Press Release / July 25, 2006

New Ukrainian administration must answer key questions about Naftohaz Ukrainy and RosUkrEnergo

The Ukrainian government needs to act in the public interest to answer numerous questions about the controversial RosUkrEnergo gas company and its relationship with state-owned Naftohaz Ukrainy, according to the campaign group Global Witness.

In April, Global Witness published an investigative report titled It’s a Gas: Funny Business in the Turkmen-Ukraine Gas Trade (“Веселящий газ: абсурдность в газовой торговле между Туркменистаном и Украиной”), which drew attention to the lack of transparency in this trade, vital to the economy of Ukraine and the wellbeing of its citizens.

In this report, Global Witness raised questions about Ukrainian businessman Dmytro Firtash, because he was known to be involved in the gas trade, but there was little information about what his role actually was. Noting that half the shares in RosUkrEnergo were controlled by Gazprom, the report expressed concern that the identities of the Ukrainian investors controlling the other half of the shares were being kept secret.

One week after the release of the report, it was announced in Russia’s Izvestiya newspaper (controlled by Gazprom) that Mr Firtash controls 45% of RosUkrEnergo through a holding company, Centragas Holding. Another Ukrainian businessman, Ivan Fursin, controls another 5% of RosUkrEnergo. Mr Firtash has given several press interviews since then, confirming his ownership of shares in RosUkrEnergo.

But although the role of Mr Firtash in the gas trade is no longer secret, many other questions are still unanswered about the role of RosUkrEnergo and its relationship with the state company Naftohaz Ukrainy. Global Witness calls on the Ukrainian authorities to investigate these questions, detailed below, in a comprehensive and transparent manner.

1. The role of RosUkrEnergo
Naftohaz Ukrainy, as the state gas company of Ukraine, has a clear role to play in the Ukrainian gas market. Gazprom, as a supplier of gas, has a commercial interest in this market too. But what is the commercial rationale for involving RosUkrEnergo, a company with no track record in the gas industry? What service does RosUkrEnergo provide to the gas trade that cannot be provided by Naftohaz Ukrainy?

RosUkrEnergo made profits of over US$700 million in 2005. Meanwhile, Naftohaz Ukrainy has accrued debts of over US$500 million, mostly to RosUkrEnergo. Is it in Ukraine’s benefit for Naftohaz to be so indebted to this private company, or for Ukraine to cede half of its domestic market to RosUkrEnergo via the new joint venture UkrGazEnergo? And what of the criminal investigation concerning RUE, launched by former Ukrainian State Security chief Оleksandr Turchynov in 2005? Why was this investigation never completed, and why does the office of the current SBU chief deny that an investigation ever took place?

2. The role of Naftohaz Ukrainy
Full audits for Naftohaz’s activities for both 2004 and 2005 have not yet appeared on its website. Global Witness has seen an unpublished management audit that highlighted many serious operational problems at Naftohaz, including wasteful spending, an ineffective supervisory board and a confused administration structure. What is being done to improve the management of the company?

The contract signed by Naftohaz, RosUkrEnergo and Gazprom in January 2006 concerning gas supplies to Ukraine does not provide adequate information about the price of gas, including transit costs and the formula used to obtain the current price of US$95 per 1000 cubic metres, or the length of time the price is guaranteed for. The contract may also not provide Ukraine with enough gas to see it through the year. These issues need to be clarified or a new contract drawn up.

3. RosUkrEnergo, Ihor Voronin and Yury Boiko.
According to a RosUkrEnergo internal document dated July 2004 and seen by Global Witness, Ihor Voronin, the current deputy chairman of Naftohaz Ukrainy, was nominated at that time as a member of RosUkrEnergo’s co-ordinating committee – an important body in charge of the company’s strategy. So was Mr Yuri Boiko, then the chairman of Naftohaz Ukrainy. This document explicitly states that Mr Voronin and Mr Boiko were “nominated by Centragas” onto the RosUkrEnergo co-ordinating committee. In effect, these two men were on the committee of a private company at the behest of private investors (Firtash and Fursin), while serving as senior officials of a Ukrainian government company whose demand for gas was a major source of RosUkrEnergo’s profits.

Global Witness has been unable to get an explanation from Mr Voronin and Mr Boiko about this blatant conflict of interest and calls on the Ukrainian government to investigate it.

4. Mr Firtash, Naftohaz Ukrainy and Gazprom
The Global Witness report shows that during the time that Yury Boiko was chairman of Naftohaz Ukrainy, this company formed a joint venture (thought to be involved in supplying barter goods to Turkmenistan) with another of Mr Firtash’s companies, Highrock Textiles. What exactly was the relationship between Mr Firtash and Naftohaz Ukrainy?

Before RosUkrEnergo’s creation in July 2004, Gazprom and Naftohaz Ukrainy agreed to create a new joint venture that would act as the operator of the Turkmen-Ukraine gas trade from 2003. But instead, a new private company, Eural Trans Gas, was created. Why was this company controlled by Firtash, a private businessman, and not by Naftohaz Ukrainy and Gazprom as originally intended? And when will Eural Trans Gas publish full audited accounts for its activities in 2003 and 2004?

Ukraine’s people are entitled to full transparency as well as comprehensive answers about the gas trade, given its vital importance to the country’s industry and its economic well-being.

Global Witness calls on the new government of Ukraine to:

• Publish full, independent audits of the state oil and gas company Naftohaz Ukrainy for the years where information has not previously been available (that is, for most of the company’s existence).
• Launch a public inquiry into how RosUkrEnergo gained access to the Ukrainian gas market and whether Ukraine needs such a company to act between itself, Russia and Turkmenistan. It also needs to examine the role of Mr Voronin and Mr Boiko to determine whether they were acting in the interests of Ukraine in their dealings with RosUkrEnergo.
• Renew efforts to investigate alleged impropriety by government officials and commercial companies, publish the results of investigations and, if wrongdoing is established, prosecute those responsible.
• Following these inquiries, a new gas agreement needs to be drawn up which gives detailed information on gas price and transit cost and stipulates for how long these prices are guaranteed for.

Contact Tom Mayne (+44 (0)7843058756) or Diarmid O’Sullivan (+44-207-561-6363) for more information.