Closer to the West, but Closed to Scrutiny

As Ukraine's Prime Minister Viktor Yanukovych builds ties with the United States, the ownership of the company handling the country's natural gas imports remains shrouded in secrecy.
As Ukraine's Prime Minister Viktor Yanukovych builds ties with the United States, the ownership of the company handling the country's natural gas imports remains shrouded in secrecy. (By Sergei Chuzavkov -- Associated Press)
By Steven Mufson
Washington Post Staff Writer
Saturday, December 2, 2006

Has Ukraine cleaned up its act?

On Nov. 8, the Millennium Challenge Corp. -- established by President Bush to use development aid to reward good governance -- announced that Ukraine had qualified for assistance. On Dec. 4, the Ukrainian prime minister, Viktor Yanukovych, arrives in Washington to meet Vice President Cheney, another date in the U.S. courtship of a government that is trying to find its place between Russia and the West.

But many energy industry experts say that a shroud of secrecy regarding Ukraine's natural gas business should have kept the country from meeting the Millennium Challenge Corp. standards for U.S. assistance. These experts point especially to the hidden identities of the owners of a Swiss-based company called RosUkrEnergo, which has been handed the rights to negotiate for all of Ukraine's natural gas imports from Russia and Turkmenistan, raising questions about possible conflicts of interest or corruption.

U.S. companies that have explored doing business with RosUkrEnergo have been frustrated by its lack of transparency. One firm uncovered links to more than 140 offshore companies and trusts, from remote island nations such as Nauru and the Seychelles to Cyprus and Panama, according to an internal document. Another U.S. company's representative said that a lawyer for the RosUkrEnergo owners didn't see why the American company needed to know who it was doing business with. After further discussions, the U.S. company's representative said he received only partial answers.

Yanukovych said in a recent interview that he was grateful to be awarded aid status, and he pledged to improve the ethical and administrative standards of his government.

The energy business is not only a key test of Ukraine's progress in the 16 areas measured by the Millennium Challenge Corp., it is also an area of vital interest to Europe. Ukraine is both a big consumer of natural gas and the transit point for more than a quarter of Western Europe's gas imports from Russia and Turkmenistan.

That flow of natural gas to Europe seemed secure until last New Year's Day, when Russia cut off shipments after Ukraine refused to agree to a sharp increase in prices. Three days later the dispute ended when the Russian natural gas monopoly Gazprom and the Ukrainian national oil company Naftohaz signed a supply agreement that gave RosUkrEnergo the role of Ukraine's middleman.

Why the need for RosUkrEnergo? The most likely answer is the company's connections rather than its expertise. Half of RosUkrEnergo is owned by Gazprom; the other half is managed by a subsidiary of an Austrian firm called Raiffeisen Zentralbank on behalf of a group of Ukrainian businessmen. RosUkrEnergo is registered in Zug, Switzerland, where taxes are low and financial secrecy laws are strong.

One international consultant believes that RosUkrEnergo has earned hundreds of millions of dollars for transactions that could easily have been handled by the state oil and gas company. Ukraine's energy minister said the country had paid RosUkrEnergo $300 million this year and owed another $300 million, Agence France-Presse reported last month.

"RosUkrEnergo, the controversial Swiss-based gas trading company, is playing a growing and persistently opaque role in the Ukrainian gas sector," according to a report issued in October by the International Energy Agency. "Its ownership structure is murky, and the company appears to make significant profit simply because it signs contracts to transit gas from Central Asia to Ukraine."

Yanukovych said he was unable to alter his government's relationship with RosUkrEnergo. "Whether we want it or not, this is the inheritance that my government got. The legal basis . . . was signed by our predecessors with RosUkrEnergo," he said. "Ukraine had no legal basis to destroy this contract. To do so would . . . put under threat gas supplies to Ukraine and to Europe."

Yanukovych said Ukraine also had no choice but to accept Gazprom's terms. "If there is a company able to supply us with necessary volumes of gas and prices lower than Gazprom, then we would negotiate with that company," Yanukovych said. "Unfortunately, this company has not been found, so we accepted Gazprom's proposal."

Carlos Pascual, former U.S. ambassador to Ukraine and vice president of the Brookings Institution, said he supported the Millennium Challenge Corp. decision on aid because of Ukraine's improvements in governance and progress in the fight against corruption. But he said the energy sector was a dark spot in the overall picture.

"The fact that there is such a lack of clarity about why this company has this arrangement and can maintain a monopoly on the transport of gas remains extremely troubling," Pascual said.

A Ukrainian businessman, Dmytro Firtash, has claimed that he owns 45 percent of RosUkrEnergo, but diplomats and investigators for companies and nongovernmental groups like London-based Global Witness believe he is a front man for well-connected Russians and Ukrainians.

Recently, RosUkrEnergo has moved deeper into Ukraine's domestic gas supply business. A new joint venture with Gazprom has been given most of the domestic distribution business. How it will run that network remains the subject of some anxiety; in November the venture refused to sign new gas supply deals with 16 Ukrainian companies in what some observers see as an effort to extract ownership stakes in the companies.

Tom Mayne of Global Witness, which in April issued a 63-page report on the Turkmen-Ukraine gas trade, said he was dismayed that even after the pro-democracy Orange Revolution in Ukraine, government leaders failed to clean up the energy sector.

One official who has survived is Yuri Boyko, the energy minister, who will be part of the prime minister's delegation here. Boyko was chairman of the state oil and gas company, Naftohaz, from 2002 to 2005 under Leonid Kuchma, Ukraine's former pro-Russia president. Global Witness said it had obtained an unpublished audit of the "hair-raising practices" of Naftohaz under Boyko. Global Witness said that documents show that Boyko, while Naftohaz chairman, also sat on a coordination committee of RosUkrEnergo. Dismissed after the Orange Revolution, Boyko was named energy minister after new elections brought back many pro-Russian officials.

Meanwhile, Western oil and gas companies are hoping for greater clarity as they seek approval to explore in the Black Sea.

Last Christmas Eve, the government published, in Ukrainian only, a notice inviting tender bids on a 12,000-square-kilometer deep-water exploration bloc in the Ukrainian portion of the Black Sea. It would be the first deep-water exploration project, and despite the low-profile announcement, it drew five bids from companies, including ExxonMobil.

The surprise winners were Vanco Energy Co., a small Houston-based firm that has prospected for oil and gas in deep water off the coast of West Africa, and JNR, an investment arm of the Rothschild family. But just as a final contract seemed close to completion, the new government decided to toss out the company's draft and come up with its own. Vanco is still waiting.

"I'm not discouraged," said John Imle, the former president of Unocal who is now at Vanco, which already has a rig lined up for work. But he said he hoped that the deal would be done by the end of the year and that Cheney would urge Ukraine to wrap it up. "The emerging market investors of the world are looking at Ukraine," Imle said. "A lot of them are looking at this deal as a bellwether deal for determining whether large energy investments are sensible."

Correspondent Peter Finn in Kiev contributed to this report.

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