22nd Oct 2020

EU turns blind eye to corruption in eastern gas trade

  • Natural gas meter - 80 percent of Russian gas exports to the EU go through Ukraine (Photo: eastpole)

The EU is sending a "fact-finding" mission to Ukraine to see if its financial troubles could lead to a new gas crisis. But it is wary of tackling deeper problems of politics and corruption in the eastern gas trade, which also threaten EU energy security.

The team of senior European Commission officials will travel to Kiev "in the coming days" and produce a report in time for a regular summit of EU leaders in Brussels on 18 June.

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The move comes after Russian Prime Minister Vladimir Putin said that Ukraine is unable to pay for Russian gas and will probably start stealing EU-bound transit volumes, unless the EU loans it billions of euros.

Ukraine's state-owned gas distributor, Naftogaz, has poor cashflow and often avoids public audits. But Ukraine sees the Putin statements as part of a propaganda war to damage its reputation and increase political support for new Russian pipelines bypassing the country.

The dispute over Naftogaz' reliability is just one aspect of a major shake-up in the Russia-Ukraine gas business.

Mr Putin and Ukraine Prime Minister Yulia Tymoshenko are at the same time trying to strong-arm Ukraine gas tycoon Dmitry Firtash, in developments which highlight the links between politics, gas and organised crime in the region.

A Putin-Tymoshenko deal in January ended the role of RosUkrEnergo (RUE), in which Mr Firtash controls a 50 percent stake, in selling Turkmenistan gas to Ukraine. Naftogaz in March also seized €3 billion of RUE gas stocks.

A little-known, Swiss-based firm called RosGas in May took ownership of Mr Firtash's Hungarian gas supply company, Emfesz, in a transaction that Mr Firtash has called "illegal" and is fighting in the Swiss courts. It is unclear who owns RosGas. But Emfesz has said it belongs to the Putin-controlled Russian firm Gazprom.

The events have already affected European interests. RUE's problems have seen it cut deliveries to EU states Poland and Hungary. The Emfesz takeover means 20 percent of Hungary's gas supply is now in unknown hands.

The Putin-Tymoshenko attack on Mr Firtash could be designed to hurt Ukraine's pro-Western president, Viktor Yushchenko, and reformist presidential candidate, Arsenyi Yatsenyuk. Mr Firtash is widely reported to have given financial support to Mr Yushchenko. The Firtash-linked TV station, Inter, has given Mr Yatsenyuk lots of good publicity.

The gas shake-up may have begun back in May 2008 with Moscow's arrest on tax fraud charges of alleged mafia boss Semion Mogilevich.

Mr Mogilevich is connected to big names in the gas trade. In one example, his lawyer and ex-wife were involved in two Firtash companies. Mogilevich associates have also worked with Oleg Palchykov, a friend of Mr Firtash and a former co-director of RUE together with Konstantin Chuichenko, now a senior aide of Russian President Dmitry Medvedev.

Analysts, such as Roman Kupchinsky from the US-based NGO Jamestown, believe that Mr Mogilevich helped Mr Firtash get started in the gas trade and used to give him protection. One way of looking at the Russia-Ukraine gas wars is not in terms of international commerce or geopolitics, but of one criminal clan muscling in on its rival.

"People can see that Firtash is a dead fish, so they are taking little bites out of him," one Brussels-based diplomat said on the Emfesz takeover.

See no evil, hear no evil

Mr Firtash, who denies having any business relations with Mr Mogilevich or paying Mr Yushchenko, is trying to engage EU support.

Robert Shetler-Jones, CEO of Group DF, a group of international companies whose assets include energy, chemical and real estate last year made a private donation of around €57,000 to the British Conservative party. Group DF's website calls itself the 'Firtash group of companies.'

Mr Firtash's small, Brussels-based public affairs firm, Macmillan, compares him to "Mazeppa" - a seventeenth century Ukrainian patriot betrayed by a fellow nobleman and forced to flee the country, leading to decades of domination by Russia.

A middleman claiming to represent Mr Firtash has also approached the Brussels offices of two large international PR firms in recent weeks.

The European Commission has so far turned a deaf ear. In March, EU officials said they were "closely monitoring" Naftogaz' seizure of RUE's gas - "closely monitoring" is a typical commission "holding statement" when it does not have a real position.

The June fact-finding mission will not ask questions about Emfesz.

"From our point of view, the takeover of Emfesz has to be done in full respect of internal market rules. If there is any suspicion this is not the case, there should be a notification by one of the parties. At this stage we have not received any such notification," a commission spokesman said.

Concrete steps

UK-based NGO Global Witness, which is no fan of Mr Firtash, in March wrote to commission president Jose Manuel Barroso urging him to root out corruption in the sector by forcing all energy companies active in the EU to disclose their ownership structure and any payments they make to governments.

A director from the commission's energy department, Marjeta Jager, replied to say that the issue is being taken care of by the EU's "political support" for the Extractive Industry Transparency Initiative (EITI).

The EITI, a global project launched in 2002 by former UK leader Tony Blair, so far counts just one country, Azerbaijan, as fully compliant with its charter.

"The European Commission has failed to recognise the danger these companies [RUE, RosGas or other alleged Gazprom offshoots] present to the energy security of the EU and has not made any attempt to convince member states to investigate the role these companies play in the supply chain," Jamestown's Mr Kupchinsky said.

CORRECTION: The article previously inferred that Mr Robert Shetler-Jones is an employee of Mr Dmitry Firtash. Mr Shetler-Jones is CEO of Group DF. It also did not spell out that the donation Mr Shetler-Jones made to the Conservative Party was of an entirely private nature.

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