Oligarch Kolomoisky wants more: Privat group aims to rise Ukraine's diesel, gas prices

Author : Olena Holubeva

Source : 112 Ukraine

In the near future, the prices for fuel might significantly increase in Ukraine
10:00, 11 February 2020

In the near future, the prices for fuel might significantly increase in Ukraine. The only working private Ukrtatnafta refinery and the semi-state Ukrnafta together with Ukrgasvydobuvannya, which are controlled by oligarch Ihor Kolomoisky, are introducing duties for imported diesel fuel and gas. And this is not his first attempt to earn super-profits on Ukrainian consumers with the help of the state machine and protectionist norms. Supporting the interests of the Privat group can have the most serious consequences for Ukraine and President Volodymyr Zelensky in the form of image losses in the eyes of international donors and investors, the weakening of Zelensky's position in the international arena: the president has repeatedly promised to distance himself from Kolomoisky and his Privat group

112 Agency

"Privat" seeks the introduction of duties on fuel

Privat, controlled by Igor Kolomoisky, Ukrtatnafta, as well as the semi-state Ukrnafta (controlled by the Privat group) and the state-owned Ukrgasvydobuvannya, submitted a joint application to the Ministry of Economic Development, Trade, and Agriculture of Ukraine on the fact of anti-competitive actions in the supply to Ukraine, Russian diesel fuel and liquefied natural gas (LPG).

“Ukrainian producers insist on compensation measures in the form of duties on subsidized imports of 8,46% with an annual increase of their size by 4,24 percentage points to 25,4% from January 1, 2024. The companies asked the Interdepartmental Commission to introduce duties without waiting for the results of the antisubsidiciary investigation, that is, as a security measure until the matter is examined in essence. The introduction of restrictive measures is justified by subsidized Russian imports. According to them, the Russian Federation by the difference in Due to the export duty on crude oil and petroleum products, as well as through a reverse excise mechanism, it subsidizes its refineries, which allegedly violates the principles of the World Trade Association.

The result of such measures will be the inevitable price increase, which will fall on the shoulders of ordinary Ukrainians and bring superprofits to Kolomoisky’s structures, experts are sure. Ukraine has not provided itself with automotive fuel of its own production for a long time: the number of private refineries, not without the efforts of the same Kolomoisky, which gained control of Ukrtatnafta, was reduced to one. Shebelynsky oil refinery of the state-owned Ukrgasvydobuvannya also produces auto fuel. The share of Ukrainian diesel fuel in the market is about 10%, and even if the Kremenchuk refinery Ukrtatnafta doubles refining, this will not change much, experts are sure.

Related: Russia and Belarus haggle over oil and gas prices

“If the decision to increase duties on diesel supplies from Russia is made, this will lead to higher prices on the market, as they account for about 36% of the market’s balance of diesel fuel,” Dmytro Glumov, a columnist for NaftoRynok industry outlet, states. Russian autogas supplies account for up to half of the market. This situation has arisen because imports replace the lack of domestic production, and if they are terminated, the Kremenchuk Oil Refinery, Ukrtatnafta, and Ukrnafta (which include gas production enterprises) will not be able to cover the deficit by market, which will inevitably lead to higher prices.

As a result, diesel fuel will rise in price by about 1,3 UAH (0,005 USD). Liquefied gas will add at least 0.7 UAH (0,029 USD). The total increase due to the introduction of protectionist measures is estimated at 530 million USD per year, of which 448 million USD will be the share of diesel fuel, experts say. The authorities are well aware of this. The fact that the introduction of duties in response to “company initiatives” can lead to limited competition and higher prices for the end consumer, head of the Verkhovna Rada committee on energy and housing communal issues Andriy Gerus states.

The situation with the introduction of duties on pipeline deliveries of diesel is indicative, as a result of which the Prykarpatzakhidtrans oil pipeline, which accounted for more than 40% of all diesel fuel consumed in Ukraine, stopped working for a long time. Soon after, the wholesale prices of diesel fuel increased significantly. In particular, the small wholesale price of diesel fuel in the first two weeks of September added almost 4 UAH per liter (0,16 USD, almost 20% of the price). It was possible to stabilize the situation only due to an increase in diesel fuel supplies from Belarus, which the government delegation from Ukraine went to negotiate. It was possible to agree on the supply of diesel fuel, which, as they say, in fact, had a Russian origin, in exchange for Ukraine’s consent to import Belarusian electricity, although this limitation caused frequent restrictions on its own generations due to surplus.

Related: Gas prices for Ukrainians can be reduced thanks to Russian transit, - Energy Minister

“After the introduction of duties on pipeline deliveries, their volumes sharply decreased: if earlier they reached 150,000 -180,000 tons per month, now after a long pause when there were no pipeline deliveries at all, they do not exceed 32,000 tons. At the same time, in the fourth quarter of 2019, its monthly volumes of deliveries by rail exceeded 100,000 tons. This is Russian-made fuel that is simply reloaded in Belarus,” Glumov says. According to the NaftoRynok observer, in general, in October-December 2019, Rosneft's diesel fuel supplies fell to 131,000 - 151,000 tons per month, which is 40% less than in the same period in 2018. In general, in 2019, Rosneft's share in the diesel fuel market fell from 38.6% to 30.4%. In addition to Rosneft, from 28,000 to 56,000 tons of diesel fuel from the Volgograd refinery Lukoil are supplied to Ukraine every month.

Another consequence of the limitation of pipeline supplies of diesel was an increase in shipments by sea, which reached record levels in the fall. The Privat group, which controls the largest oil transshipment facilities in Odesa and Chornomorsk, benefited from this. Shortly after the introduction of protectionist measures, the group became one of the five largest importers. The proof that Privat is already preparing to earn more is information about the acquisition of two tankers with a deadweight of 30,000 tons for the supply of diesel fuel against the background of an appeal to the Ministry of Economic Development and Trade with a request to establish new barrage measures.

Now the price situation in the diesel fuel market is stable. Moreover, in the short term, there are even prerequisites for lowering prices. “This is due to the fact that all commodity markets dipped in the world due to the coronavirus epidemic, including a drop in oil prices. Compared to January 20, Brent quotes collapsed from 65.2 USD to 56.37 USD per barrel. Accordingly, the price of quotes by which Ukraine buys imported fuel has also decreased, given that the market price is correlated with a delay since there are stocks of fuel purchased in previous periods, we expect a decrease in prices in the first half of February,”  says Glumov.

Autogas has also become cheaper since the end of December. According to the A-95 Consulting Group, the average market wholesale price of LPG has decreased by 14% since the beginning of the year.

Related: Implications of the government reshuffle for Russia’s oil and gas sector

However, the situation may soon change. If duties are introduced, prices will go up. Now, due to low competition, imported diesel fuel is sold to Ukraine with a premium of 20 USD/t compared to other countries. “As a result of the introduction of the import duty, it will be traded by $ 70 per ton (!) higher. What’s the point? In fact, one Ukrainian plant - the Kremenchuk refinery owned by the oligarch - could earn money?”  Sergey Kuyun, the director of A -95, notes.

Kolomoisky’s tricks

It is worth noting that this is not Kolomoisky’s first attempt to exercise the influence option in power structures and get superprofits. In March 2018, Ukrtatnafta filed a petition with the Ministry of Economy with a request to conduct a special investigation and impose restrictions on the import of petroleum products, which caused massive protests by car owners, who realized that the result of such a decision would be an inevitable price increase. Then the company justified its position by the high cost of fuel produced. However, according to experts, the reason for this is the lack of sufficient investment in the enterprise.

On January 14, 2020, Ukrtatnafta appealed to President Zelensky with a request to stop Naftogaz's import of oil products from Belarus under the pretext that the Mozyr Oil Refinery allegedly could be connected with Russian subsidiary companies. Since mid-December, MPs from the Servant of the People party have been trying to lobby the initiative of the Privat group enterprise in the Verkhovna Rada to increase excise taxes on gas and lower it for gasoline. Currently, it does not find the support of the majority, but if adopted, as reported, it will inevitably lead to higher prices for gas stations.

Related: Ukraine imports liquefied gas that came from sea terminal in Poland

As it has been repeatedly reported, in 2014-2015, significant funds were withdrawn from Ukrnafta through the straw firms, controlled by Privat, which led to the formation of huge tax debt (it was not possible to pay off until recently through the gaskets). Several years ago, they even discussed the option of transferring part of the assets of Ukrnafta, in particular the gas division, to the state-owned Naftogaz to repay the debt. Negotiations concerning this issue were conducted directly with Kolomoisky. However, the oligarch managed to avoid this option. Last week, an amicable agreement was signed and approved by the court between Ukrtransgaz and Ukrnafta regarding the recognition of the latter as the right to disputed volumes of gas, which led to several years of legal proceedings. We agreed that Naftogaz would buy this gas from Ukrnafta for 612 million USD, which it should receive from the state budget as compensation for selling gas to the public. Another 596 million USD will be paid by Naftogaz for gas, which Ukrnafta would produce and transfer to Naftogaz in future periods. Ukrnafta will direct all these funds to repay the tax debt. In other words, the state budget will once again pay for the sins of Kolomoisky.

Such a step might indicate the continued serious influence of the oligarch on President Zelensky.

Will Zelensky pander Kolomoisky?

Obviously, the decision to support the initiative of the Privat structures and the introduction of duties upon their request will be a negative signal for business and ordinary Ukrainians, because the president and his team have repeatedly stated that they are in no way connected with toxic oligarch Kolomoisky. This will not go unnoticed by international donors - the EBRD and the IMF, who are seeking structural reforms in Ukraine and have repeatedly defended the interests of our country in the international arena. It will also push away large foreign investors who will continue to perceive Ukraine as a territory that is not trustworthily corrupted by politicians and financial-industrial groups.

Related: Ukraine, Turkey discuss possibility of transporting Caspian gas, - Zelensky

Numerous political scientists believe that government support for Kolomoisky’s initiatives will hit the Cabinet’s ratings, as well as the president’s ones, as the rise in gas station prices will be associated precisely with the influence of the oligarch on power. In the eyes of people, such frank support for the interests of the Privat group will be evidence that the social standard of living of ordinary Ukrainians is less important for the president and his team than individual private interests.

Ukrzaliznytsia (Ukrainian railways) is among the largest consumers of diesel fuel; in the event of a rise in price, it might shift it onto the shoulders of consumers, which will lead to a further increase in passenger prices and tariffs for shippers. Also, the Ukrainian army is the largest buyer of diesel fuel: a rise in prices will obviously not contribute to an improvement in its affairs.

Profile associations representing the interests of industries that will be affected by the rise in price have already criticized the initiative of enterprises, controlled by Privat and the establishment of duties.

Related: Russia uses less than half of Ukraine's Gas Transmission System’s capacity in January

Mining and metallurgical enterprises also opposed the introduction of an additional duty on imports of diesel fuel and liquefied gas. According to experts, such a step would result in an additional financial loss of about 12 million USD per year for the industry, according to the address of the Mining and Metallurgical Complex of Ukraine to Prime Minister Oleksiy Honcharuk and Minister of Economy Timofiy Mylovanov, signed by the president of the Ukrmetallurgprom association Oleksandr Kalenkov and head of the Federation of Metallurgists Ukraine Serhiy Belenky. Mining enterprises consume about 7% of diesel fuel; its price is an important component of the prime cost of metallurgical products.

“Under such conditions, any increase in the cost of fuel weighs on the cost of industrial products, increasing the expenditure of production, washing out the enterprise’s working capital, and limiting development opportunities. According to preliminary estimates, if a duty is imposed on imports of diesel fuel and liquefied gas of Russian origin, the mining and metallurgical complex of Ukraine will lose about 12 million UІВ - both due to rising fuel prices, and an increase in the cost of related services and materials, the cost of which depends on fuel prices,” reads the message.

Related: Ukraine to finish heating season with excess gas reserves, - Energy Minister

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