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. Last Updated: 07/27/2016

Gas Trader Keeps Orange Team Apart

APGazprom CEO Alexei Miller, left, President Putin and Industry and Energy Minister Viktor Khristenko meeting at Putin's Novo-Orgaryovo residence outside Moscow on Jan. 4, the day the natural gas deal was reached with Ukraine.
KIEV -- Soon after the head of Ukraine's Security Service, Olexander Turchinov, started delving last summer into who was behind RosUkrEnergo, the secretive Swiss-registered trader that later landed a monopoly on gas sales to Ukraine, he found himself out of a job.

"The investigation was almost at the final stage. ... Turchinov went too deep into this investigation, and that really was why he had to step down," former Prime Minister Yulia Tymoshenko said in an interview with foreign journalists this week.

As Turchinov began to uncover the unknown beneficiaries behind the trader, which at the time handled gas sales between Turkmenistan and Ukraine, mounting friction between Tymoshenko and President Viktor Yushchenko hit a crisis point as corruption allegations flew. Tymoshenko was fired and Turchinov, her close ally, was forced to resign too.

"After that, the investigation was just artificially closed," she said.

Now, as Ukraine heads into parliamentary elections on Sunday, RosUkrEnergo and the multibillion-dollar gas supply deal it went on to win in January have come to symbolize the new power struggle that has riven this country's political elite.

The deal has further defined the collapse into bickering factions of the pro-democracy movement headed by Yushchenko and Tymoshenko, which started to hit the rocks almost as soon as they took power early last year. It has also helped boost the rise in popularity of Viktor Yanukovych, the pro-Russian, one-time rival for the presidency, amid a public backlash against the gas deal RosUkrEnergo won and the cost increases that will result from the higher gas prices it introduced.

The rise of the trader, which started out as a replacement for a discredited middleman but retained many of its directors, could stand in the way of so far tentative attempts to reunite the king and queen of the Orange Revolution following the elections. While Yushchenko stands by the agreement, Tymoshenko argues it has opened the way for Russia to begin winning back control of its errant neighbor.

Turchinov backs Tymoshenko in saying the deal should be annulled following the elections. "There is no other way to defend the interests of the Ukrainian economy," he said Thursday. "Europe is now dependent on an nontransparent scheme of supplies that will lead to the legalization of shadow capital, and for Ukraine it is just a catastrophe."

Under the deal, which was signed Jan. 4 after a tense three days during which Gazprom had cut off gas supplies to Ukraine, Yushchenko's government agreed to an almost two-fold price hike to $95 per 1,000 cubic meters. Expensive Russian gas was to be mixed with cheaper gas from Central Asia and funneled through RosUkrEnergo, the Zug-based trader half owned by Russian gas giant Gazprom and half owned by unnamed beneficiaries through Austria's Raiffeisen Bank.

The former object of Turchinov's investigations -- which he says has ties to Semyon Mogilevich, a Ukrainian-born Russian citizen considered a major figure in international organized crime -- had been turned into the monopoly gas supplier to Ukraine overnight.

While much of the population was already becoming increasingly disillusioned with Yushchenko as economic growth slowed and his Cabinet slid into chaos amid infighting with Tymoshenko, the gas deal drove the general sense of unease home. The parliament voted to oust his Cabinet in the immediate aftermath, and it has been clinging on until the elections. Helped along by promises of better relations with Russia and better prices for gas, Yanukovych's Party of the Regions looks set to get the largest percentage of the vote, some 30 to 34 percent. Polls suggest 17 to 20 percent for Yushchenko's Our Ukraine and 14 to 20 percent for Tymoshenko's bloc.

What happens to the deal after the elections could determine whether Yushchenko and Tymoshenko can make their peace and form a ruling coalition, or whether Yushchenko in the end will join with Yanukovych.

The gas deal could well prove to be a sticking point. While Yushchenko told journalists Wednesday that he saw no reason for it to be revised, Tymoshenko has made annulling the agreement a key condition for a coalition.

She has branded the deal a threat to Ukraine's national security and claims that by signing the deal Yushchenko sold out to Russian forces seeking to bring Ukraine back into the fold.

"The gas deal is not just a gas deal," she told journalists Tuesday. "This deal has created a classic model for ruling Ukraine from another territory. It has done so by creating debt dependency and also by giving RosUkrEnergo the right to use Ukrainian gas storage facilities and transit networks for the next 25 years."

Claiming the price of gas was too high and could go up at any time, Tymoshenko said the agreement would open the way for RosUkrEnergo -- and Gazprom -- to gain leverage over cash-strapped strategically important companies in Ukraine such as Naftogaz Ukrainy, Ukraine's gas monopoly, and eventually its most important national asset, its pipeline network.

With so much at stake, insiders say fireworks could still be ahead. "This is the calm before the storm," said Olexander Chaliy, a former deputy foreign minister in charge of gas negotiations.

Other independent observers have said Yushchenko's government should not have allowed itself to be forced into signing such an agreement, especially because, technically, Gazprom cannot cut off supplies for more than two days without endangering its pipeline network. Also, the agreement Ukraine signed with Gazprom in August 2004, setting the price at $50, was valid for five years.

"Without corruption, it was impossible to sign such an agreement," Tymoshenko said. "If an official signs this, it means they are corrupt. It means they fell under the dependency of those whom they were signing with. They became manageable and turned into puppets.

"We changed the president, we have replaced 18,000 officials, the ministers are new. But we have failed to overcome the system of clans, oligarchs and Kuchmaism," she said.

Yushchenko fired back on Wednesday, telling journalists, without naming Tymoshenko directly, that those who were against the deal involving RosUkrEnergo were seeking to replace it with their own crony company, Itera, the trader that handled the Turkmen-Ukraine gas trade when Gazprom was under previous management. Kommersant on Thursday reported him as saying he had no idea why the trader had been given a monopoly on sales to Ukraine and that all responsibility lay with the Russian side.

Yushchenko has often said he has no idea who is behind the trader, but Tymoshenko claims he is covering it up. "The state security services now know who the founders of RosUkrEnergo are and how they became the founders of this company," she said.

A Hungarian Heritage

The trader indeed appears to have ties that go back to the regime of former President Leonid Kuchma, who maintained close ties with the Kremlin and seemed happy for Ukraine to remain in Russia's fold. It also appears to have links with Eural Trans Gas, the gas trader set up in December 2002 to handle gas sales between Turkmenistan and Ukraine.

The day after Gazprom signed a contract with ETG to handle the sales, it was founded in the Hungarian village of Csabdi by Israeli lawyer Zeev Gordon, who has said in interviews that Mogilevich has been his client for more than 20 years but has told him he had nothing to do with the trader.

The former head of ETG's Moscow office, Oleg Palchikov, is now co-director of RosUkrEnergo in Zug. Palchikov has not responded to requests for comment.

In July, at the height of his investigation, Turchinov told the Financial Times that he was investigating both ETG and RosUkrEnergo for alleged ties to Mogilevich. Both ETG and RosUkrEnergo have denied any such ties. Wolfgang Putschek -- an executive at Raiffeisen who is also a director of Centragas, the Vienna-registered vehicle that owns the Raiffeisen half -- has said Raiffeisen was satisfied with the due diligence it performed before taking on its fiduciary role and that no such ties were found. He has even said the company planned an IPO later this year.

Further ties with ETG can be found in the list of directors of Centragas. Registration documents show two British directors, Howard Wilson and David Brown, who also acted as directors in vehicles that became shareholders in ETG in 2004 in a restructuring scheme designed to improve the company's transparency.

Brown, together with Robert Shetler-Jones, was a director in Denby Holdings, the holding company behind Atlantic Caspian Resources, which that year gained a 44 percent stake in ETG, according to a report by Hermitage Capital management. Wilson, meanwhile, was a director of a little-known entity called JKX Gas, based in the Netherlands, which obtained a 30 percent stake in ETG, documents show.

Calls to Brown and Wilson were not returned. A secretary of the office of Denby Holdings in London said they were both available but could not take calls. Shetler-Jones was also working at the same office. When reached by telephone, he directed all calls to Merlin PR, a London-based PR company that Centragas hired after the January deal.

The Centragas director, Putschek, however, said Shetler-Jones no longer had anything to do with the company. He said he had once sat on RosUkrEnergo's coordination council but had long ago stepped down.

What Turchinov Says

Turchinov claims to be the one with the key to these convoluted schemes. But so far he has been tight-lipped on what exactly his investigations uncovered. On Thursday, in answer to questions following a news conference, he confirmed that his investigations had uncovered the involvement of Mogilevich, his associate Igor Fisherman, Kuchma and the alleged head of Mogilevich's Ukraine operations, Dmitry Firtash. But he would not go into details explaining the links. "There is information on this now in the hands of the Security Service. But the investigation has been frozen, and I don't think it would be correct to disclose operative information," Turchinov said.

He said the Security Service had evidence that Firtash had been in contact with leaders from both the Kuchma and Yushchenko governments. "You can see the relations with the former regime and [Firtash's] contacts with high-placed people in the current leadership," he said.

But that's the extent of what Turchinov will reveal so far. Some observers say the Tymoshenko team is staying silent so as to be able to use the information as a political bargaining chip to broker its way into positions of power following the parliamentary elections.

Turchinov says Yushchenko personally intervened in his investigation of RosUkrEnergo. In an interview published on Radio Free Europe's web site in September, he said the president told him to stop "persecuting my men." He confirmed on Thursday that "such a sorry conflict" had taken place.

As the elections loom, the Jan. 4 deal has been sitting in limbo. Prime Minister Yuriy Yekhanurov has stalled on signing an intergovernmental agreement to further enshrine it as law and has given the venture that RosUkrEnergo formed with Naftogaz a license to distribute much less gas than originally planned.

"Any coalition is going to raise questions over whether this agreement should be reviewed," Chaliy said. "But the question of how much it will be changed depends on what the configuration of the government is going to be."

While everyone waits for the elections, Russian and Ukrainian officials are busy blaming each other for the existence of the unnamed beneficiaries of RosUkrEnergo. President Vladimir Putin has said Ukrainian structures stand behind the 50 percent stake. Yushchenko, however, has said that there are no official Ukrainian organizations behind RosUkrEnergo. Yekhanurov has said the Russian side forced the Ukrainians to sign the deal.

Gazprom insists the deal is there to stay. "Gazprom does not sign deals that last from one election to another," Alexander Medvedev, deputy CEO of Gazprom, said last week. "The deal will not be canceled because there are no grounds for doing so." The Jan. 4 deal, however, replaced the deal Gazprom signed with Yanukovych's government a few months ahead of the 2004 presidential election.