Since last autumn, Ukrainian oil traders have been required to provide guarantees to the Russian Federal Technical and Export Control Service that their end buyer would not be a military institution.
But what may seem like Kremlin measures to prevent Russian oil products from being used as fuel against the pro-Russian separatists in eastern Ukraine has also amounted to greater Russian control over the supply of oil products to Ukraine, according to industry experts.
Ukraine produces just 2 million of the 15 million tons of crude oil it needs for refining, says Alexandr Sirenko, an analyst at UPECO, a Ukrainian oil consultancy. Imported oil products are therefore vital to the economy.
Some Ukrainian oil traders began to provide the necessary guarantees to Russia, according to Sergey Sapegin of the Psykheya scientific center, even though it takes no expert to realize that it’s impossible to guarantee that oil products won’t be sold multiple times.
Smaller traders have been the most hurt, whereas larger traders, able to reach agreements with Russian oil giants state-owned Rosneft and privately-owned Lukoil, are still in business, said Sapegin. For instance, according to the director of energy consultancy firm A95, Sergey Kuyun, WOG and Lukoil have an agreement. But even if they are able to seal deals, says Kuyun, companies caught selling to the Ukrainian army will have their contracts terminated.
A second alley to consolidate control is the re-opening of the only Russia-Ukraine fuel pipeline, PrykarpatZakhidTrans, which has been closed for two years. The pipeline, which enters Ukraine through Sumy Oblast, used to supply Euro-3 diesel, a low grade of fuel that was banned in Ukraine in 2014.
Ironically, the low quality fuel that had been sitting in the pipeline was sold to the Ukrainian ministry of defense, says Sirenko of UPECO.
Russia’s Rosneft will now use the pipe to supply diesel to a little known Swiss-registered company called International Trading Partners AG. The Swiss registered entity purchased the pipeline from Russia’s state-owned Transneft in March 2016 with ease.
The pipeline, which runs along northern Ukraine into Hungary, was originally owned by the Russian Soviet Republic and discussions to buy it back from Russia have been going on since the collapse of the Soviet Union.
“It’s very simple — what’s happening is a restructuring of the market, and instead of having fuel supplied by an unrestricted amount of traders, the fuel will be supplied by one operator that is approved by the Kremlin,” says Sapegin. “Also, whenever deemed necessary, the pipeline can be shut off.”
Thirty-year-old German Anatolii Schafer is the only director at the company, which prior to oil trading operated in Ukraine as supplier for Kyiv North East Mining Company, according to reports by Ukraine’s Biz.liga news agency. Both companies were taken to court for not paying import duties in Ukraine in 2014. Biz.Liga has linked the company to Viktor Medvechuk, the head of the presidential administration under President Leonid Kuchma. Medvechuk is also close to Russian President Vladimir Putin. However, the links are tenuous.
It’s unclear who stands behind the Swiss company, but what is clear is that they are now the proud owners of a key piece of Ukrainian infrastructure. What’s also clear is that the Ukrainian Anti-monopoly Committee approved a deal, worth millions of dollars, that involved a less than transparent company. According to Sapegin, the pipeline can provide Ukraine with 100,000 tons of fuel a month, and an annual total of 1.7 million tons to Ukraine and Hungary.
“Since July 2016, we’ve started to see big volumes of Russian oil products being sold again: 80,000-90,000 tons. It’s still not what it was in October 2015 – 170,000 tons,” said Kayun. “Before the embargo, Russia used to make up 30 percent of the market.”
In this period of flux, faced with a deficit, Ukrainian traders diversified and increased imports from Belarus, Poland, Lithuania, Israel, Greece and Bulgaria. The Belarusians, who refine Russian oil, went from holding up to 50 percent of the import market to 80 percent, said Kuyun.
But last month, the head of Russia’s Transneft, Nikolay Tokarev, announced his company would be reducing its supplies of oil to Belarus by 5 million tons. They had previously agreed to supply 24 million tons of oil per year, and a large portion of that is used for the domestic market of Belarus. Sapegin said that this reduction would make Ukraine more dependent on direct imports of Russian oil products.
Ukraine cannot copy Belarusia’s boom in oil refining as only one out six Ukrainian refineries is active (the Kremenchuk refinery), says Sirenko. According to him, Belarus captured the Ukrainian market by undercutting domestic refineries in 2009, and later, as Ukrainian refineries closed down, raised its prices. Neither does Russia have any interest in encouraging Ukraine to refine its own oil, according to him.
“It’s more advantageous for Russia and Belarus to sell their finished product to us,” said Sirenko.
While Russia has been working its influence over the Ukrainian energy market to its advantage, Ukraine, even in the face of Kremlin aggression, has been oddly acquiescent.
Ukraine has been widely criticized for not even matching Western sanctions against Russia. Sanctions on food products, long imposed by Russia on Ukraine, were only reciprocated by Kyiv as recently as January 2016.
“We find ourselves in a so-called hybrid war where we have armed fighting but still maintain some friendly relations,” said Sapegin.
The topic of oil products was only raised by the post-Maidan government in April 2016: Shortly before stepping down, former Prime Minister Arseniy Yatsenyuk announced that Russian oil products would be included on a list of sanctioned Russian goods. However, the order has yet to implemented by the government of new Prime Minister Volodymyr Groysman.
Ukraine’s Economy Ministry, which is responsible for the list, could not be reached for comment by the Kyiv Post.
Russian President Vladimir Putin (L) talks to Rosneft President and Chairman of the Management Board Igor Sechin during a deal signing ceremony with his Venezuelan counterpart Nicolas Maduro at the Kremlin in Moscow, on July 2, 2013. (AFP)
