Drivers in Ukraine often complain about quality of fuel. They mean the so-called bodyaga ("surrogate"), which of course is produced illegally. Using do-it-yourself method.

The bottom line of this operation is to mix the base component of fuel with various additives, which can significantly shorten the vehicle’s life or increase the vehicle owner’s expenses.

Thus, backyard production of fuel inflicts huge losses upon the national economy.

Firstly, low-quality fuel damages vehicles of both private and public owners. Secondly, the state budget receives less in tax revenues. Thirdly, it undermines market competition by allowing for unjustifiable underpricing. Fourthly, it represents a serious source of corruption, because illegal production cannot go without "protection" by public authorities.

How widespread has this phenomenon become today? Do government authorities responsible for public procurements check the quality of fuel? And how this situation can be fixed? A lot of questions need an answer.

History of the problem

The backyard manufacture of gasoline at mini oil refineries and oil depots is a "goldmine". Gasoline taxes are much higher than taxes on diesel fuel, and its "manufacturing" technology is simpler.

The "handicraft" fuel manufacturing output has surged in 2013-2014, when excisable gasoline could be produced using non-excisable components imported to the country in unlimited quantities.

Gasoline is usually "diluted" not at filling stations but at small oil depots, where various additives are added to the fuel. Why these mixtures are dangerous?

For instance, tetraethyl lead so favored by "diluters" increases the mixture’s octane rating to the standard number, but over time, kills piston rings and valves. In turn, naphthalene causes carbon deposits in the fuel system, damaging hoses, fuel pumps and injector’s nozzles.

By the same token, there was fierce bidding in the past at auction sales of the so-called "stable natural gasoline" produced by state-owned Ukrgazvydobuvannia. This gasoline is used in chemical industry, but it was often used as the main component for counterfeit fuel.

Octane number increasing additives, antiknock agents and other gasoline components were also legally imported to Ukraine.

By the end of 2015, the problem has reached threatening proportions. According to estimates by auditors of the Auditing Chamber, the volume of gasoline consumption in Ukraine has exceeded the volume of legal manufacture and import of this commodity by more than 1,390 thousand tons in 2013 and by 463 thousand tons in 2014.

In other words, the sales turnover of illegally-manufactured gasoline in 2013 was 35-38%, and in 2014 15-20% of the total gasoline consumption volume.

As a result, according to the State Fiscal Service (SFS), the special fund of the state budget has lost almost UAH 3.2 billion in 2013 and UAH 1.9 billion in 2014 in unreceived revenues from excise tax on gasoline. In 2015, the state budget’s losses from illegal marketing of petroleum products in the form of unreceived excise tax revenues amounted to UAH 1.2 billion.

The year 2016 became a turning point, when excise tax on motor fuel components was introduced at the same rate as gasoline tax. In addition, the government launched an electronic system of administering excise tax on petroleum products, which became fully operational on 1 April 2016.

The new mechanism created comprehensive control over excise tax payments, and made legalization of "off-the-books" outputs, which previously popped up on documents literally out of thin air, extremely problematic.

The results weren’t long to wait. According to data by A-95 Consulting Group, the shadow turnover of diesel fuel has dropped to the figure that could be disregarded: in the first half of 2017, it was estimated at 1% of the market volume.

The situation with gasoline has also improved. While the volume of shadow gasoline market in 2015 was 440 thousand tons, after legislative changes in 2016 this figure has declined to 200 thousand tons. In the first half of 2017, experts estimated "non-excisable" gasoline volumes at 70 thousand tons, or up to 8% of the market volume.

But even 8% is a very substantial loss for the state budget and for car owners.

After the fire at Vasylkiv Oil Depot

One of the largest fires in Ukrainian history has occurred at BRSM’s Vasylkiv Oil Depot. This fire started on 8 June 2015 and lasted for three days, resulting in 6 deaths and 15 persons injured.

The-then Prime Minister Arseniy Yatsenyuk, the Interior Minister Arsen Avakov and the Head of the State Emergency Service Mykola Chechotkin said, against the backdrop of blazing oil reservoirs, that the fire was caused by production of counterfeit fuel.

The backyard production in Vasylkiv has been no secret long before the fire. "Stable natural gasoline", octane number increasing additives, antiknock agents and many other things were delivered there in railroad cars.

After the loss of Vasylkiv Oil Depot, market interlocutors say, these shipments have been rerouted to new oil terminals in Koziatyn (Vinnytsia Oblast), Hadiach (Poltava Oblast), Holovanivsk (Kirovohrad Oblast) and Pereiaslav-Khmelnytskyi.

"Dozens of oil depots in Ukraine continue to operate in gross violation of law", a representative of a fuel importer says.

It means that the cause of the Vasylkiv tragedy – backyard fuel production – is alive, nobody has learned a lesson from this tragedy, and the guilty have not been held liable. Thus, the owners of BRSM remain unpunished.

IMPORTANT! State Oil LLC is a gasoline filling station chain operating under the BRSM brand. Its CEO is Vasyl Kir, and the ultimate beneficial owner is Ihor Revko residing in New York, USA. Journalists believe that the company is affiliated with the family of the ex-Minister of Energy and Coal Industry Eduard Stavytskyi (who worked in the Azarov government), although BRSM itself denies it.

"For the time being, the only punishment they suffered was the loss of 20-25 million dollars’ worth of burned property, police raids and handouts of countless bribes to everyone, from investigators and prosecutors to ministers. Some of the bribes also went to "peripherals" of various sorts, in particular, environmental institutes.

"Last year, one of them reported that the fire has done no damage to the surrounding areas, although in that place, fire consumed in seven days as much petroleum products as the entire Kyiv Oblast consumes in a month. The expenses were seemingly huge, because BRSM owners did not give a penny to the families of the perished and injured", A-95 Consulting Group Director Serhii Kuyun says.

State Oil LLC maintains that the expert’s words are just an assumption.

"State Oil LLC as the company managing the chain of gasoline filling complexes operating under the BRSM-Nafta brand declares that it has absolutely nothing to do with the occurrence on 8 June 2015 of fire at the aforementioned oil depot.

"Mr. Kuyun’s assumptions regarding the reasons that caused this fire are unfounded and unproved. We at State Oil LLC believe that the persons guilty of this tragedy will be identified and punished in accordance with Ukrainian law", State Oil LLC commented.

There are two features that distinguish BRSM among other market players. Firstly, this gasoline station chain continuously sells much more fuel than it buys. We are talking about the five-year period of 2013-2017.

Raw materials and motor fuel components received at BRSM oil depots

2014-2017, thousand tons

Commodity	Source	2014	2015	2016	2017 (4 months)
Components and raw materials for gasoline manufacture
Gasoline for industrial purposes	Domestic	-	-	1,5	0,2
Natural gas condensate	Domestic	12,0	14,5	6,9	-
Light petroleum products, unnamed	Domestic	-	-	10,1	0,8
Gas condensate distillates	Import	-	2,5	-	-
Liquid pyrolysis products	Import	-	0,3	-	-
Antiknock agents	Import	-	0,1	-	-
Multifunctional fuel additives	Import	-	0,9	-	-
Octane/cetane number increasing additives	Import	44,9	9,9	2,3	-
Pyrolysis products	Import	-	0,3	-	-
Solvents	Import	-	0,4	-	-
Isopentane fraction	Import	25,2	9,9	11,1	1,5
Pentane fraction	Import	0,6	1,2	2,8	-
Natural gas liquids and mixes	Import	-	0,5	6,5	1,0
Diesel fuel additives
Reactive fuel	Import	13,8	10,9	-	-
Oils	Domestic	-	4,9	8,8	0,2
Oils	Import	0,7	2,6	-	-
Total		97,3	58,9	49,9	3,8

Sources: Ukrainian Railways, SFS

Secondly, according to data by A-95 Consulting Group, 35% of gasolines sold at the company’s filling stations is gasoline of А-95 grade, which BRSM allegedly does not procure (either through import or in the domestic market). Only the А-92 grade. So, where does BRSM get the absent product and the А-95 gasoline?

In late 2016, BRSM drew attention from the Office of the Prosecutor General and the State Fiscal Service, which accused the gas station chain of evading more than UAH 1 billion in taxes. Out of 175 filling complexes, up to 100 stations were closed.

These actions had reflection upon the sales statistics: during four months of 2017, BRSM’s turnover shrank by half, and the chain is now kept afloat basically by gas stations in Kyiv and the Kyiv Oblast, which avoided sanctions. But even that could not change BRSM’s approaches: deliveries of gasoline components continue, even if in lesser quantities.

As before, BRSM’s procurement nomenclature features only the А-92 gasoline, and not a single ton of the А-95.

The group of companies affiliated with BRSM is the biggest recipient of specific cargoes.

"Formally, BRSM, or rather State Oil company which owns these gas stations is "squeaky clean", and all dirty work is done by other companies of this group. Before the beginning of 2016, Myronivka Oil Depot in the Kyiv Oblast was a very powerful producer of the "surrogate". However, its business has folded after introduction of excise tax on motor fuel components in early 2016", Mr. Kuyun explains.

State Oil LLC asserts that the А-95 gasoline sold at BRSM-Nafta filling stations is produced at Rompetrol-Rafinare oil refineries of KMG International Group in Romania, where it is procured for sale in Ukraine.

"Mr. Kuyun’s information that State Oil LLC’s import portfolio does not contain wholesale procurements of gasoline of this grade is false, and his motives are unknown. In addition, we’d like to inform that beginning from 2015, all types of fuel sold in Ukraine via our gasoline filling complexes undergo annual examinations by the Institute of Consumer Examinations. According to their reports, the quality of examined fuels, in particular, the А-95 gasoline is fully conformant with European standards", State Oil LLC declares.

The "sludge" from Yu A R LLC

This summer, Directorate of Kryvyi Rih Oxidized Ore Mining and Beneficiation Complex, State Enterprise made a procurement of fuel. The tender documentation stated the expected cost of UAH 3.559 million (including VAT) for 157 thousand liters of gasoline and diesel fuel.

The winner of this tender made an offer of UAH 1.259 million lower than the expected cost: UAH 2.3 million. It was a million less than the offer from another bidder, OKKO Business Contract.

The local online publication Kirovohrad 24 suggested that Yu A R LLC produces fuel in the backyard, explaining their suspicions by the low price. The journalists believe that nothing can justify the 35-percent lowering of the price offer vis-à-vis the expected cost, and therefore, that company "produces sludge".

At the author’s request, another energy expert Hennadii Riabtsev, Psyche Special Programs Director calculated the real cost of fuel at the time of tender, using diesel fuel as an example. The minimum retail price at the time was 19.94 hryvnias per liter, or 17.54 hryvnias without gas station’s conditionally constant expenses and price markup.

According to contract terms, the company may raise the price by 10%, so the real price is 15.94 hryvnias, which is less than the amount offered by the company (16.57 hryvnias). The situation with gasoline is the same.

"The "Pupkin arithmetic" shows that theoretically, this company could find a cheaper (although low-quality) resource and receive profit from selling it under a tender", the expert says.

"Low price is an indispensable but insufficient proof of falsification or contraband. An examination is required, after all", Mr. Kuyun believes.

"For instance, there is a scandalously known company called Trade Commodity. It wins all tenders held by the Ukrainian Railways and Defense Ministry, offering the lowest price. We see where they deliver from, and have all reasons to assert that they "mix" diesel fuel with kerosene-based jet fuel and low-quality fuel. But in order to indict them, we have to have analysis results. We don’t have them. And therefore, they go to court and "undress" us there. That’s it. That’s why, you have to be very careful with what you say", the expert adds.

According to the Kropyvnytskyi publication, Yu A R LLC mixes lower-quality fuel with higher-quality one at its oil depot. To prove their point, the publication has released a report by Kryvyi Rih Test Laboratory owned by Galnaftogaz Concern PJSC (OKKO gas station chain, EP).

According to this report, the fuel is not compliant with technical regulations, because the sulfur content in the examined fuel sample 30 times exceeded the normative rate.

Galnaftogaz Concern declined to comment on the report, citing commercial secrecy. In our opinion, such a reaction proves that this document is genuine. Otherwise, the lab could claim that the report is a fake, or it does not concern the company in question.

Yu A R LLC itself declined to comment on the situation.

After the aforementioned publication in Kirovohrad 24, the company "forgot" to provide within five days a police clearance certificate for the bidder’s official who signed the offer. This formality became the grounds for naming White Bear LLC, whose price offer didn’t differ much from the previous offer, as the winner of the tender.

Who owns the aforementioned companies? According to information from YouControl analytical platform, White Bear LLC is owned by Mykola Hrytsai, and the company’s director is Tetiana Radionova.

In the past, a portion of this company was owned by Kropyvnytskyi Mayor Andrii Raikovych (Petro Poroshenko Bloc "Solidarity"). However, after a corruption scandal, he withdrew as a company’s founder and reregistered his stake in his business partner’s name. That company still constantly wins tenders, delivering millions of hryvnias’ worth of goods to state and municipal institutions.

The achievements of Yu A R LLC, E-Data portal reports, are much more modest: just hundreds of thousands of hryvnias. This company with the authorized capital of only 2 thousand hryvnias is owned by the Znamianka resident Yuri Kovalchuk.

According to Valerii Zinchenko, Executive Director at Directorate of Kryvyi Rih Oxidized Ore Mining and Beneficiation Complex, fuel quality is controlled by their own specialized analytical laboratory by taking samples from the supplier’s tank trucks.

However, not many state-owned enterprises and public institutions are able to check the quality of fuel they procure. So, how much low-quality fuel does the state procure?

The scandal with Trade Commodity and other dubious public procurements

The recent resonant corruption scandal involving Defense Ministry’s procurements made us think about the amount of the "surrogate" in public procurements.

As a reminder, Trade Commodity LLC (TC), which in the last two years has won UAH 7.11 billion worth of public tenders, procures a significant portion of fuel from Ukr Petrol LLC, a company subject of criminal investigation into illegal manufacture of petroleum products.

Little is known about this company in general, other than criminal investigation into illegal fuel manufacture. Presently, the National Police are conducting pretrial investigation into illegal manufacture of petroleum products and marketing of harmful products.

The investigators have established that in 2015-2016, a group of persons started illegally producing and selling fuel without procuring required permits and paying taxes. The swindlers were selling "mixes of oil fractions containing hazardous chemical substances" purportedly as the А-80, А-92 and А-95 gasolines and diesel fuel.

Overall, according to information from the Unified State Register of Court Judgments, 5475 court judgments related to backyard fuel production have already been entered in Ukraine.

The author has sifted out the cases involving the aforementioned BRSM group of companies, Ukr Petrol LLC, petty entrepreneurs "turning out" small quantities of fuel in garages, and the cases of unauthorized "gasoline dilution" by gas station personnel.

During the last two years, we have found court judgments entered against Petroleum Oil Group LLC and Alliance Synthesis LLC (Dnipro), Triumph LLC (Dolynska village in the Kirovohrad Oblast), Melar LLC (Mykolaiv), and Invest Center Firm PE (Ivano-Frankivsk).

Neither of the above companies has won a supply tender, but tenders were won by companies through which, according to court cases, the "surrogate" was sold.

Supplier	Contracting authority	Amount, UAH
Expo Oil Plus LLC	Vocational School No 81	562,116.24
Sphere Oil Group LLC	Prydniprovska Railway, a regional branch of Ukrainian Railways PJSC, and Energoatom NNEGC	8,397,819.90
Petrol Plus LLC	Kyivpastrans ME	26,520,000.00
Vsesvit LLC	State Specialized Transport Service of the Ministry of Infrastructure	647,590.52
Cyclone PE	Various public institutions and state-owned enterprises	252,742.00
Total:		36,380,268.66

All the aforementioned legal entities are involved in the case concerning backyard fuel production in Dnipro as the companies selling the illegally-manufactured fuel and lubricants.

In sum, as follows from one court case alone, the state bought UAH 36.38 million worth of likely poor-quality fuel.

How the situation can be fixed

The outrageous instances of backyard fuel production prove that control over the flow of excisable commodities, first of all at oil depots and when transported in tank trucks, must be tightened even more.

Presently, the algorithm for oil depots is in place. Beginning from 1 January 2018, all oil storage facilities must be equipped with meters and level gauges transmitting information directly to SFS. The Cabinet of Ministers resolution setting out detailed requirements to fuel metering systems at oil depots is expected to be approved in the nearest future.

The situation with tank trucks is more difficult, and it has no solution for the moment. A commodity travels from the place of illegal production or import in a tank truck under forged documents, and nobody can check the legality of this cargo.

A system of issuing excise tax invoices must be in place to enable authorities to check at any time, using conditional barcode reader, whether the cargo in question is registered in the database. This system works well in Europe.

Controlling authorities and consumers themselves should make sure that registers of debt settlement transactions are always used for retail sales of fuel at gasoline filling stations.

This article was written as part of the USAID project “Transparent Energy Sector”. The opinions expressed in this article are those of the author and do not necessarily represent those of the United States Agency for International Development and DiXi Group analytical center. If this article is reprinted, the reprinting of the above disclaimer is obligatory.

Dmytro Sinchenko for EP