Understanding Energy Dependency in the former Soviet World: Corruption, Intermediary Companies, and Energy Security in Ukraine and Lithuania

By
Markian Dobczansky

"Transit countries are the weak link in the European energy infrastructure, and intermediary companies in the transit countries are the weak links within the weak links," according to Margarita Balmaceda, associate professor, John C. Whitehead School of Diplomacy and International Relations, Seton Hall University, and associate, Davis Center for Russian and Eurasian Studies, Harvard University. Speaking at a 10 December 2007 Kennan Institute lecture, Balmaceda argued that these non-transparent companies have become sources of corruption and rent-seeking, and have discouraged the diversification of the energy sector. Furthermore, since 2001, these companies have started being used to pursue political goals in addition to pursuing profit, she said.

As the energy sector in Eastern Europe and Eurasia has become privatized, intermediary companies such as Lithuania's Dujotekana and Ukraine's RosUkrEnergo have taken on a larger role in transporting Russian and Central Asian gas to European markets. Balmaceda stated that, in many cases, the state has unofficially delegated energy policy to such intermediary companies, which are non-transparent and whose role in transporting gas is not really clear. Furthermore, intermediary companies often become the focus for corruption, she said.

The case of Dujotekana, the Lithuanian natural gas company, is illustrative of these trends. Vytautas Pociunas, a top official in the State Security Department of Lithuania (VSD) who had until recently been the head of the department in charge of investigations in the energy sector, was found dead in the Belarusian city of Brest in August 2006. As a result of the parliamentary investigation into his death, documents appeared that seemed to implicate the VSD and Dujotekana in corruption. According to Balmaceda, the documents revealed much about how intermediary companies can be used to pursue both profit and policy.

Balmaceda asserted that this system allowed Gazprom, Russia's natural gas company, to control the entire Lithuanian gas market, but with higher profits than if it had merely acted through the Lithuanian-German-Russian consortium of which Gazprom was a member. She added that it made a mockery of the stated European and Lithuanian goals of diversification of suppliers, and additionally transposed Gazprom's internal problems onto Lithuanian soil.

In the Ukrainian case, the role of RosUkrEnergo as an intermediary company is still unclear. After the January 2006 energy crisis between Russia and Ukraine, this company was set up as a joint Russian-Ukrainian venture to mediate between Russian and Central Asian gas suppliers and the Ukrainian gas market. Clearly the company has received access to large-scale rents from this agreement, although it is still uncertain how the system operates in practice, Balmaceda noted.

The Ukrainian case highlights the importance of contractual diversification in addition to "geographical diversification," meaning a diversity of source countries for natural gas. While geographical diversification has increased as a result of the RosUkrEnergo negotiations, contractual diversification has not, as contracts for supplying gas to Ukraine remain non-transparent, unclear, and monopolized by a single country. Unlike in Lithuania, no comprehensive investigation into the activities of RosUkrEnergo in Ukraine has occurred.

In Balmaceda's analysis, the Lithuanian and Ukrainian cases show how intermediary companies have been used to pursue profit and political goals. Furthermore, intermediary companies have succeeded in combining foreign and local rent-seeking interests, and for discouraging diversification, Balmaceda said. The cases are different, however, in subtle ways. Balmaceda pointed out that the potential profits in Ukraine are much higher than in Lithuania, and this causes more attention to be paid to Ukraine's energy market by those seeking profit and influence. Furthermore, the cases also highlight the importance of good governance to the energy sector, as the higher level of transparency and accountability in Lithuania has led to modest reforms.

Balmaceda observed that the two cases also imply other policy-related conclusions. There are limits to Gazprom's assertion that disputes with neighbors are simply a result of "moving to market prices," she stated. Furthermore, she said, Russian actors acquire new potential sources of power in the CIS not only by acquiring new companies, but by collecting kompromat materials and using opportunities to their own advantage. Third, this system created a ready source of soft corruption money that could be recycled into the system. Fourth, Gazprom's agreements on intermediary companies have transposed internal conflicts over property and influence onto foreign soil. Finally, the involvement of the VSD in the Lithuanian scheme pointed out the limitations of relying on state agencies for pursuing state security.

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