Ukraine’s energy: The State and oligarchs in a deadlock

Adrian Prokip,
Energy Analyst,
Ukrainian Institute for the Future,
Kyiv, Ukraine,

Senior Associate,
Kennan Institute,
Washington DC, USA

As well as many other fields of economy, Ukrainian energy sector is under the control of the state and oligarchs. In a broad sense an oligarch is a person who possesses huge business, has an impact on the government and controls media giving him the possibility to shape public opinion.

On the one hand, privatization of energy assets, which had begun in late 1990s, was a key to efficient management of the energy sector. But on the other hand, big business related to politics and the government later became an obstacle to developing market competitiveness and transparency. Different governments aligned themselves with different business groups supporting their struggle for power. Besides, governments have avoided market approached pricing for energy with regard to households for almost all the years of Ukraine’s independence.

At final extent, today the Ukrainian energy is not very efficient, with no real markets emerged and being concentrated and controlled by the state and a number of oligarchs. However, these oligarchs differ: some of them are developing big businesses while the others are just seeking to keep their rent-tied-to-government system.

The key non-governmental player of Ukrainian energy is Rinat Akhmetov who managed to develop the biggest energy holding in Ukraine DTEK working in different areas. His companies are responsible for 20-25% of domestic electricity production (mostly coal power plants) and 80% of coal production and deliveries. These are the biggest private-owned gas producers in the country; however, the biggest players are state-owned companies, responsible for 80 % domestic gas productions. Akhmetov’s companies are also key players in Ukrainian renewable energy sector, being responsible for about a third of country’s renewable energy production.

The second biggest group of energy players are state-owned companies. Among these are Energoatom – operator of all nuclear power plants, being responsible for 50-55% of electricity produced, Centrenergo – group of coal power stations, responsible for 10-14%, and Ukrhidroenergo – state operator of big hydro power plant, responsible for 7%.

Energy distribution companies are owned by different oligarchs and local elites. The most powerful among them are Rinat Akhmetov, Igor Kolomoyskyi, Surkis brothers, Konstiantyn Grigoryshyn and Russian VS Energy. Kolomoisky is a key player in petroleum distribution who also controls national oil producer Ukrnafta, where the state is a major owner.

State is a key player in the gas field, owning Naftogaz of Ukraine, responsible for gas transit through Ukraine, 80% of domestic gas production and is a key gas importer. However, gas distribution is controlled by private entities. And oligarch Dmytro Firtash controls 2/3 of this market.

But owning energy assets is not the most important way of the state’s influence on the energy sector. The most crucial are government regulations, attempts of rent seeking by those, who are close to government or by oligarchs themselves.

During Viktor Yanukovich Cabinet the major oligarchs were Serhii Kurchenko and president’s son Oleksandr Yanukovych, who tried to become new key actors in energy. Former member of parliament Mykola Martynenko is now under investigation because of possible corruption ties to Energoatom and state-owned uranium mining company. Another former MP Igor Kononeko, who was close to former president Petro Poroshenko, controlled Centrenergo and import coal supplies. Now after the 2019 elections the ruling elites changed once more and the control shifted once again to other people. This time it is about people close to Igor Kolomoisky. In addition, some people believe that Akhmetov was tied to President Poroshenko.

Government regulation affects transparency, profitability and investment attractiveness of the energy sector. In some cases, the manner of state regulation depended on oligarchs’ interests, who could influence on government and parliament. Another sticking point in state energy regulation is energy pricing for final consumers. For many years’ government postponed establishing market prices for households. First of all, it is because of unaffordability of these payments for a big share of Ukrainian citizens. So that was a political issue for every government.

Therefore, the problem of Ukrainian energy development is that it remains blocked in a deadlock by the state and oligarchs. Possible solution could be shifting to energy market and independent energy regulations. In 2015 Ukraine adopted a law “On natural gas market” and in 2017 a law “On the electricity market”. According to this legislation Ukraine had to establish energy markets with the same regulation as in the European Union. The hope is still for breaking the deadlock by 2020 when Ukraine will probably have finally introduced free energy markets.

But the new President and the Government do not seem to support the idea of free energy markets and market oriented pricing. Instead, they are looking for a way to overregulate the energy sector again. This will only preserve the status quo and worsen the situation in Ukrainian energy following a new round of competition among oligarchs.

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