Previously, deals between Russia and Ukraine had been handled by intermediaries, which contributed to corruption. In addition, gas produced domestically was heavily subsidized by the state and sold at cheap prices, also creating opportunities for corruption, and preventing incentives for consumers to use it efficiently. Kobolyev said that Ukrainian gas consumers would use three to four times more gas than people in comparable Eastern European countries.
Kobolyev and his team managed to diversify gas sources through making deals with European suppliers and improving energy efficiency, as well as changes to management practices in the firm, thus making the company profitable.
He said further improvement will be achieved in May, when the Ukrainian government repeals the obligation to sell gas through intermediaries in order to comply with a requirement set by the International Monetary Fund (IMF). This will allow Naftogaz to sell gas directly to households, Kobolyev said.
When asked about measures that could be taken by other large state-owned enterprises that want to replicate Naftogaz’s success, Kobolyev said that the key to his company success was corporate governance reform. The most success can be achieved when the state doesn’t intervene in company operations and governance, he said.
If the “state intervenes then the result is significantly less attractive, ... less profitable, or less value-creating and that was the main reason why Naftogaz managed to succeed,” Kobolyev said.
Kobolyev was also a proponent of a long-term plan to privatize Naftogaz, the strategy approved by the former Ukrainian government, and believed that this strategy should be applied to “all major enterprises which don’t have strategic impacts on vulnerable areas of the economy.”
Naftogaz Deal With Russia’s Gazprom
Naftogaz signed a 5-year deal with Russian state-owned company Gazprom ensuring uninterrupted transit of Russian natural gas to Europe on Dec. 30, 2019. The agreement requires Gazprom to ship 65 billion cubic meters (bcm) of gas to Europe through Ukraine in 2020—22 bcm less than Gazprom transited in 2018—and 40 bcm annually over the following four years.Gazprom has also paid Naftogaz $2.9 billion awarded by the Stockholm arbitration court, which, together with additional interest and back payments, amounts to about $5 billion, said Michael Carpenter, managing director of the Penn Biden Center for Diplomacy and Global Engagement.
In return, Naftogaz agreed to “drop most of the claims and assets that it was seeking to attach or freeze … in various parts of Europe, with the exception of claims that Ukraine maintains to stolen properties in illegally annexed Crimea,” Carpenter said.
Due to the U.S. sanctions, the completion of Nord Stream 2 will be significantly delayed, possibly for at least a year, according to Carpenter.
“All in all, it’s a great deal,“ Carpenter said. ”It is a compromise—nobody got 100 percent of what they wanted—but it is a great deal for Ukraine’s energy security.”
Atlantic Council Eurasia Center Director and former U.S. ambassador to Ukraine John Herbst said that it was foreseen in 2014 that Russia could potentially “use gas as a weapon in the winter of 2014-2015.” Kobolyev, together with his team, enacted “reforms to increase gas pricing to reduce overuse of gas and the great pressure on the budget coming from the gas sector.”
Further Steps to Advance Ukraine’s Energy Security
“International institutions [could] help Ukraine’s new government finish the corporate governance reform,” since it’s unlikely for Ukraine to become prosperous or achieve energy independence “without corporate governance reform, without proper supervisory boards, without independent people who insulate state-owned enterprises,” Kobolyev said.Increasing energy efficiency will also help, but it requires more investment, advanced technology, and skills, according to Kobolyev. While the government won’t be able to influence energy prices, promoting efficient energy solutions will cause consumers’ energy bills to decrease; that may translate into a political gain for the government.
Carpenter said during a panel discussion that the United States can help Ukraine become energy independent “with reforms to achieve energy efficiency.” Wasteful consumption patterns of energy in Ukraine skews energy prices “and does not create an incentive to reduce” them, he said.
Naftogaz’s success has inspired other Ukrainian state-owned and private enterprises to employ the same anti-corruption and transparency policies, said Kobolyev, who emphasized that there are two key factors critical in fighting corruption: “First, is there should be proper market compensation ... and second, is there should be rule of law.”
If Ukraine lowers its corruption level to that of its regional neighbors, its GDP could increase by 0.85 percent, according to the USAID strategic plan. The energy sector in Ukraine is one of four sectors with the highest level of corruption. The USAID program will support anti-corruption champions in Ukraine’s state and local governments by promoting transparency, electronic services, and replacing paper-based transactions with online electronic systems, political finance reform, and a dedicated anti-corruption court.
“What is very important is that people in Ukraine should be shown that not being corrupt is a pragmatic choice,” Kobolyev said. “Not some rosy unrealistic option, [but] that they will be better off not being corrupt.”
