Sunday, January 28, 2007

Fusion of politics and business

Ukrainska Pravda carries a story entitled "Hayduk and Firtash provoke a government mini-crisis in Hungary" about some rather shady business, bits of which I have loosely translated:

Billions of KWatts of electricity, primarily generated in Burshtyn, Western Ukraine are exported, via several private structures at a highly attractive price, to western neigbours Poland, Hungary, Romania and Slovakia. Most of the deals were set up in 2003 by the Ukrainian state enterprise UkrIntEnergo when Vitaliy Hayduk was deputy prime minister in charge of the energy sector in the Ukrainian government.

Vitaliy Hayduk was recently appointed Secretary of the National Security & Defense Council by president Yushchenko. He is co-owner of one of Ukraine's largest financial industrial groups - Industrial Union of Donbass.

It can be said that he is the 'godfather" of all of the companies who earn millions of dollars from supplying cheap Ukrainian electricity westward. By this means Industrial Union of Donbass can obtain cheap Ukrainian electricity for its metallurgical companies in Huta, Poland and Dunaujvaros, Hungary.

[Dunaferr (Hungary) made the entire world to look differently at the Ukrainian business. Dunaferr is the largest metallurgical enterprise in Hungary (annual income being greater than 600 million Euro). Around 40% of its production is exported to the countries of E.U.- from I.U.D.'s official website]

The Orange Revolution did not cause the electricity export schemes to become more transparent, and after the 2006 parliamentary elections, I.U.D.'s business rivals SCM and RosUkrEnergo started 'demanding a piece of the action'.

Trading company Emfez, linked to Dmitro Firtash, which has been selling gas to Hungary for a few years, got involved. But this was not to the liking of the Hungarian 'System Consulting' company, controlled by Hungarian industrialist and Socialist party leader and MP Laszlo Kapolyi, which would lose some of its own business as a result. Profits from 'System Consulting' were also conveniently being siphoned off to an American off-shore company to avoid payment of taxes."


The allocation of electricity import capacities from Ukraine to Hungary has turned into a subject of controversy as new market entrants are vying for positions previously held by dominant importer System Consulting Zrt, the Hungarian daily Nepszabadsag reported Monday. System Consulting, controlled by Hungarian industrialist and Socialist MP Laszlo Kapolyi, has a 20-year contract valid through 2015 for import capacity rights for 350 MW of border-crossing capacities. The company imports electricity from Ukraine's Burstyn power plant, where it helped finance investments to create special generating blocks (the so-called Burstyn Island) that can produce electricity in line with the technical parameters of Western European power grid association UCTE (Union for the Co-ordination of Transmission of Electricity).

However, the daily notes that at least two other companies are now jockeying for position on the Ukraine-sourced electricity import market. These are Emfesz Kft, a company that dominates the liberalized segment of Hungary's natural gas market and which is indirectly controlled by Ukrainian businessman Dmitry Firtash, and Energy Capital Zrt, an electricity trader in Slovakian and Ukrainian ownership whose main client is Ukrainian-owned Hungarian steel producer Dunaferr.

The new demand for import capacity rights has led to what Nepszabadsag describes as controversial and possibly politically motivated decisions by Hungarian and Ukrainian grid operators on the allocation of import capacities for 2007. Hungarian grid operator Mavir announced a tender in mid-November to commit Ukrainian import capacities that are not tied down in long-term import contracts, saying that the Ukrainian grid operator failed to provide Mavir with its own allocation plan for the coming year. However, the results of the tender - in which neither Emfesz nor Energy Capital received capacity rights - were annulled by the Hungarian Energy Office (MEH) due to procedural irregularities.

In a subsequent decision, Ukrainian grid operator Ukrenergo announced in late December that it awarded border-crossing capacity rights totaling 200 MW to Emfesz, and just 250 MW to System Consulting. According to analysts cited by the daily, the generous allocation to Emfesz may have been attributed to the company's alleged close ties to Ukraine's Energy Minister Yuriy Boiko, which Emfesz spokesman Boris Shestakov denied.

However, just one day later in late December the decision was overturned and Emfesz ended up with just 100 MW of import capacity rights, as opposed to System Consulting's 350 MW and Energy Capital's tiny 5 MW. According to Nepszabadsag, Emfesz has appealed the decision and is now awaiting a final ruling, as Shestakov told the daily that the decision was modified under "unusual pressure from some Hungarian officials." System Consulting's Kapolyi told Nepszabadsag that if the company was eventually awarded less than the contractually committed 350 MW, it would most likely turn to the courts, or at the minimum demand compensation for its investments at Burstyn."

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