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Third Energy Package & Ukraine

March 6, 2015

There are simply far too many historical entries on the blog identifying Ukrainian energy as a major font of corruption from which so many drink – directly and indirectly.  In every such entry over the many years the subject has been raised, albeit ad hoc, each one has called for the butchery of Naftagaz, the epicenter of energy corruption in the nation.

This testimony by Igor Kolomoisky yesterday, himself a beneficiary of nefarious energy deals, mergers, acquisitions – and ultimately corruption – is but the tip of the iceberg.  Indeed the testimony reveals nothing that wasn’t already previously known to those that follow the shenanigans surrounding energy in Ukraine.  It does however, at the very least, partially display the systematic, systemic, long standing, and occasionally complex/occasionally blatant dirty deals and bribery made behind the curtain.

It comes on the same day that the EU again called on Ukraine to make headway toward meeting the legal requirements of the Third Energy Package (legislation that is entirely abhorrent to The Kremlin).  Compliance with this legislation would at the very least require a “restructuring” of Naftogaz, which if not quite the much needed butchery, would certainly go beyond cosmetic surgery.

Ukraine is already a member of the Energy Community Treaty, which theoretically if actually implemented in full and enforced, when multiplied by the requirements of the Third Energy Package, would also put Ukraine in compliance with Chapter 15 of the acquis communautaire regarding “Energy”.

Chapter 15 of the Acquis underlines the EU energy policy objectives including the improvement of competitiveness, security of energy supplies and the protection of the environment. It also consists of rules and policies, notably regarding competition and state aids (including in the coal sector), the internal energy market (opening up of the electricity and gas markets, promotion of renewable energy sources), energy efficiency, nuclear energy and nuclear safety and radiation protection.

There is then the AA/DCFTA between the EU and Ukraine which refers to the above linked ECT, and created a four pillared approach relating to pricing (and dual pricing), transport and transit (per Art 7 of the ECT and Art V of GATT), independent regulators and non-discriminatory exploratory /production rules.

If Ukraine is genuinely to attempt EU membership over the distant horizon, compliance with as many acquis chapters as possible (and near compliance with others) would be wise – albeit a leap above what is required in the DCFTA, even prior to any application.  However, in the case of energy, regardless of any EU aspirations, in order to confront a major source of corruption, meeting DCFTA, Energy Charter, GATT and Third Package commitments is a worthwhile goal in and of itself.

The EU is right to press Ukraine over energy as a top priority.

However, as the (self-serving) testimony of Igor Kolomoisky indicates, it is going to be exceptionally difficult to accept the European energy legislative future, without dealing with the ghosts of Ukrainian Naftogaz energy past.

There are historical issues of illegal/very dodgy privatisations, sales, part privatisations, re-privatisations, outstanding assets and liabilities to numerous actors, the unpicking of some very intricate schemes, and the confronting of some very blatant corruption to deal with.

But where to draw the historical line over issues that have not become statute barred by time, and yet have genuine grievances either by State/Naftogaz against (nefarious) contractor/partner, or (nefarious) contractor/partner against Naftogas/the State?

It is a situation made no simpler when issues like the Naftogaz accounts show that Ukrnafta, in which Mr Kolomoisky holds a large share, is listed as “Unknown manufacturer” with $ billions listed, rather than under its corporate name.

How many other “unknown manufacturers” appear on Naftogaz accounts?  And who owns them (in full or in part)?  Do they owe, or are they owed?  How did the become contractors/partners?  Through fair means (unlikely), or foul (almost certainly)?

It all becomes a little bit Donald Rumsfeld-esque – “There are known knowns (Naftogaz). These are things we know that we know. There are known unknowns (Mr Kilomoisky/Ukrnafta). That is to say, there are things that we know we don’t know. But there are also unknown unknowns (the other “unknown manufacturers” who are systematically paid because they always have been paid, but are otherwise entirely unknown as to ownership or added value). There are things we don’t know we don’t know.”can

Few contracted parties will acquiesce when $ billions are in dispute, and will thus “lobby” (corral the MPs who “owe” them) in parliament, and litigate in court, to stall new any legislation whilst their vested interests remain unsatisfactorily resolved – even if they reluctantly accept that the “European legislative way” cannot be delayed forever.

In short, unless the nefarious history of Naftogaz is confronted and outstanding grievances/”issues” dealt with, it is going to be very tough going to get European harmonising legislation passed.  How this can of worms will be dealt with remains to be seen.

If and when these historical matters are addressed, then begrudgingly, resistance to legislation relating to the Third Energy Package, whilst simultaneously getting to grips with a source of billion $ corruption in Ukraine, may stand a far better chance of becoming law.  Perhaps no small amount of domestic political, and external diplomatic energy, will be well spent finding some creative solutions given the high importance of reforming all things “energy” in Ukraine.

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