Monthly Archives: April 2008

Akhmetov’s SCM weighs in on Dniproenergo: Kolomoisky is no “Robin Hood”

Yulia, don't steal, Dniproenergo for the people!

A walk through Kyiv shows that the fate of Dniproenergo is far from sealed, as PR posters from both sides of the conflict continue to pepper the city. (The majority seem to be anti-Privat, however — more pictures appended at the end of the post).

A decision earlier this month by Ukraine’s Supreme Court deemed a debt-for-equity plan instituted last year at the major electricity producer illegal:

The controversial restructuring plan that was struck down saw the state’s share lowered to 50%+1 through a supplementary stock issue that resulted in magnate [Rinat] Akhmetov’s Donbass Fuel and Energy Company (DTEK) gaining control of about 44% in Dneproenergo. DTEK, in turn, agreed to pay about $10 million, take on the company’s loans totaling around $200 million, and provide another $200 million in investment.

The shareholders had accepted this agreement and it was recognized by the government’s securities and stocks commission. However, Dniproenergo’s registrar, Ukrneftegaz, refused to amend the company’s shareholders’ register. Ukrneftegaz is controlled by Privat, a key owner of which [Igor Kolomoisky] recently expressed frustration at the manner in which Dniproenergo’s share issue had been handled. [The Mirror Weekly has an excellent rundown of Privat’s use of shareholder registers in various corporate management disputes.]

A Privat-affiliated company and minority shareholder in Dniproenergo (owning 257 shares, or 0.00655%) launched the lawsuit against the restructuring plan, culminating in the [April 8th] Supreme Court ruling.

While this decision paved the way for Prime Minister Yulia Tymoshenko’s privatization plan for the electricity generator, President Yushchenko soon after halted the implementation of Tymoshenko’s vision.

The court ruling also threw Dniproenergo’s financial status into jeopardy, as the company once more finds itself in bankruptcy.

Ukrainian breakthrough, Dniproenergo for the people

Last Wednesday Dniproenergo sent an open letter to “the country’s leadership,” namely Yushchenko, Tymoshenko, and Rada Speaker Arseniy Yatsenyuk, pleading for intervention from the government and a return to the way things were before the Supreme Court decision.

The inclusion of the political angle gives the dispute further depth. Not only do we see a battle between the businesses of two of Ukraine’s richest men (Akhmetov is #1, Kolomoisky is #3), but also a continuation of the near-constant conflict between Yushchenko and Tymoshenko.

She needs these privatizations to proceed in order to pay for her ambitious social programs. He has intimated that her privatization docket is set up to unfairly benefit certain political supporters.

The disagreements have led to a nasty battle over the leadership of the important State Property Fund.

From the Eurasian Daily Monitor:

Yushchenko canceled Tymoshenko’s orders to replace the head of the privatization body, the State Property Fund (FDM), and to privatize one of the last big factories still remaining in state ownership, the Odessa Portside Plant (OPZ). Tymoshenko, with the courts on her side, disobeyed and instructed her subordinates, perhaps for the first time ever, to ignore Yushchenko’s orders. Yushchenko sent his guards to protect the FDM from Tymoshenko’s team, and confrontation between the Presidential Guard and police was barely avoided.

An even larger conflict is looming, as both Yushchenko and Tymoshenko envision constitutional reform that would sway the balance of power to their respective branches of government.

Cases such as the Dniproenergo are a good example of how allegiances overlap, transcending political boundaries and affecting billion dollar businesses.

I had earlier translated sections of an interview given by Privat‘s Igor Kolomoisky dealing with the ongoing Dniproenergo dispute.

Last week Oleg Popov, the general director of Akhmetov’s holding company System Capital Management (SCM), gave a wide-ranging interview to Kommersant. In the interest of providing equal time, here are excerpts from the interview dealing with the Dniproenergo disupte (my translation):

– Have you already made a decision on how you will contest the Supreme Court’s ruling on Dniproenergo?

First we should see it and read the justifying section (мотивировочная часть). For two weeks we haven’t yet seen it. But I figure that we have, as the lawyers say, “a very strong case,” so most likely we will contest the decision and stand up for our rights in court. We’re sure that nothing was illegal.

– Will you contest it anew under open circumstances or in a European court?

That will depend on the justifying section.

– Are you planing on refraining from investing in Dniproenergo in connection to this decision?

The government doesn’t have an issue with the quality and process of the [debt-for-equity] rescue plan [санация] for the enterprise. We remain willing to invest in the facility, if such investment is deemed necessary by the enterprise and the government.

– Is it possible to talk about the political motivations of this decision?

Of course not! Take a look at what essentially took place. You’ve got a minority shareholder–a representative of Privat Group which sued the company Dniproenergo, contesting the supplementary share issue and the conducting of the [shareholders] meeting. They claim that their rights were allegedly infringed upon by us conducting this supplementary issue. That is, this case is exculsively between two business entities over the legitimacy of the conduction of a shareholders meeting and other procedures of the rescue.

Everything else–that’s PR from Privat, talk of “justice” [справедливость] and “the interests of the government.” What do we see here? A very simple picture. We have people who are interested in satisfying their personal interests and recollecting [восстановить, renewing] their “justice.” What interest Privat has, I’m not exactly sure. But judging by the numerous crusades for “justice” undertaken by Privat, for example the case with the Nikopolsky ferroalloy plant (NZF), all these discussions on “justice” and “the interests of the people” end once Privat gets commercial participation in a project. And by no means competitively. [И отнюдь не на конкурсе.]

– Yes, but the co-owner of Privat Igor Kolomoisky says that he is fighting for justice…

Do you want to call him Robin Hood?

– He so named himself in an interview with the internet publication Ukrainskaya Pravda…

I don’t see around him the large number of admirers that typically surround a people’s hero, standing up for justice.

– Mr. Kolomoisky levied accusations against you claiming that the permission for Energy Company of Ukraine (EKU) to vote for the rescue was given by [then] Prime Minister Viktor Yanukovich. By doing so, he played into Rinat Akhmetov’s hand as a shareholder in Dneproenergo…

We never used any preferential treatment from the state regardless of who was leading the government [i.e. the PM]. Moreover, the rescue plan was approved not by the [PM-controlled] Cabinet of Ministers, but by the Zaporizhye regional business court [where Dniproenergo is located]. We didn’t have any preferential treatment in relationship to other participants of the the tender on the conduction of the rescue. Anyone who wanted to propose their own rescue plan, they proposed it. The creditors chose our proposal since we propsed more money and the instant repayment of [Dniproenergo’s] debts. We didn’t have any preferential treatment and we don’t want to have any in the future. If we will have it, we can become weak and uncompetitive. No one needs this, above all our shareholders.

– Then why did you decide to carry out the rescue exactly in last year?

If the enterprise hadn’t recovered during 2007, then from Jan. 1st, 2008, it would have gone under the hammer [i.e., to auction]. We at that moment were minority shareholders, owning 18% of the shares in Dniproenergo. We had a goal: provide long term growth to the worth of the enterprise. We were and remain interested in its financial health. We, as creditors, were invited to participate in the competition for the rescue, and we won it. We proposed a real plan of action, invested the money, saved this enterprise and are prepared to invest further. But shareholders, who have about 2 or 3 shares, are dissatisfied with the situation and launched countless legal actions in order to turn everything around.

– Igor Kolomoisky stated that Dneproenergo didn’t settle up the debts with his companies. That, in principal, is the reason that he gave for the current conflict. Is that so?

That’s not true. Dneproenergo fulfilled its debts to all its creditors, at least those who have been able to support their claims, which would include Privat if they were in the register [of debts].

– According to you, the state is not at all participating in the Dneproenergo case?

As concerning state organs, as far as we know, they don’t have an issue with the rescue of the enterprise and our participation in it. The state doesn’t take part in court processes and doesn’t initiate them. Attempts to win back [отыграть] the situation and return Dneproenergo into bankruptcy are being carried out only by Privat. It’s them [Privat] that has an issue.

– Then how would you comment on the fact that the Vice Minister of Justice Evgeniy Korniychuk predicted the results of the case two weeks before hand?

(Pause.) At a minimum, it’s strange. If you take into account that the government organs don’t have any claims to us, because they are not involved in the court process, then it is strange to hear such a statement.

– According to our information, Mr. Korniychuk also met with the Supreme Court judges on the day the decision was given.

(Pause.) You asked me [earlier in the interview], what other problems exist in conducting business in Ukraine. If your information is correct, that speaks to the fact that judicial power, which should be independent, appears [is, является] not to be so.

– Returning to the claims of Mr. Kolomoisky against you. He says that the $400 million that you paid is too small for the 28% of shares that you got.

When we made the decision to take part in the rescue of Dniproenergo, the total worth of Dniproenergo on the PFTS [Ukraine’s major stock exchange] was at the level of about $460 million. We proposed to pay and paid for the supplementary shares based on an assessment of the entire enterprise to be worth $1.2 billion.

– Then why did Mr. Kolomoisky value only the share you received at $1.2 billion?

Probably his managers simply got confused during the calculations.

– Nonetheless, the shares of Dniproenergo rose in the last year, and now the share packet that you received is worth, based on the PFTS quotation, $626 million.

Let me tell you a another story. Do you remember Krivorozhstal? (He draws a picture with two scales, Time and Worth.) If we take 2002, 2003, 2004, 2005, 2007. We skip 2006, because then nothing happened. In 2002-2003, metallurgy was stagnating. The estimated value of all the metal enterprise groups (меткомбинаты) in the world was not very high. Upon reaching 2004, a medium-term growth tendency was noticed for metallurgy. In this year we took part in the competition for Krivorozhstal and won it, paying $800 million. In connection to the fact that the political situation in the country changed, in 2005 that enterprise went through a re-privatization process, and it was sold at auction for $4.8 billion. Mitall Steel won.

Two years pass. The world metallurgy market is now rising and growing at a quick tempo. Now Krivorozhstal is worth $15 billion. What are we to do with it? Where is the justice? If guided by the logic of 2005, then maybe the government ought to once again re-privatize the metalworks factory? And sell it for $15 billion, returning $4.8 to Mittal Steel? In two years, Mittal couldn’t do anything that would make the worth of the enterprise grow at such a rate. Indeed, the company’s growth in value was in connection to the entire industry–the market for iron ore and steal also grew. So would it be just to sell it again? Is a third time necessary? Would that be just?

If we are going to operate not based on an understanding of law, but on an understanding of justice, you can hardly talk about their being clear rules of the game for investors in our country. And you can hardly say that we have an attractive investment climate.

Note: I have at times switched between spelling the company “Dniproenergo” and “Dneproenergo.” These are the Ukrainian and Russian transliterations, respectively. It is spelled both ways in the media, depending on the language of the medium. While I tend more often to use the “i” variant, I like to include the spelling with “e” every once in a while in order to help pick up search engine-driven traffic. Such is the prerogative of a blogger.

Private money vs. Just [fair] law


In front of TGI Fridays…

Stuck in traffic in front of the club Avalon


Firtash and Privat resist Naftogaz’s encroachment on Ukrgazenergo as Gazprom prepares to enter Ukraine’s gas market

Protesters linked to Firtash and Privat rallied against Naftogaz's attempts to replace Ukrgazenergo

Protesters connected to major factories in Ukraine that have been sparring with Naftogaz over gas deliveries rallied on Tuesday in front of the national energy company’s office. The picketers were protesting against reductions in gas supply to the industrial enterprises.

The gas cuts are a result of the factories’ unwillingness to sign new supply contracts after political pressure forced the gas trader Ukrgazenergo from Ukraine’s internal market.

Negotiations in Moscow between Naftogaz and Gazprom appear to have found a solution to placate the protesters, as the newly established Gazprom Sales Ukraine (GSU) will provide most of the factories in question with gas beginning in May.

Naftogaz dismissed the rally as a “political show,” and part of “unprecedented pressure from the side of interested business groups with the aim of complicating and delaying the negotiations currently underway in Moscow [between Naftogaz and Gazprom over a middle- to long-term gas supply agreement].”

Naftogaz’s statement further defined those “business groups” as Dimitry Firtash-controlled enterprises and the financial-industrial conglomerate Privat Group.

Firtash is a co-owner of Ukrgazenergo and the key Ukrainian figure in the country’s shady gas supply scheme. Ukraine’s Prime Minister Yulia Tymoshenko has long rallied against the role Firtash has played as a gas middleman between Central Asia, Russia, Ukraine and Europe. Her government has led a push to replace his presence with that of the state-owned Naftogaz.

Earlier this month, factories that are controlled by Firtash and that had been receiving gas from Ukrgazenergo–namely Rivneazot, Crimean Titan and Krimsky Soda–complained that Naftogaz was limiting their gas supplies. Naftogaz has asserted that Presidential and Cabinet of Ministers decrees have stripped Ukrgazenergo of its right to provide gas on Ukraine’s internal market. It has aggressively sought to transfer sales previously with Ukrgazenergo to its own gas marketing subsidiary, Gaz Ukrainy.

The industrial consumers are holding out on signing a new contract with Naftogaz after political pressure forced their previous supplier, Ukrgazenergo, out of the picture

These companies, however, refused to sign new contracts and instead have asserted that their agreements with Ukrgazenergo are still valid. They have warned that dropping gas pressure could lead to technical problems and even catastrophic accidents, particularly since many of the factories are chemical producers.

Naftogaz, via its spokesman Valentin Zemlyansky, asserted that gas supplies to these enterprises have remained above the technical minimum required to avert a disaster.

While it may be expected that Firtash would protest actions that limit the revenue to his companies, Privat’s inclusion in the dispute is slightly more surprising.

The Privat-controlled Galychna and Neftekhemik Prekarpatia oil refineries both suffered reduced gas supplies due to a failure to sign on with Naftogaz. Representatives of these companies were also allegedly present at the protests in front of Naftogaz’s offices, in addition to workers from Firtash-connected enterprises.

Privat and Naftogaz have a recent history of conflict within Ukraine’s energy sphere, as they are sparring over the fate of Ukrtatnafta and its Kremenchug oil refinery.

The two companies have also had a longer-running feud over Ukraine’s largest oil firm, Ukrnafta. Privat is a 42% shareholder, enough for a blocking stake despite Naftogaz’s 50% holding. The two sides have been unable to agree on the distribution of dividends, leading to a round of unsuccessful shareholders meetings and criticism from Tymoshenko.

Despite this history of conflict, Privat has generally been seen as an ally of Tymoshenko (though typically only when it serves the interests of the financial group). Privat has had its own problems with Ukrgazenergo, with the gas trader allegedly refusing to supply Privat-connected industries for a period of time last year.

Siding with Firtash in this latest dispute may be an attempt by Igor Kolomoisky, a key owner of Privat and the group’s most public face, to earn points with Firtash for future collaboration.

Send the bandits in Naftogaz to jail!

Kolomoisky suggested in a recent interview that he would be interested in buying out Firtash’s stake in RosUkrEnergo (RUE), a 50% owner of Ukrgazenergo and the key coordinator of Ukraine’s gas imports. Privat’s hold-out in signing contracts with Naftogaz may be an indication that it is expecting to do business in the future with Ukrgazenergo, despite the government’s intention to remove it completely.

Indeed, no word was given about the Privat-owned enterprises when Zemlyansky announced that negotiations on Tuesday in Moscow arranged to have GSU provide gas to the Firtash-connected companies.

While this arrangement may be a way for Firtash’s factories to avoid buying gas from Naftogaz, the situation hasn’t yet fully solidified. Neither Ostchem (Firtash’s holding company for chemical factories that includes the affected plants in Ukraine) nor Gazprom said they had any knowledge of the deal. A source in Gazprom told Kommersant that “the question of Dimitry Firtash was not raised during the negotiations.” Talk of Firtash is just “small change in negotiations between countries,” the source added.

Naftogaz's spokesman asserted that the protestors had no legal justification and were instead looking only to make a scene.

The agreement (if it exists) may not even satisfy the protesters. “They haven’t given any concrete demands,” Zemlyansky told me. They are instead more interested in creating the image of dissent in an attempt to influence the continued restructuring of Ukraine’s gas sphere.

Those rallying in front of the office appeared to be actual factory workers (and essentially asserted as much, when I asked them) as opposed to the pensioners and students protesting the Dniproenergo conflict (which are typically hired for $10-20 day).

However, Wednesday’s steady rain and cool weather dispersed all but a few people sitting in tents pitched in front of the office. Zemlyansky said that he expects them to be completely cleared away by the end of the week at the latest.

A court case is currently in the works that aims to resolve any legal claims by the enterprises, as well as an anti-monopoly case lodged against Naftogaz’s increased presence within the gas market.

Meanwhile, the negotiations in Moscow have been pushed back to Wednesday as the two sides are struggling over additional (unknown) amendments to last month’s broad agreement and guarantees from Ukraine on the repayment of about $2 billion in debts for gas already delivered.

Yulia, don't give a disaster to Rivne!

An early draft of the the amended agreement currently being negotiated allegedly included language that allowed Gazprom to unilaterally annul the new arrangement in the event of Ukraine’s failure to repay its obligations. The previous setup, featuring Ukrgazenergo, would then be put back into place.

I talked with Ukrgazenergo’s press secretary on Monday, but he didn’t want to comment on the situation yet, saying only that “things are still being figured out.” He did agree to talk after the “May holidays,” a two-week block of time between Orthodox Easter (April 27th) and (WWII) Victory Day (May 9th) when basically nothing gets done.

One development is likely during that time, however. If an agreement is reached in Moscow on Wednesday, the holidays’ centerpiece–International Day of Labor on May 1st–will see GSU enter Ukraine’s market officially.

Note: Zemlyansky confirmed that Ukrgazenergo’s April 1st shareholders’ meeting, which was held in Naftogaz’s office, didn’t reach a quorum due to the absence of RUE’s representatives. (RUE and Naftogaz are 50/50 shareholders in the gas trader.) He suggested that the spate of failures among energy company shareholders’ meetings (Ukrgazenergo, Dniproenergo, Kievenergo, Ukrnafta, Ukrtatnafta, etc.) is representative of today’s turbulent nature of Ukraine’s energy sphere. I would add that political turmoil is also playing a part.

Zemlyansky went on to call the situation surrounding Ukrtatnafta a “political issue,” saying that Naftogaz needed to wait for the politicians to sort out things before they could attend to the business side of things.

Waiting for politics to resolve itself, though, seems at times to be a never-ending endeavor here.

RosUkrEnergo to remain Ukraine’s gas supplier

RosUkrEnergo's tagline belies its reliance on personal connections - From

On Friday an official from Ukraine’s presidential secretariat announced that RosUkrEnergo (RUE) would be supplying Ukraine with gas for the remainder of the year.

The continuation of this arrangement comes as a blow to Prime Minister Yulia Tymoshenko’s hopes to completely remove the maligned middleman.

While she has praised the expulsion of RUE’s 50%-owned subsidiary UkrGazEnergo from Ukraine’s domestic gas market, its place will partly be filled by a new Gazprom subsidiary authorized to directly market gas to Ukrainian consumers.

In the meantime, Naftogaz (Ukraine’s state-owned oil and gas company) is aggressively seeking to make deals with Ukraine’s major industrial consumers, likely in an effort to stymie Gazprom’s commercial ambitions.

Naftogaz confirmed that it signed a contract with RosUkrEnergo to purchase 49.8 billion cubic meters (bcm) of gas at a price of $179.50 per thousand cubic meters (mcm) through to the end of 2008.

Meanwhile, “Gazprom Sales [Marketing] Ukraine,” (“Газпром сбыт Украина,” or GSU — I haven’t seen that acronym used yet, so remember, you saw it here first) a fully-owned subsidiary of Gazprom, has registered in Ukraine and is in the process of gaining clearance to sell 7.5 bcm per year on the country’s “unregulated” industrial market. GSU will buy the gas from Naftogaz (who itself purchases it from RUE, which purchases it from Gazprom Export, which allegedly purchases it from Central Asia), though according to early drafts of the new gas scheme agreement, Naftogaz is limited to an extremely minimal price increase (pennies per mcm) on the sale to GSU.

The industrial sector of gas sales had been dominated by Ukrgazenergo, but intense regulatory and administrative pressure has essentially forced the gas trader to shut down operations. (Nonetheless, I am still in talks with Ukrgazenergo to arrange an interview, and will update accordingly.)

Naftogaz, via its subsidiary Gaz Ukrainy, is looking to fill as much of the void left by Ukrgazenergo as possible, lining up contracts from 90 of Ukraine’s top industrial gas users. It is unclear whether the holdouts of companies connected to RUE co-owner Dimitry Firtash have been resolved.

Late in March, Ukraine attempted to pressure RosUkrEnergo by halting the transit of gas owned by RUE through Ukraine destined for sale in Eastern and Central Europe. The Polish and Slovak consumers the gas was meant for lodged complaints, citing violations of the Energy Charter. It isn’t known if the new agreement with RUE protects the trader’s ability to transit gas through to Europe, a lucrative aspect of the scheme.

The early draft of the agreement reached between Gazprom and Naftogaz last month left the exact seller of gas at the Russia-Ukraine border–either Gazprom or RUE–ambiguous. While Tymoshenko was apparently able to erase the words “not less than” before the 7.5 bcm quota to be granted to Gazprom, removing RUE–with its rumored connections to the Yushchenko camp, organized crime, Gazprom management, former politicians, etc.–proved to be not so easy.

Note: No word on the potential technical default of Naftogaz, but the debt issue with Gazprom for gas sales during the first four months of this year–a couple billion dollars, apparently– remains a pressing issue. Meanwhile, the government is suggesting that domestic prices for gas raise by 3% and 5% (depending on volume consumed) per month, beginning in May (i.e. 21-35% by the end of the year). This, in combination with an increased presence in the industrial sales sector mentioned above, should help Naftogaz’s financial situation. Of course, 20% inflation rates and woeful bill collecting problems won’t help.

Also, Naftogaz has scheduled (another) attempt at a shareholders’ meeting for Ukrtatnafta, again with the aim of changing leadership and making sweeping administrative changes. The meeting is scheduled for May 29th (coincidentally, the day before my birthday). Meanwhile, the company announced the April 23rd auction of its 4.4 thousand sq. meter office building in Kremenchug, with a starting price of UAH 9.9 million (just under $2 million). Clearing out the shelves before the store gets taken over?

Supreme Court backs Tymoshenko’s vision of Dneproenergo

4/12/08 – Updated with the responses of President Yushchenko and Rinat Akhemtov below

Ukraine's Supreme Court ruled in favor of PM Tymoshenko on the Dniproenergo ownership struggle - From

Yesterday Ukraine’s Supreme Court ruled that the ownership restructuring and debt consolidation plan that significantly boosted Rinat Akhmetov’s share in Dniproenergo last fall was illegal. This decision supported the complaints of the financial conglomerate Privat while paving the way for Prime Minister Yulia Tymoshenko’s privatization plan for the major electricity generator.

This ruling came on the heels of another Supreme Court decision concerning Ukrtatnafta that also benefited Tymoshenko’s vision for Ukraine’s energy sphere.

The decision confirms Tymoshenko’s assertion that the state-owned Electricity Company of Ukraine (EKU) owns just over 75% of Dneproenergo. The controversial restructuring plan that was struck down saw the state’s share lowered to 50%+1 through a supplementary stock issue that resulted in magnate Akhmetov’s Donbass Fuel and Energy Company (DTEK) gaining control of about 44% in Dneproenergo. DTEK, in turn, agreed to pay about $10 million, take on the company’s loans totaling around $200 million, and provide another $200 million in investment.

The shareholders had accepted this agreement and it was recognized by the government’s securities and stocks commission. However, Dniproenergo’s registrar, Ukrneftegaz, refused to amend the company’s shareholders’ register. Ukrneftegaz is controlled by Privat, a key owner of which recently expressed frustration at the manner in which Dniproenergo’s share issue had been handled.

A Privat-affiliated company and minority shareholder in Dniproenergo (owning 257 shares, or 0.00655%) launched the lawsuit against the restructuring plan, culminating in the latest Supreme Court ruling.

While the state now regains legal authority of around 76% in Dniproenergo–with Tymoshenko hoping to sell 60%+1, according to her privatization plan–the electricity company once again finds itself in financial problems as a result. This is underscored by the subheading of Kommersant’s article on the ruling, which reads “Dneproenergo is once again bankrupt.”

DTEK apparently remains the holder of Dniproenergo’s debt, giving it potential influence while the company is in a state of bankruptcy. This will likely complicate efforts by EKU and the government (and possibly Privat) to install new management for Dniproenergo and continue on the privatization plan.

DTEK criticized the ruling and promised to turn to European courts and appeal the decision (my translation):

“Unfortunately, the court in this case did not rule solely by the letter of the law, but acted in the interests of the Privat Group, which has organized a mass raiders attack on Dneproenergo

The raiders, acting with one goal and attracting to their side some government officials from EKU and the Ministry of Fuel and Energy, attempted one thing — to return Dneproenergo into bankruptcy and under the guise of protecting the interests of the government, insert into the genco’s [electricity generating company] ranks of leadership managers loyal to the Privat Group…

We expect that today’s decision by the Supreme Court will be disputed in European courts, which are not subject to pressure and influence and are hopefully protected from the lobbying of financial-industrial groups.”

Indeed, the details of the Supreme Court’s decision, as relayed to Kommersant by a court source, raise suspicion of undue outside influence.

On Monday, Deputy Minister of Justice Evegeny Korniychuk met with each Supreme Court Justice separately for a closed-door meeting to discuss the Dniproenergo decision. Korniychuk had stated in late March that the Supreme Court “must make a decision” [“обязательно примет решение”] on the cancellation of the share issue. (The Kommersant article seems to imply that he was urging for a decision that would rule the restructuring illegal, but this is a bit up to interpretation.)

Kommersant also notes that the court seemingly came into the case with a preordained decision (my translation):

Curiously, the hearing on Dneproenergo yesterday lasted not more than 40 minutes. “The judges listened to the arguments of both sides, deliberated for about 15 minutes and then came out with their already-prepared decision laid out in a few pages,” said Dneproenergo board member Dmitry Tevelev (who was present at the court session). According to Andrei Astapov, a partner at the law firm Astapov Lawyers, such a quick announcement of a decision is only possible when the result is known in advance.

If such machinations are true, this emphasizes the paucity of rule of law within Ukraine even at the highest levels, despite being the focus of many international aid efforts. It also casts doubt on the decision, regardless of whether or not it was legally sound. Abnormalities in the manner in which the ruling was reached obviously reflect poorly on that eventual decision.

Last fall’s original restructuring plan drew criticism because the government, under then-PM Viktor Yanukovich from the Party of Regions (Rinat Akhmetov is a fellow Regions parliamentary deputy), essentially signed off on a deal organized solely in back rooms.

Tymoshenko has pushed for the cancellation of the deal and sees a privatization tender as a way to let potential investors compete and draw in more funds. “We decided to begin a clean privatization of thermal [i.e. coal and gas] electricity generators. This step should interest serious investors,” she said of her electricity sector privatization plan.

And while Dniproenergo’s shares surged 6% yesterday on news of the decision, there is speculation that this rise was essentially engineered by Privat in an attempt to show that investors agreed with the Court’s ruling. Since February, Dniproenergo’s capitalization has dropped by about $250 million.

Despite an ostensibly admiral goal of Tymoshenko, the methods being taken and the tactics being resorted to–by all sides (the parliament’s Committee of Justice, led by a Party of Regions deputy, was lobbying just as hard for DTEK)–paint the entire Dniproenergo issue in a rather poor light.

Update (4/10/08): “I respect the court’s decision,” says Akhmetov. “We have two roads: we can challenge it, or if the supplementary stock sale is illegal, then we have payed more than UAH 1 billion ($200 million) and the government should return that. Soon we will publicly say, which way we will choose.” (4/12/08 — Taras at Ukrainiana has video of Akhemtov’s quote uploaded. Thanks.)

Update (4/12/08): President Yushchenko has stepped into the fray, signing a decree on Friday that suspends Tymoshenko’s privatization plans for Dniproenergo and three other gencos. He (via his secretariat) has been critical of the government’s privatization docket, particularly the electricity companies. Yushchenko has implied that Tymoshenko is planning to use the sales in order to reward her political backers.

The two politicians have feuded over the fate of the head of the state property fund committee, the key organ in privatization procedures. Yushchenko has also used anti-trust reasoning in past attempts to suspend the sale of other assets, like the Odessa chemical plant.
As quoted by the Reuters article on the story, this decree attempts to find constitutional justification for the presidential-ordered suspension:

“The decisions and orders of the cabinet do not comply with the first part of Article 17 of the Constitution of Ukraine, according to which ensuring economic security is one of the most important functions of the government.”

Tymoshenko is relying on a full slate of privatizations this year in order to pad the government’s budget and fund her populist program of returning lost Soviet-era savings. Less controversial sales may yet continue, as progress is being made on the plan to privatize nearly 70% of Ukrtelekom. The starting price was recently set at $2.4 billion.

Any major privatization would likely be seen as a win for Tymoshenko, and she may be better off pushing for whatever she can get at this point.

Naftogaz’s financials are creating worry as Ukraine and Russia struggle to finalize their gas deal

Naftogaz's debts continue to rise - from

Despite signing a key agreement on the development of gas sphere relations over three weeks ago, Ukraine’s Naftogaz and Russia’s Gazprom have yet to draw up and agree upon the technical and commercial contracts needed to make the deal final.

April 1st had been the anticipated deadline for reaching a solid agreement, but negotiations have now spilled over into the second week of April.

Meanwhile, March 31st was also the extended deadline for Naftogaz to fulfill its creditors’ requirements on a portion of its outstanding debt. Representatives of two of Naftogaz’s main creditors visited Kyiv in late December to push for progress in reaching the requirements on a $500 million Eurobond. Negotiations with government officials convinced the lenders to push back the January 1st deadline. However, the regulation–publishing Naftogaz’s 2006 IFRS report–has yet to be completed (though financial information on the company is available and has been analyzed by Ekonomichesky Izvestia), threatening the financial viability of the company.

Naftogaz is looking to get another two-month extension on publishing the financial report, which should be ready in a couple weeks according to information a source gave Reuters. Ernst and Young, Naftogaz’s auditors, have apparently been hesitant to certify the 2006 results without first knowing the company’s future tax burden and other prospective information. This uncertainty was exacerbated when a Cabinet of Ministers meeting last week failed to approve Naftogaz’s financial plan. The issue is set to be reexamined at another meeting on April 9th.

Ukrainian President Viktor Yushchenko warned of Naftogaz’s dire financial situation, saying the company “has never been closer to bankruptcy.” This elicited a quick response from PM Yulia Tymoshenko, who has asserted that her government will not allow a financial tragedy to befall the national energy company. Indeed, this year’s budget contains a $2.4 billion bailout in the form of sovereign guarantees, should it come to that. The Cabinet is also promising to lower Naftogaz’s tax burden.

Naftogaz's profits have also dramatically increased - From

If the government can escape from this latest debt issue–which is compounded by outstanding debts to Russia for recent gas deliveries–then Naftogaz has a solid chance of turning its economic situation around.

In 2007 Naftogaz reportedly made about $620 million, and the new version of the gas scheme should increase the revenues to the energy company and its subsidiaries. That’s assuming, of course, that a deal that replaces the current structure can ever get signed.

Amidst gas negotiations with Russia last month, Ukraine’s Cabinet of Ministers amended the draft agreement on the future of the gas scheme, capping the amount of gas Gazprom will be allowed to sell on the internal market at 7.5 billion cubic meters (bcm) per year. The original deal stipulated only no less than 7.5 bcm, but gave no maximum. Other amendments, however, remain unknown as the current version of the agreement has not been publicized.

The shifting terms of the deal make predicting Gazprom’s response difficult. Nonetheless, Naftogaz is continuing to work at expelling Ukrgazenergo from Ukraine’s gas market–a key term in the prospective deal.

One of Ukrgazenergo’s main jobs–buying gas at the border of Russia and Ukraine from RosUkrEnerg–is set to be transfered officially to the hands of Naftogaz, according to the draft agreement. (Indeed, this is likely already happening, due to an anxious Ukrainian government backed by the services of customs officials.)

Naftogaz refuted claims it was resorting to gas cutoffs in order to pressure holdout industrial customers

Ukrgazenergo’s other central job is selling some of that gas to industrial consumers within Ukraine. Tymoshenko employed the National Energy Regulation Commission to severely limit the amount of gas Ukrgazenergo is regulated to sell to the industrial sector. While the gas trader is fighting that decision in court, Naftogaz’s subsidiary Gaz Ukrainy has stepped into the void created by the commission’s decision.

Last week, the chemical factory Rivneazot complained that its gas pressure had dropped by about 20%, creating a potentially dangerous situation within the plant. The factory blamed Naftogaz for the drop in pressure, telling the company–which is in the process of replacing Ukrgazenergo in supplying Rivneazot–to “stop experimenting in the country’s gas sphere.”

“Irresponsible actions of Ukraine’s Cabinet of Ministers and Naftogaz in settling the situation in the gas industry are destabilizing the work of Rivneazot which could potentially lead to severe environmental and humanitarian consequences in the Rivne region [of Ukraine].

“Rivneazot also calls on the judicial organs of Ukraine to give a proper assessment of the actions of Naftogaz and its responsible figures, who by virtue of professional incompetence, negligence or design [intention], provoke a technological catastrophe in one of the largest chemical producers in Ukraine.”

These complaints of decreased pressure were echoed by the Krimsky Titan and Krimstky Soda factories. Not coincidentally, all three enterprises are owned by Dimitry Firtash, the major Ukrainian shareholder of the maligned gas intermediary RosUkrEnergo (RUE). Tymoshenko has long tried to remove RUE from the gas scheme, but for now is targeting RUE’s 50% owned subsidiary, Ukrgazenergo.

The three factories are trying to hold out for the fulfillment of their contracts with Ukrgazenergo, and conflicts over signing new agreements with Naftogaz likely led to this latest row.

Naftogaz responded by calling the accusations of decreased gas pressure “provocation and indirect pressure from the owners of RosUkrEnergo against representatives of Naftogaz on the eve of the next round of talks with Gazprom.”

“The company figures the statement by the press service of Rivneazot concerning the reduction of the volume of gas to the company from April 3rd of this year to be unreasonable, merely political in character and a form of sabotage against the process of transition to direct negotiations with Naftogaz.”

Besides facing resistance from such industrial consumers, Naftogaz will likely encounter other problems as it attempts to insert itself further into the gas supply scheme. Not the least of these is actually signing the new agreement with Russia, something that hopefully will be completed within the next week.

But also key will be resolving the debt situation, as becoming a major gas supplier requires significant credit–a characteristic not likely for a company flirting with default.

Note: There were rumors that Naftogaz (50% shareholders of Ukrgazenergo) would press Gazprom (25% ownership) into voting to liquidate Ukrgazenergo completely and legally at the company’s April 1st shareholders’ meeting. However, the meeting was not recognized due to a lack of a quorum. The next meeting apparently isn’t likely until October.

I’m still waiting for word on the results of the latest attempted Ukrtatnafta shareholders’ meeting. (Though here’s an amusing rundown of the attempted meeting in mid-March on the Kremenchug premises, replete with unmarked private security guards, buses full of thugs and a fire drill.)

The latest Dneproenergo and Kievenergo shareholders’ meetings also faced problems, apparently due to the absence of the companies’ registers, which are under the control of Privat-affiliated Ukrneftegaz. I hope to post on these issues–as well as more on the spy allegations at TNK-BP–as more info comes out.

TNK-BP spy arrest allegedly connected to Ukraine’s gas negotiations

Recent espionage intrigue may relate more to Russia-Ukraine relations than already-strained asdf - From

Last month two Russian brothers, Ilya and Alexander Zaslavsky, were arrested and charged with industrial espionage, allegedly passing on strategic energy-sector secrets to a foreign entity.

Ilya worked for TNK-BP, whose Moscow offices were raided in connection to the charges. Alexander was a leading member of the British Councils alumni club in Moscow. Both had attended Oxford and hold dual US-Russian citizenship.

BP’s representation in Russia was simultaneously hit with alleged immigration violations forcing the company to suspend about 150 employees.

These actions come in the midst of TNK-BP and Gazprom finalizing a deal that would cede control over the giant Kovykta gas field to Gazprom, the end result of months of pressure on the project being headed by the joint Russian-British venture.

The combination of these circumstances led many observers to assert that the Kremlin has begun to crack down on TNK-BP, particularly the company’s foreign representation. Rumors of TNK-BP’s eventual take-over by the state-owned firms Rosneft (unlikely) or Gazprom (more likely) have been spinning for at least a year, though they have usually concentrated on the Russian TNK side of the company selling out. The new pressure on the British side of the venture has been taken as evidence of a further degredation of Russia’s oil and gas investment climate for foreigners.

The moves against BP also contribute the current upswing of tensions between England and Russia, in particular stemming from the unresolved poisoning of Aleksandr Litvinenko.

However, a newspaper article published last week suggests that the arrests of the two brothers is unrelated to British-Russian intrigue. Instead, the espionage allegations are being connected to the recent negotiations between Gazprom and Ukraine over the supply of natural gas.

According to the Russian paper Tvoy Den (Your Day), which was quoting information from sources within Russia’s special forces, “the Zaslavsky brothers were arrested for attempting to sell a secret supplement to the Energy Strategy of Russia through 2020, in which the development plan of Gazprom was detailed.”

The information was passed to Ukrainian hands right before gas negotiations during Yushchenko’s visit to Moscow on February 12th.

During the talks, the Russian negotiating side was surprised at some of the confidential information that the Ukrainians were using in their bargaining. As a result, suspicion of a mole arose and led to the investigation that fingered the Zaslavsky brothers.

In the meantime, the insider information has proven beneficial to the Ukrainian negotiating stance:

According to TD’s source, it was the possession of Gazprom’s plans that allowed the Ukrainian PM Yulia Tymoshenko to puff up the gas scandal with Russia and for some time successfully boycott the agreement of the Russian and Ukrainian presidents on the fulfillment of Ukrainian debts and terms of the delivery and transit of Russian gas.

This assertion has led to headlines the like of which proclaim that “Tymoshenko was victorious over Gazprom thanks to spies from TNK-BP.” I have yet to see any English-language coverage, though.

There are more than a few issues raised by Tvoy Den’s article which I will delve into later — I just wanted to get this info out there for now.

Privat’s Kolomoisky on Dniproenergo

Privat's Igor Kolomoisky explains his thinking on Dniproenergo - From Last week Ukraine’s 3rd richest man, Igor Kolomoisky, gave a candid interview to the independent online newspaper Ukrayinska Pravda. Kolomoisky is a key owner of the powerful conglomerate Privat Group and has a worth of $4.76 billion according to Focus magazine.

He has a past of providing interesting interviews, and this latest is no exception. Most of the news on the interview centered on Kolomoisky’s surprising assertion that he is interested in purchasing the 50% stake of RosUkrEnergo of Dmitry Firtash and Ivan Fursin. However, he also talked about the conflict surrounding Dniproenergo, where he and rival magnate Rinat Akhmetov are vying for control over the major power generating company.

(Note: A Youtube video of the tussle between private security forces and the Party of Regions deputies that I described in my post has been uploaded, as well as a version remixed with a saloon brawl scene from a Russian western that highlights the “colorful” language used by the politicians.)

Since Ukrayinska Pravda’s English section hasn’t been updated in about 4 months, I decided to roughly translate some of his interview regarding the Dniproenergo situation:

– Who for you is better, [former] Prime Minister [Viktor] Yanukovich or [current] Prime Minister [Yulia] Tymoshenko?

Still Tymoshenko.

– Why?

Because under PM Tymoshenko I don’t know of a case when to a company such as Dniproenergo, they took it, diluted its shares, seized it, maybe even legally. The government had 76% of the shares, and suddenly it’s 51%.

I know that all this occurred under Yanukovich. This happened to many other things in 2004 [when Yanukovich was PM]. For example, Krivorozhstal [steel factory], and also Ukrrudprom and the Nikopolsky ferroalloy plant [NZF].

We should all be aware that Yanukovich and company are an established, well-structured, cohesive and cynical political-industrial corporation, which is convinced that its interests are above the interests of the country and the people living in this country.

For it, power is the goal and the means, and they won’t stop at anything on the way towards power and the holding of that power. Ukraine may collapse, but [Yanukovich’s] Party of Regions will remain.

Tymoshenko [as PM] — that’s a different, and not less difficult situation. She’s the classic “black widow” in politics. She is a loner and power to her represents an absolute value, but ideologically she’s an evident trotskyist. The reason for this sits within her, and she herself can’t realize this. As an unsuccessful oligarch, she hates any capital, and especially major capital. And this combination of trotskyism and a ruined business career in addition to vindictiveness gives her an explosive mixture.

A weak hope for the positive gives her internal solitude — around her there still has yet to form a stable company with shared interests.

– Today’s critique of Tymoshenko, you are dodging [лукавите], because earlier you succeeded at finding with her a common tongue. More so, in many ways it was because of you that she was dismissed in 2005 — Tymoshenko was charged with lobbying for your interests. Do you have any remorse?

I can’t say that the removal of Tymoshenko happened because of me. That means that I don’t have any pangs of conscience. Rather, Tymoshenko was dismissed because of her wishes to remove personal accounts of [Ukraine’s 2nd richest man Viktor] Pinchuk — immediately, today and irrevocably. And in that moment our interests coincided.

– But at that time in the issue of Akhmetov being selected for Dniproenergo, you openly helped Tymoshenko…

We didn’t help her, we helped our selves. The thing is, the history with NZF, with Kirovozhstal, wasn’t a cold shower for anyone. It didn’t become one! Tell me, what’s the goal to fight for NZF, if in 2005 no one learned anything?

It was shown to the whole country that when they pinched Kirvorozhstal and then it got taken away from them, that it’s just bad luck, an unfortunate circumstance. [Tymoshenko succeeded in re-privatizing Kirvorozhstal at an open auction, netting billions more than when it was sold on the cheap to Pinchuk.] But ten different objects didn’t get taken away and now its possible to boldly continue to steal further. The actions towards Dniproenergo are an advertised method — at first you can pilfer, and then bargain about how much to give in order to let it remain with you!

Why are you trying to limit [deprive] Akhmetov’s right to manage Dneproenergo due to his 44% holding if you yourself manage [Ukraine’s largest oil company] Ukrnafta based on your 42% ownership?

I’m not depriving his rights to manage, even if he had 1%. But what of the shares of the government that appeared to be his? Akhmetov didn’t have 44%. If you manage, then please, do your managing, let you pay wages, bonuses, but that doesn’t mean that they should give you the shares as a gift.

– Maybe you’re jealous of Akhmetov, that he was swifter and able to reach an agreement with the officials more effectively that you and get control over Dniproenergo?

I am very respectful towards Akhmetov, especially when it comes to his swiftness [проворство – agility, nimbleness]. He is a very swift guy. (laughs)
– What are you fighting for in the Dniproenergo conflict?

We’ll start with the fact that Dniproenergo hasn’t accounted for its debts to Privat. We have a small shareholding, but it’s significant enough to not prevent us from saying that we’re a major shareholder. [The Privat-affiliated Business Invest company owns approximately 0.0065% in Dniproenergo.]

We never had pretensions to manage the company. But I don’t like how it was done — to use administrative resources, in that Yanukovich was PM and all privatization issues could be decided within three or four rooms, just to transfer one to another the loan slips, sign everything, and transfer shares from the state’s pocket to private interests. That’s what I don’t like.

– So you’re fighting for justice [справедливость]? [Just like Superman, yeah?]

On the one hand, for justice, and on the other — for my interests.

– And what’s more important?

I can say that at first, justice, and then my interests, but they won’t believe me and will say that first off my interests, and then justice. But actually here my personal interests and the fight for justice coincided.

My interests included the following: I don’t want them to deprive me, Privat Group, or any other company in Ukraine — except [Akhmetov’s] SCM –the possibility to participate in what we consider for us necessary

I am for everyone having equal opportunities to come and participate in a competition [privatization tender]. But not by one purchaser, as it was with Kivorozhstal or for NZF.

– How much money have you already spent on the Dniproenergo conflict?

Believe me, the budget is unlimited. (grins)

– If they had offered you, would you have bought the shares in Dniproenergo?

I don’t know. The company is very rich, looking at it in perspective. But let’s look at it from the economic point of view. The debts of Dniproenergo were about one billion gryvna, that is $200 million. And how much does Dniproenergo cost? Not less than $3 billion.

Dneproenergo went into bankruptcy because it didn’t account for the $200 million dollars. But that isn’t a critical sum, not one that needs to elicit new shares, the cause of [Akhmetov’s] 44%. Who conducted an estimation of the company? How much were the shares valued at? How did it happen, that for the settling of $200 million, 44% was given away? As I figure it, 44% of $3 billion is $1.2 billion. So where did that billion dollars disappear to on the way, and who ended up obtaining it?

– Who do you think?

Whoever today owns those shares.

– If tomorrow they redo the sale of Dneproenergo, would you participate in the auction?

I’d have to look at who else is going to participate. If it might fall into someone else’s hands, besides those of Rinat Akhmetov, and so forth. For us that’s important, because we need transparent terms for the formation of the price.

In general, we don’t consider Dniproenergo as an object of intense interest for us. But we’re going to think about it.