likely also its owner and who owns a share in RUE as well. The same address of Centragas Holding and DEG Handels- und Unternehmensberatung GmBH in Vienna is shared also by Zangas company, according to Robert Shelter-Jones owned by Dmytro Firtash.
Questions are raised also by the article, which appeared in the Gazprom-controlled daily Izvestia, concerning the final owners of Centragas Holding. It was published under pseudonym Vladimir Bereznoy and was based on the results of Pricewaterhouse Coopers audit. It was published after some remarks about Mogilevich and Kuchma had appeared that the two were the people behind Centragas. It identified Firtash and Fursin as the only owners. According to the online edition of Ukrayinska pravda daily, it was the publishing of the information about the owners that was supposed to prevent further inquiries from the side of the U. S. Justice Department, because they might have come too close to the actual owners.
The name of Ivan Fursin has not been well-known in gas trading circles so far. According to suppositions, indicating Firtash – a man experienced in intermediary companies – is supposed to stop further searching (and protecting) influential people, because there are some speculations that names of prominent people might appear: people close to Gazprom, to Russian and to Ukrainian government.
The ownership background of RUE has been investigated by the FBI as well as by Ukrainian SBU, but it was stopped by President Yushchenko after the initiator of the investigation Prime Minister Tymoshenko had been deposed in September 2005. The Ukrainian President claimed that he does not know the shareholders of Centragas. However, he must have had the information according to former head of SBU Alexander Turchynov. Some speculations also appeared that behind the investigation was Tymoshenko’s effort to replace RUE with Itera company again, which used to be an intermediator at the time when Tymoshenko was the head of Naftohaz. Alexander Turchynov became Tymoshenko’s electoral campaign manager before the 2006 elections.
The connection of Mogilevich, Firtash and RUE has also been examined. Both dissociated themselves from the connection, but Mogilevich is considered to be the owner of the Cyprus-based company Highrock Holding, where Firtash is the director.
Despite the fact that RUE is supposed to protect also Ukrainian state interests, in 2004 were into the coordination committee responsible for the company strategy nominated Igor Voronin, current deputy COB of Naftohaz Ukrainy, and Yuri Boiko, at that time the head of Naftohaz. However, both of them were nominated for Centragas. That means that their presence in the coordination committee of a private company was ordered by private investors (Firtash and Fursin), and at the same time they were high-positioned employees of the state enterprise Naftohaz, which did not have share of ownership in RUE and whose demand of gas was the largest source of RUE income.
Direction: Central Europe
The figure of Dmytro Firtash is interesting in the whole story and it is related also to Slovakia. Since he is a partner in companies trading with or partly owned by Gazprom, mutual contacts between Firtash and the highest representatives of Gazprom must be above-standard.
The mechanism of RUE company enables to carry out Russian foreign energy strategy of expansion to European market through majority share of Russian state in Gazprom. RUE is already active on Hungarian and Polish markets via business organization EMFESZ, and Slovakia is mentioned as well. So far the Office for Regulation of Network Industries of Slovak Republic has no information on any companies interested in entering our gas market, yet the fact is that it does not have to be informed about it according to current legislation, because the entering should be based on a contract with an existing operator. SPP (Slovak natural gas industry) has not made a statement in relation to the issue so far.
EMFESZ is a Hungarian company trading with gas, and with the 2.8 billion cubic meters it is one of the biggest gas suppliers in the country. The official owner is Mabofi Holding seated in Cyprus . EMFESZ was founded in 2003 by Ukrainian enterpriser Dmytro Firtash, who – according to Hungarian press – is also the actual owner. In April 2006, the company by means of EMFESZ NG Polska signed contracts for supplies of 2.5 billion cubic meters of gas to Poland, and thus as the first company it took the chance to enter the up-to-then monopoly sphere of gas supplying (TPA – third party access) of industrial enterprises. EMFESZ became a regional partner of RUE, it is the only company which sells gas obtained from RUE in Hungary and which has a 10-year contract of gas deliveries signed with RUE. In the future, the company plans to enter the development of infrastructure actively by means of building their own gas pipeline from Ukraine to Hungary, as well as being active in construction of reservoirs. In the beginning of March Firtash announced that he was planning to place 25-35 % of EMFESZ shares in the stock market in Budapest, but at the same time he mentioned that a certain part would be sold to RUE company, which he owns together with Gazprom.
Implications for the countries of Central Europe
Gazprom has chosen an excellent strategy. It is still questionable, whteher Dmytro Firtash is the final owner of the shares in EMFESZ and RUE, or a planted player, who is to gain shares on the markets for someone in the background. By selling the share in EMFESZ to RUE, Gazprom would get directly to Hungarian and Polish markets. With the influence which Gazprom has in Ukraine via UGE, it extends its field of activity, it implemets slowly in local distribution companies and gets to final customers, which up to now has been only a dream. This enables untransparent trading with natural gas, where planted people have been representing for more than ten years interests of lobbing groups and Gazprom. Dangerous for Ukraine is also the increasing debt of Naftohaz; it owes the biggest part of the amount to RUE for gas supplies. It is Naftohaz that still owns transport and distribution networks in the country and by increasing debt it can lose its portfolio.
Since in the most countries of Central Europe industrial companies can choose also their alternative gas suppliers, there is a space opening for expansion of gas trading companies with unknown background. Regulatory Office should have the power to investigate the situation of companies interested in entering our market.
A question has emerged, whether the EU is able to secure its energy demand without corruption and violating good governance in the countries mining and transporting gas, but the question is a matter of the governments of European countries as well. The question has emerged in relation to intermediary companies, since the EU is dependent on their functioning. The EU has to make efforts to convince Russia to ratify and to respect the Energy Chart with the ambition to make the gas and oil trade transparent.