Names like Nordex, Slavutich or Respublika may have been forgotten, but they were the ancestors of Itera, EuralTransGas and RusUkrEnergo, their better known, and more recent, successors. Their fundamental business model is to get the money actually paid by Ukrainian gas users and capture it while not giving a pretext to the central Ukrainian authorities to cut off gas transit.

A good way to understand what happened is to consider the situation of a big metallurgical company in Eastern Ukraine, paying its gas deliveries to Ukrgazprom in Kyiv at 80 $/tcm9—money which is never handed to Gazprom in Russia. It would certainly be profitable for that company—and for Gazprom—to be able to pay only 50 $/tcm, but to pay it directly to a trader which has access to Gazprom’s gas or its pipelines.Yet the central government in Kyiv did not allow this, thanks to its hold over Gazprom via its export pipes. But that leverage by Kyiv could be avoided if the gas were bought from someone other than Gazprom, such as Turkmenistan, which was not exporting anything to Europe. Thus the big Ukrainian industrial users teamed up with Gazprom managers and a few well placed people in the Central Asian republics to create the illusion that they were buying gas not from Gazprom, but from other suppliers—despite the fact that the gas was going through the exact same pipelines—“through Russia” instead of“from Russia.”

Other such large Ukrainian end-users then tried to grab more of the domestic gas market beyond their own needs, using their specific supply schemes. By offering gas at 60 $/tcm to other industrial users in their region, the trader got paid for more gas, and the first buyer could make a 10 $/tcm profit along the way. Of course, this undermined Ukrgazprom (which would lose revenue from paying customers), and led to vicious infighting inside Ukraine, which dominated the politics of the country for the next 10 years, as the biggest gas consumers tried to become the entity that could buy directly from the trader and sell more (at a profit) to others in Ukraine.

That money, captured by a few intermediaries, did not profit Gazprom itself, but certainly allowed a few of its well-placed managers (high enough in the hierarchy to make it possible to get several tens of billions of cubic meters of gas transported through Gazprom’s pipelines) and a few Central Asian oligarchs to make huge fortunes. The scheme is inherently unstable, as those that have to buy the gas from the local trader will always try to get rid of that middleman by going to the source. Thus metal-bashing plant no.2, which buys gas from metal-bashing plant no.1 at 60 $/tcm (who itself buys its from “Turkmen” trader at 50 $/tcm for its own needs as well as for resale within Ukraine) will try to offer 55 $/tcm to the trader to switch places with metal-bashing plant no.1. Thus Russian intermediaries played off Ukrainians one against the other to extract cash from Ukraine— something that Gazprom was structurally unable to do itself.