Privat seizes Dniproblenergo

Figures connected to Ukraine’s powerful financial-industrial group Privat seized the offices of electricity distributor Dniproblenergo on Friday, in a move reminiscent of previous Privat-led corporate raids against the downstream oil company Ukrtatnafta and the power generator Dniproenergo.

The Dnipropetrovsk-based Dniproblenergo (the “obl” in the middle comes from oblast, meaning “regional”) is Ukraine’s largest power distributor, providing electricity to about 24 thousand enterprises — around 27% of Ukraine’s consumers.  The state-owned Electricity Company of Ukraine (EKU) controls 75% of the firm, with the Cyprus-based Larva Investments Ltd (a part of the Energy Standard group) owning 15.9% and the remaining 9.1% in the hands of minority shareholders.  This last category includes 3 shares owned by the Privat-connected company Business Invest.

Andrey Martinyuk, the director of Dniproblenergo from 2005-2006, was elected to return as head of the company after board changes made at an April 30th shareholders’ meeting attended by EKU and Privat and held at Dnepropetrovsk’s Palace of Culture. The government’s securities and exchange commission declared the meeting invalid, but Martinyuk continued to assert his legitimacy to the post.

At 8:00 AM on Friday, a few dozen guards from the Privat-controlled private security firm B.O.G. (an acronym for “Security. Protection. Guaranteed.” spelling the Russian word for God) broke into Dniproblenergo’s offices.  According to Kommersant’s account:

Plowing through the gates [to the office], they neutralized [Dniproblenergo’s on-site] security, broke through doors and forcefully ejected the company’s general director Edward Sokolovskiy from the building. Upon arriving on the scene of the altercation, the police were presented with a July 25th ruling from the Zhovtneviy district court of Dnipropetrovsk [declaring] the naming of Andey Martinyuk to the post of general director as legal.

Dniproblenergo’s chief accountant apparently escaped from the raid, managing to take away with her the firm’s official seal.  (Stamps are a big deal for organizations in Ukraine.)  Despite this, Martinyuk is proceeding as if under complete control of the company.

EKU, whose president is the former financial director of the Privat-controlled oil company Ukrnafta, supports the move, citing poor financial performance as the impetus for the change in management.  Martinyuk, the state electricity company’s choice for a replacement, had been the director of EKU’s distribution department.  The Fuel and Energy Ministry is also on-board with the seizure.

The ousted Sokolovskiy, who is connected to Rinat Akhmetov’s DTEK, accuses Privat and EKU of collaborating in an unlawful attempt to replace him.  He denies financial problems, saying that the raid “could be connected to the fact that in 2007, the company increased its profits by 7.5 times — to UAH 86.8 million [$18 million].”  This figure does not match other reports claiming that the profits for 2007 stood at UAH 28.3 ($5.9 million).

The press office of Alexander Turchinov, Yulia Tymoshenko’s first deputy prime minister, announced that the seizure would be examined by a government commission this week.  A statement circulated by his office said that “We will make efforts to prevent raiders attacks by the side of the Privat group.”

The same security firm was used in the October 2007 seizure of the Kremenchug offices of Ukrtatnafta, where once again a former head of the company was reappointed under the guise of saving the firm from financial ruin.

In March 2008, B.O.G. led an attack at Dniproenergo but the raid was expected and rebuffed under the presence of the press.  The fate of the electricity generator remains in limbo, as Privat, Rinat Akhmetov, Tymoshenko and President Yushchenko all have interests in the matter.

Kommersant ends its article by listing a couple of other sites that may fall victim to Privat-led seizures, including the Crimean Generator Systems, Luganskteplovozu and the Dnipropetrovsk (sunflower seed) oil extraction factory TM Oleina.

As the Ekonomicheskie Izvestia article sums up,

Dneproblenergo, together with Dneproenergo and a range of other energy-providing companies, is one of the objects of conflict in the protracted battle [conflict] between the current leadership of the Fuel and Energy Ministry on the one hand and, on the other, the management of the energy companies that was appointed during the period of [former PM] Viktor Yanukovich’s government.

The tactics in this battle include moves such as these dramatic corporate raids, gerrymandered shareholders’ meetings, control over the physical shareholder register, competing judicial decisions and proxy confrontations in the political spectrum.

Of course, while they may make for interesting reading, such events are not very helpful for Ukraine’s business world…

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

Yulia [Tymoshenko], don’t betray! Dniproenergo for the people! The fate of the electricity producer is still being fought over.

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: Returning Dniproenergo to the people” “Ukrainian Breakthrough” was the name of Tymoshenko’s election campaign policy proposals.

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 in Ukraine’s gas supply scheme.

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.

“Tymoshenko, give the criminals in Naftogaz a slap on the wrist!” The factories have refused to sign new contracts with Naftogaz once Ukrgazenergo was removed from the scheme.

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!” Most protesters appeared to be from the Firtash-owned factory Rivneazot.

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 let Rivne be destroyed!” Rain pushed out most of the protesters, though the tents still remain.

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.

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 dniproenergo.ua

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.

Privat’s Kolomoisky on Dniproenergo

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.

Tymoshenko moves against Ukrtatnafta

Tymoshenko and Naftogaz are reaching for a score with Ukrtatnafta – From sportsline.com / Getty

Even as the government of Ukrainian Prime Minister Yulia Tymoshenko is working to shake up the country’s electricity sphere, she is also attempting to reassert control over the country’s largest oil refinery. However, this move is deepening a rift between her and the financial group Privat, a relationship she is depending on for support in her electricity moves.

A March 18th ruling by Ukraine’s Supreme Court nullified a series of lower court decisions concerning the status of an 18% piece of the downstream oil company Ukrtatnafta. Dispute over the ownership of these shares erupted into a forceful seizure of the company’s Kremenchug refinery in October 2007.

Tatarstan believes the 18% should be under its control, which would give it a majority. Lower court decisions have supported this interpretation.

The latest Supreme Court ruling, however, annulled Tatarstan’s claim to the shares, putting them back into play. Tymoshenko seized the opportunity to assert that the shares are rightfully under Ukrainian government control (likely by Naftogaz), giving her side a majority stake. She announced the government’s plans to insert new leadership, replacing the management put in place by the seizure alleged to have been orchestrated by Privat.

Korsan, a Privat-affiliated company that owns just over 1% of Ukrtatnafta, joined Tatarstan in objecting to the ruling and the moves by Tymoshenko. This puts Privat and Tatarstan into an uneasy partnership with the aim of prolonging the status quo at Ukrtatnafta.

Tatarstan had earlier halted crude shipments to the refinery in protest of the seizure, and recently opened an international arbitration case over the raid. Tatneft, Tatarstan’s government-owned oil firm and a partner in Ukrtatnafta, alleges that it never received payment for crude in the refinery at the time of the seizure and is now seeking hundreds of millions of dollars.

Naftogaz had earlier this month tried to call an Ukrtatnafta shareholders meeting with the aim of replacing the company’s leadership. Ukrtatnafta contested the legality of the proposed meeting, however, and it did not take place.

A further meeting attempt by Naftogaz on March 14th at Kremenchug was supported Ukrtatnafta’s shareholders register–in the hands of the Privat-controlled Ukrneftegaz–showing the state energy firm with a 62% holding in the company. Naftogaz and Tymoshenko assert that the meeting was successfully opened on company property, with proceedings immediately transfered to a new meeting to be held on March 18th at Naftogaz’s premises in Kyiv. However, the legality of this meeting was disputed by the regional shareholders and securities government commission.

Nonetheless, Naftogaz proceeded as a legitimate meeting had taken place. The March 18th meeting was further delayed to March 28th (tomorrow), likely giving the government time to secure a favorable ruling from the Supreme Court on the disputed shares. With that decision in hand, it appears poised to attempt to insert its own management team.

Tymoshenko allegedly discussed the fate of Ukrtatnafta with Putin during her visit to Moscow last month. She also apparently recently held a closed-door meeting with President Viktor Yushchenko to discuss the situation, possibly to clear her strategy for resolving the conflict with him. The Supreme Court ruling may be an attempt to insert a semblance of the rule of law into the dispute, giving her enough justification to proceed with her version of a resolution.

Perhaps she is aiming for a compromise: ceding control of the disputed shares to Ukraine in exchange for removing Privat–the alleged instigators of the corporate raid–from the picture. If this is the case, expect a decrease in the protests lodged by Tatarstan, especially if they receive a favorable ruling on the arbitration case.

(Tatneft has learned to survive without its direct oil shipments to Kremenchug, instead boosting its Novorossiysk deliveries and exports to central Europe via the Druzhba pipeline. It is also increasing its own local refinery production. Given this mixed output, Tatarstan may be willing to simply subsist on earnings from its current Ukrtatnafta share and not push for a further development.)

However, the effect of these moves with Ukrtatnafta may lead to consequences in Ukraine’s electricity sphere because there is an overlap of key players in both dramas.

As I wrote on Tuesday, Privat and the Electricity Company of Ukraine (EKU) have partnered up in an attempt to change the leadership of the power generating company Dniproenergo. Tymoshenko’s privatization plan for the firm–and three other major generators–relies on the same interpretation of the company’s disputed shareholding used by the attempted raiders.

It is unclear exactly how Ukrneftegaz, the shareholder registrar for both Dniproenergo and Ukrtatnafta, will behave as these conflicts deepen. Privat and Naftogaz already have a strained relationship over Ukrnafta, the majority state-owned oil company effectively controlled by Privat due to its 42% stake. The outcome of these disputes will go a long way in predicting how their future relationship will turn out.

I’ll try to follow tomorrow’s meeting and update accordingly.

—–

Note: Igor Kolomoisky, a key owner of Privat, recently suggested (English) he was interested in buying out the interests of both Dmitry Firtash and Ivan Fursin from the maligned gas intermediary RosUkrEnergo. Such a move would add a further nuanced wrinkle to Privat’s relationship to the Ukrainian government.

Update (3/28/08): A Gazprom source told Kommersant that Kolomoisky’s overtures toward RUE are “childish and not serious.”  Konstantin Chuychenko, a member of Gazprom’s board and an executive at RUE pointed out that Gazprom has a right of first refusal should Firtash and Fursin decide sell their stakes.  The source said that in this event, Gazprom would go ahead and buy the shares. However, Kolomoisky maneuvered past a similar clause in picking up a significant stake in the 1+1 TV station through a court case decided last year, suggesting he has experience in this type of operation.

Privat-led seizure of Dniproenergo rebuffed

Privat’s grab at Dniproenergo was rejected last week. Still waiting for officials to call a foul… Image from scout.com / AP, in honor of the NCAA basketball tournament. Go Badgers!

On Friday, two private security firms (and a handful of Party of Regions deputies) tussled in front of the Zaporizhye offices of Dniproenergo in an apparent attempt by Privat and the state-owned Energy Company of Ukraine (EKU) to take control of the regional electricity firm. The attempted seizure was rebuffed, but a secretive shareholders’ meeting of disputed legality was held “in close proximity” later in the day in another effort to appoint Privat-affiliated figures to the company’s board.

The government’s shareholder regulation commission refused to support the legality of this meeting and the management appointed by the currently-accepted ownership–50%+1 owned by EKU, 44% by Rinat Akhmetov’s Donbass Fuel and Energy Company (DTEK)–will remain in place. However, another shareholders’ meeting scheduled for March 27th promises to deliver more intrigue.

• Dniproenergo is one of Ukraine’s largest electricity generating companies, with its three thermal power plants combining for a capacity of about 8 gigawatts. In 2007 the company reported a profit of about $24 million on over $765 million in revenue. Controversy over ownership of the firm has arisen since an August 2007 supplementary stock issue. The sale, which was approved by the outgoing Viktor Yanukovich government, dropped EKU’s share from 76% to 50%+1 and raised DTEK’s stake by 26% to about 44%–above the 40% threshold needed to block company decisions. DTEK allegedly paid about $10 million for the shares and also agreed to assume around $190 million in Dniproenergo’s debt as well as to make future infrastructure investments.DTEK, an energy holding company composed of coal and electricity assets, reported profits of over $190 million last year. It is owned by Rinat Akhmetov (via his massive holding company System Capital Management), who is a deputy in Yanukovich’s political party as well as Ukraine’s richest citizen.

“Stop the rePRIVATization of Dniproenergo” advertisement in Kyiv. The racist undertones are a bit disturbing, even if unintended.

Both EKU and Privat–which, via its subsidiary Business Invest, owns 0.0065% in Dniproenergo–have contested the controversial sale. A court case spearheaded by Privat that challenges the stock issue is currently being considered by Ukraine’s Supreme Court after a lower court ruled in favor of DTEK.

While EKU is government-owned, it is seen to be an ally of Privat, particularly in this fight. EKU’s current president is the former financial director of Ukrnafta, an oil company essentially controlled by Privat. Also, neither EKU nor Privat is interested in Akhmetov being in control of Dniproenergo. Ukraine’s current Prime Minister, Yulia Tymoshenko, sharply criticized the stock sale during her campaigning last fall, alleging that Akhmetov used his political connections to increase his share of Dniproenergo to a bargain price. Privat is apparently interested in obtaining the potentially lucrative asset itself. A privatization of Dniproenergo–along with three other regional power generators–has been announced, but the terms and viability of such a sale remain vague. (Update: Comments from Tymoshenko on privatization plans in English.)

A “Government, return Dniproenergo to your country!” advertisement on the streets of Kyiv. Apparently, Akhmetov taking control over the company is okay, but Privat taking control is treason.

Tensions had been growing in advance of a shareholders meeting that was scheduled for last Friday, March 21st. Competing propaganda posters began appearing in the streets of Kyiv last week. On Thursday, Ukraine’s Fuel and Energy Minister announced the government’s intent to change Dniproenergo’s leadership at the next day’s meeting.

Also on Thursday, Vladislav Lukyanov, a fellow deputy of Akhmetov and Yanukovich in the Party of Regions (PoR), warned there could be an attempted forceful seizure of Dniproenrgo’s office. In expectation of trouble, Dniproenergo invited members of the press to its office on Friday. Also present were five PoR representatives, including Lukyanov and Elbrus Tedeyev, an Olympic gold medal winner in freestyle wrestling.

An audience was therefore on hand to document the resulting physical confrontation.

As retold by Kommersant, early Friday morning about thirty camouflaged men from the Dnipropetrovsk private security firm “Security. Protection. Guaranteed.” (whose Russian initials, БОГ, spell out “God”) stormed Dniproenergo’s offices and clashed with the company’s own security team as well as the PoR deputies. (The PoR’s experience in obstructing the work of Ukraine’s Verkhovna Rada by blockading the rostrum and dais must have come in handy.)

Privat is based in Dnipropetrovsk, and the same security firm was earlier used in seizures of a Kremenchug steal mill and Ukrtatnafta’s oil refinery.

However, the raiders could not gain access to the building and retreated in their minibuses after Dniproenergo called in guards from the prestigious security firm Berkut (Golden Eagle). Things then quieted down giving the defenders time to lick their wounds–one deputy had his coat torn and others came away with bruises.

By 11 AM, the State Commission on Securities and the Stock Market (GKTsBFR) acknowledged that no legally valid shareholders’ meeting could have taken place, as regulations called for any meeting to occur on the company premises between 8 and 10 AM.

However, this didn’t stop EKU and Privat from attempting to convene a shareholders meeting “in close proximity to [Dniproenergo’s] office,” according to the head of EKU’s corporate law department, Alexander Maliy. Justification for the meeting centered on the refusal to recognize the result of the supplementary stock issue, meaning that EKU still owns over 75% of the company giving it the right to make unilateral management decisions.

This interpretation is allegedly supported by the figures in Dniproenergo’s shareholder register, which is controlled by the controversial financial firm Ukrneftegaz. Ukrneftegaz, in charge of keeping the registers for energy companies with significant government ownership, is owned by Privat. The same firm is implicated in the ownership dispute still raging over Ukrtatnafta (expect an update from me soon).

At the secretive shareholders meeting, the EKU “elected” a new board of observers for Dniproenergo that is full of Privat-affiliated figures. Lukyanov dismissed the results of the meeting, saying that “after the storming was unsuccessful, Privat decided to place its leadership into the firm by a different manner.”

Dniproenergo also refuses to accept the result of this meeting, pointing to a court ruling annulling the meeting as well as various procedural violations. “We have nothing to disprove,” says Dniproenergo board member, Dimitry Tevelev. “An illegitimate decision cannot be implemented.”

Another shareholders meeting is scheduled for March 27th. The other major state-controlled power generating companies also have shareholders meetings scheduled in the near future–Kievenergo on March 28th, Zapadenergo on April 2nd, Tsenterenergo on April 3rd, Donbassenergo on April 15th, and Krimenergo on April 22rd. Management changes are on the agenda for all of them.

Some analysts are predicting that the physical confrontation with Dniproenergo is the first step of a coordinated effort between Privat (which controls the books) and EKU (which has the votes) at remaking the leadership structure of Ukraine’s power generators. We’ll see if the next steps are as action-packed as the first one was.

Update (3/25/08): Protesters gathered outside the Fuel and Energy Ministry in Kyiv holding anti-Privat signs. They are the usual subjects: bored-looking students and cranky pensioners willing to hold a sign for a little money. I asked them what they thought of the conflict, but didn’t get much in the way of a response besides a general belief that Akhmetov “is right.” Here’s a couple pictures from the “rally.”

“Dniproenergo for the people, not for Privat!”

“Take care of state–not Privat–interests!”

“Dniproenergo in the hands of Privat = energy crisis in Ukraine!”

Privat making moves in Ukraine’s oil sphere

Note: I started writing this on Monday but my computer crashed on Tuesday and I have been struggling to get it working again since then. I’ll follow up this post with one covering the further developments (including the reappearance of some figures from the past — Igor Makarov and Itera along with scandal-ridden Igor Bakai) in the on-going gas negotiations.

—-

Much attention is still focused on Ukraine’s evolving “gas war” with Gazprom (Igor Didenko walked out of negotiations over Naftogaz’s debt to UkrGazEnergo, though follow-up meetings showed progress; Yulia Tymoshenko reiterated her pledge to remove middlemen even as her counter-point Raisa Bohatyryovna is in Moscow to pass along Yushchenko’s promise of stability; gangster Semyon Mogilevich’s arrest fueled speculation on imminent shakeups, while Dimitry Firtash once again denied any connection between the two within the gas sphere), despite calls by Naftogaz to de-politicize the ongoing and oft-contentious negotiations.

Honoring Naftogaz’s request (kind of), I’ll turn to some recent developments in Ukraine’s oil sphere.

Late December 2007, Igor Kolomoisky, one of the major owners of the Privat Group, bought a 12.6% stake in British firm JKX Oil & Gas. The deal, valued at over $150 million based on stock price, makes Kolomoisky the second largest shareholder in the company behind only Alexander Zhukov. JKX’s presence in Ukraine is an 80% holding in the country’s largest private oil producer Poltava Petroleum Company (PPC). With production levels of about 800 tons of oil and 1 million cubic meters of natural gas per day, PPC trails only Ukrnafta (50%+1 owned by Naftogaz, 42% owned by Privat) in output for Ukraine.

Following the sale, Kolomoisky’s Privat partner Gennadiy Bogolyubov announced the possibility that the powerful financial group would divest from its 42% holding in Ukrnafta. Besides facing a 25% increase in oil extraction rental rates that severely limits profitability, firms with significant state ownership are also obliged to sell natural gas production to Naftogaz at the fixed rate of $53 per thousand cubic meters–well below market value. This provision, Decree 31 from the previous Yanukovich-led government, already forced out independent producer Cardinal Resources and appears to be pushing Privat into the private sector.

However, some analysts consider Privat’s statements on selling out of Ukrnafta as only a threat, as the group attempts to wrangle a better tax situation within the hydrocarbon sector from a government seen to be sympathetic to Kolomoisky. Indeed, Naftogaz today announced the possibility of raising the price for domestic (non-industrial) consumers at the end of the current heating season, recognizing the detrimental effect the depressed rate has on Ukrainian gas production sphere (which is tasked to supply the regulated market). It is unclear if these moves are related, but reform of the tax and fee structure surrounding Ukrainian hydrocarbon extraction is a key step in boosting domestic production figures, insuring adequate upkeep and attracting foreign investment.

Naftogaz and Privat are also apparently sparring over Ukrnafta’s profit allocations for 2006, with the government calling for 50% of the $480 million net profit to be distributed as dividends. The minority shareholders (including Privat), on the other hand, felt that number was too high and that more should be re-invested into production capabilities. The shareholders were set to vote on the issue in May 2007, but it was tabled until a shareholders meeting last week. However, neither Privat nor state representatives attended the meeting, leading to the absence of a quorum. The new leadership of Naftogaz apparently has to reach an agreement (.doc) on the fate of the profits, and the issue has been pushed back to a later (undetermined) meeting.

Meanwhile, Privat is making moves concerning its refineries, as well. Given Kremenchuk’s supply issues, the two smaller Privat-controlled refineries in Western Ukraine (Galichina and Neftekhimik Prikarpatia) have been forced to shut down production and undergo modernization repairs. Recently, however, the management of the refineries sent a letter to the government asking about the possibility of reversing the Odessa-Brody pipeline and sending Caspian crude north. Some would then be exported into Europe while the two refineries committed to processing 5 million tons per year. Responding to the letter, Fuel and Energy Minister Yuri Prodan instructed Ukrtransnafta to study the possibility of reversing the flow and including the two refineries in planned shipments.

Refining Caspian crude, which is a higher quality than Ukrainian or Russian varieties, would prevent Privat from having to invest in long-delayed upgrades to the Galichina and Neftekhimik Prikarpatia refineries. Newly-enacted government regulations on the quality of diesel fuel for Ukraine would have likely forced the refineries to close for repairs anyway, regardless of the availability of supply. Tapping into Caspian crude, however, would allow them to reopen without the costly improvements.

Ukraine’s President Yushchenko met with his Azeri counterpart Ilham Aliyev in Davos last week to discuss energy issues. A couple days later in a meeting with Prodan, Azerbaijan’s ambassador to Ukraine said they are willing to provide 5 million tons of Azeri crude per year should the pipeline reverse direction. However, there was talk of sending the crude (via the Druzhba pipeline) to a Czech refinery, or even building a new Azeri-sponsored plant within Ukraine.

TNK-BP has been coordinating the shipment of Russian crude southward through the line and managed to increase volumes in 2007 by 160% to 9 million tons for the year. Much of this increase was due to an agreement between Russia’s pipeline operator Transneft and Ukraine’s Ukrtransnafta to lower tariffs on Russian crude so long as the total volume exceeded 9 million tons for the year. However, this provision expired on December 31st and Transneft promptly increased tariff levels by 38 percent. While TNK-BP is working on reaching a similar deal, in all likelihood this year’s volumes will be down significantly due to the less attractive economic situation.

This should open the door for Ukraine to push through its reversal plans, presuming it can get all the players on board. The 5 million tons requested by the Privat-controlled refineries is considered to be overly ambitious for their production capabilities, and was likely meant to try to dissuade the construction of a new refinery (leading to more domestic competition) to handle the crude. While Prodan asked Ukrtansnafta to examine the scenario, it is unclear how strongly he would lobby for Privat’s interests. Privat, while perhaps not playing a central role through its refineries, would be key due to its strong position at the Odessa oil port. Of course, this is even assuming that the government decides (and manages to) actually reverse the pipeline.

In the meantime, despite the closing of its two Western Ukraine refineries, Privat maintains a strong position within Ukraine’s refined products sphere due to its alleged control over Ukrtatnafta and the Kremenchuk refinery. Indeed, the halting of production at Galichina and Neftekhimik Prikarpatia–predicted due to the change in fuel regulations–has been suggested as an impetus for Privat to take control of Kremenchug, thus ensuring a market for its domestically produced crude (via Ukrnafta) and a continued presence in the refined products sphere. While Pavel Ovcharenko ascended to the top of the company pledging to remove shadowy middlemen from Ukrtatnafta’s supply chain and resurrect the firm’s financial status, nearly all of the refinery’s products are apparently sold via Privat-controlled Optima Oil or even Ukrnafta itself.

Ukraine’s vice prime minister Alexander Turchinov has stated that the Cabinet of Ministers will work to resolve the issue for the benefit of all parties (though he is also quoted as saying “for the benefit of Tatneft”), which is at least a welcome change from the silence the conflict had been generating from the government before. There is no word on exactly how this will happen, and Tatneft and Naftogaz (the two major shareholders fighting for control, despite Privat apparently pulling the strings) didn’t respond to my requests for a comment. However, Ukrtatnafta is apparently on a list of firms drawn up by PM Yulia Tymoshenko’s office for privatization (working on confirming this), and the government may attempt to structure any future sale in a manner that would create some form of resolution.

Even as Turchinov stressed the possibility of ending the conflict, though, Yuri Prodan ensured that an underlying source of tension–also involving Privat–will continue. The Privat-controlled financial company Ukrneftegaz is in charge of managing the shareholder registers for energy firms that have significant Ukrainian state ownership–including Ukrtatnafta. Tatneft accused Ukrneftegaz of manipulating the list for Ukraine’s benefit, leading to the eventual management dispute. Ukrneftegaz has also been accused of lobbying for the interests of Privat in energy deals and using its powers to dictate shareholder meetings. Prodan recently defended Ukrneftegaz’s performance, and said the state plans on continuing to use the financial company’s services.

Given these examples, it is clear that Privat–that is, Kolomoisky and Bogolyubov–are major players in Ukraine’s energy sphere, particularly within the oil market. While the rise to power of Industrial Union of Donbass-connected officials within Yulia Tymoshenko’s government may somewhat temper this involvement (IUD is a rival business conglomerate from Donetsk), Privat is still seen to be close to various factions within the ruling coalition. While Privat recently failed at its attempt to block Rinat Akhmetov’s deal with Dneproenergo, most observers are expecting the business group to use its political connections to launch another attempt at halting the transaction and increasing its presence within Ukraine’s energy market.

Kremenchuk expects lowered production through Q1

Ukrtatnafta reported expectations of processing nearly 1 million tons of oil in the first quarter of 2008, about 2/3 of production levels the refinery was running at before direct crude supplies from Tatneft were shut off in October of 2007. The firm plans to buy 510,000 tons of oil on Ukraine’s domestic market and 360,000 of imported oil, presumably from Russia. It will also add 60,000 tons of vacuum gas oil.

The 2007 results for Ukrtatnafta, also announced, had production levels down 10% to 5.6 million tons. The company blames this decline on “lessened supplies of imported oil,” but stresses new gains in the efficiency of the plant’s refining process that helped offset this drop. The company’s release also praised Pavel Ovcharenko’s leadership:

“[He] quickly carried out the restoration of [Ukrtatnafta’s] financial health…break[ing] a chain of unprofitable months. Such rapid movement depended on timely and effective leadership decision, including the cancellation of intermediaries in the sphere of the sale of oil products and a switch to direct contracts with company-owners in the filling-station family and with large industrial enterprises.”

Meanwhile, a source within the company has suggested that Ukrtatnafta’s financial situation — perhaps not as rosy as implied by the press release — could be strengthened by bumping up wholesale prices of gasoline. The retail price (presumably at the pumps of Ukrtatnafta’s expansive gas station network) would remain the same, though. This would squeeze profits out of the filling station division in order to provide the refinery with more cash for oil purchases. However, money seems less a problem than finding a consistant crude supplier.

So far, Tatneft — Ukrtatnafta’s disgruntled minority owner and principal oil supplier — appears to be doing well in limiting supplies of Russian oil following the halting of its own pipeline crude deliveries in response to Ovcharenko’s ascension, which replaced Tatneft-friendly Sergei Glushko. Glushko’s hearings on possible criminal corruption charges are presumably continuing in Kyiv, but I have not been able to get much information regarding them.

While domestic supplies have helped pick up the slack caused by Tatneft’s actions, this has left two smaller Ukrainian refineries without crude to process. These two refineries are linked to the Ukrainian business conglomerate Privat, which allegedly orchastrated Ovcharenko’s leadership move at Ukrtatnafta and is the major player in Ukraine’s oil market. Privat is now looking elsewhere for crude supplies, but has been stymied in picking up Russian crude due to pressure from Tatneft on its fellow Russian producers and oil traders.

Tatneft had earlier threatened Rixo International over its role in providing the Kremenchuk refinery with crude supplies (Tatneft apparently saw Rixo as an easier target to approach than the Putin-connected trader Gunvor). I contacted Rixo today to try to get an update and response from them, but was told everything was “p and c” (private and confidential) and would not even confirm receiving a communication from Tatneft.

Meanwhile, Ukrtatnafta has moved its company representation headquarters in Kyiv, just blocks away from the major national governmental buildings. A fitting metaphor, due to the alleged relationship between the forces behind the recent management shift and Ukraine’s new Yulia Tymoshenko-led government.

Update (1/16/04): The two smaller refineries left without a crude source, Galichina and Neftekhimik Prikarpatia, have sent a letter to Ukraine’s President, Prime Minister, and the head of Naftogaz asking for a decision on the future use of the Odessa-Brody (OB) oil pipeline. The pipeline is currently sending Russian oil south to Odessa, but was instead meant to ship oil tankered into the Black Sea port north, with a future extension bringing the supplies into the heart of Europe or the North Sea. This would alleviate congestion in the Bosphorus while providing a potential non-Russian route for Caspian oil. The two refineries also hope to tap into the flow of Caspian, with expectations of processing at least 5 million tons of crude from the pipeline per year, if it is reversed.

Kazakhstan’s President recently floated the idea of building a canal from the Caspian to the Black seas. Opening this shipping lane — rather than having to rely on pipelines running through the south Caucasus — could potentially ensure more reliable shipments for the OB pipeline. The previous Yanukovich-led government had cited questions about sufficient supply in its decision to direct the flow southward. While the government has allegedly received about $20 million in profits from the current use of the pipeline by TNK-BP, proponents of switching to shipping Caspian oil northwards assert that more money is available. Regardless of the (relatively far-fetched) canal, Ukraine has apparently been assured of greater volumes of pipeline-fed Caspian oil should the government decide on switching the direction of the flow.

Privat, which controls the Galichina and Neftekhimik Prikarpatia refineries, also has a large presence in the Odessa oil port, particularly with the services company Sintez. As such, it may view increased oil tanker shipments into Odessa as a further source of profit, beyond the refining work at its two plants enabled by the flows of Caspian crude.

Tymoshenko’s government begins work in Ukraine as Yanokovich leads rival “shadow cabinet”

Last Tuesday saw Yulia Tymoshenko elected as new Prime Minister of Ukraine after several failed Rada (parliament) votes. Eventually resorting to an individual hand-raising / oral -confirmation voting procedure, however, ensured that she passed with the required majority — barely. Only one vote carried her into the new post, which paved the way for the new Bloc of Yulia Tymoshenko (BYuT) and Our Ukraine – People’s Self Defense (NUNS) coalition government. However, her slim majority has left her with less political capital than her impressive parliamentary election results (gaining over 8 percentage points between elections) would have otherwise suggested.

Recognizing this, the Party of Regions has resolved to occupy its new role as opposition with relish, and has already formed its own “shadow cabinet” in response to the government just formed by Tymoshenko and her allies.

The opposition Minister of Economics Irina Akimova told Ekonomicheskie Izvestia that the Party of Regions sees the oppositional cabinet of ministers as a springboard for criticizing the actions of Yulia Tymoshenko’s government in parliament: “Also, participants in the oppositional cabinet will acquire certain skills, if they don’t already have them, in order to follow the work of this or that ministry. When the power changes, they will come with prepared presentations about what their ministries need to contribute into the strategy of the country.”

Ousted PM Viktor Yanukovich has taken on the role of “shadow” Prime Minister, while former Fuel and Energy Minister Yuri Boyko has reclaimed that role in this Party of Regions-organized endeavor.

His counterpart in the real government — the one that occupies the ministry buildings and official government offices rather than the Zoyarny movie theater — is Yuri Prodan, a NUNS representative with a history in the Fuel and Energy Ministry and a former deputy in the President-controlled National Security and Defense Council (NSDC).

Oleg Dubina, a veteran of the Dnipropetrovsk industrial sector, has been named as the new chairman of Naftogaz. He has already been holding talks with Uzbek representatives about the possibility of arranging direct sales of natural gas from the Central Asian country to Ukraine, which currently relies on RosUkrEnergo (RUE) for its gas import needs. Dubina is connected to the powerful Industrial Union of Donbas (IUD), which has a history of direct sales of Uzbek gas, so this relationship may help establish something on a larger scale. However, Uzbekistan is reportedly seeking a price of $180 per thousand cubic meters from Gazprom, and any counter offer from Naftogaz would have to be higher. Adding in transport costs would put the Ukraine border price closer to $220, higher than the $179.50 agreed upon with RUE.

Naftogaz is facing an increased tax burden for next year — up from 26% to 30% — along with a government regulation freezing the residential consumer price of gas at current levels. The sale price of domestically produced gas, another opportunity for Naftogaz to potentially turn a profit, is expected to remain at the same depressed level as well. While industrial prices are expected to rise 30%, much of the sales to this sector are controlled by UkrGaz-Energo, a joint venture between Naftogaz and RUE, which dilutes any profits coming to the embattled state energy firm.

In another move by the new government within Ukraine’s energy sector, the Ministry of Finance has called for a 25% increase in the rental rates (up to about $400 per ton) applied to domestic oil production next year. This largely affects Ukrnafta (not to be confused the Ukrtatnafta), the majority state-owned oil production company that accounted for about 95% of Ukrainian oil production last year. However, while 50%+1 of the shares are controlled by the government, the Privat Group owns over 40% of the shares, and therefore effectively guides the actions of the company. This ownership structure made the announcement of the tariff increase more surprising, given that Privat is seen to be connected to the current government and supported NUNS in the last election (Igor Palitsa, a former Ukrnafta chairman, is on the NUNS list).

According to NUNS deputy Viktor Topolov, the current price for oil is about $580 per ton, and the cost of extraction is about $175. Adding the $396 proposed tariff negates all but a few dollars in profits, hardly enough for any re-investment or development — and well below the $300 average world profits on a ton of oil. Typical oil production rental prices (in Europe and Russia, for example) are determined as a percentage of world oil prices (usually around 12-15%), which would come out to closer to $100 per ton.

Viktor Pinzenik, a BYuT deputy, is Ukraine’s new finance minister, and this surprising tariff increase (the previous government had assured Ukrnafta it would keep the charge the same) may be an early fissure between the BYuT and NUNS coalition. However, Privat has also spearheaded a court procedure relating to a recent Dniproenergo deal in what appears to be an attempt to gain more control over the regional energy firm. (A key decision was made by the same court that was central in the move that brought about the “management dispute” at the Kremenchuk refinery.) Analysts for this article cite alleged closeness between Privat and Tymoshenko as a possible reason behind this latest move, contradicting the assertions that Privat is now moving closer to the NUNS sphere.

According to the director of the International Institute of Privatization, Property and Investment, Alexander Rybchenko, Privat holds an edge in the unfolding case due to the current political situation:

“The Privat Group once again, as with NZF [nickel and ironworks factory], benefited from the coming to power of Yulia Tymoshenko. Therefore, now the political protection is on the side of the group, but if president Viktor Yushchenko or the new secretary of the NSDC Raisa Bogatyryova [see below] does not change the situation, Privat will have an advantage in the form of government support.”

It is unclear at this point just which factions will emerge more powerful withing the new government, and how exactly major business players will utilize the new structure.

As referenced above, Yushchenko unexpectedly named Raisa Bogatyryova, the second deputy on the rival Party of Regions (POR) parliament list, as secretary of the powerful NSDC on Monday. POR-head Yanukovich has stated that no party member will serve high-level positions in the BYuT -NUNS government and meetings between POR members in the past two days have apparently been contentious regarding whether or not she should accept the offer. As of the evening of the 25th, however, it appears that she accepted the invitation and will become the new NSDC secretary. It remains to be seen whether she will be cut from the POR list now, as she apparently made the decision against the wishes of most high-ranking members.

The announcement also caught off-guard members of the new coalition government, who apparently only learned of the offer through the press. According to Taras Stetskiv, a NUNS deputy:

“At a minimum, we are surprised. Never in the civilized world has the opposition — a political opponent — been given such a key post like the position of secretary of the NSDC.”

Apparently, such a move had been in the works since immediately after Tymoshenko was elected PM, with Boris Kolesnikov being the first POR name suggested. The choice of Bogatyryova, a professor from Donetsk with a background in medicine, apparently only happened on the 24th. This appears to be an attempt by Yushchenko to balance Tymoshenko’s ascent into the top of Ukraine’s government by promoting a key figure in her (and his, not to be forgotten) opposition party. Some POR deputies — before Yanukovich’s statements on remaining strictly in the opposition surfaced — praised the choice as an example of pragmatic bipartisanship. Tymoshenko has diplomatically stated that she will agree to work with all high-level presidential appointees in the government. Bogatyryova’s potential impact will likely affect coordination efforts between the president and parliament, but losing her POR position would alter the relationship.

Meanwhile, Yushchenko is planning a visit to Moscow to meet with Putin in the near future, and the topic of gas negotiations is likely to come up — regardless of what actions Tymoshenko may take in the meantime. The “specter” of Dimitry Medvedev — current Gazprom chairman and favorite to win Russia’s March presidential elections — will likely temper such talks. While Medvedev has been open to the idea of restructuring the gas supply scheme, outspoken Russian political analyst Stanislav Belkovsky suggests that Medvedev will champion for RosUkrEnergo, pointing out that he attended law school with Konstantin Chuychenko, one of RUE’s current executive directors.

Tymoshenko’s government has finished a re-worked 2008 budget that incorporates increases in social spending as well as the newly-finalized $179.50 price for natural gas. The budget must still pass POR approval, and the window for enacting it before Jan. 1st is rapidly closing. Nevertheless, it appears that Tymoshenko is willing to live with the current gas price — or at least, fully prepare for its likely existence — rather than attempt a last-minute negotiating blitz. Not only would this move have cost her political capital even as she is working on getting the budget passed, but it also would have worried gas consumers in Europe who remember the drop in downstream gas pressure caused by the contentious negotiations around January 1st of 2006.

All in all, it has been a busy and interesting start for Ukraine’s new government. Passing the budget will be a key first step, as will establishing the new centers of power and important relationships. With any luck, this government will be productive for Ukraine in general, and not resort to the bickering and deadlocks that have marked some of the country’s recent political incarnations.