Update on Privat’s role in the Ukrtatnafta affair as Glushko dismissal hearings begin

Hearings on the dismissal of former Ukrtatnafta head Sergei Glushko began yesterday in Kyiv, but I am still working on trying to gain access to them. In the meantime, the Ukrainian news magazine Kommentarii (Comments) ran an article in this week’s edition attempting to shed some light on the recent supplementary oil shipments routed to the refinery. The article alleges that Gennadiy Timchenko, a former KGB colleague of Russian President Vladimir Putin, is connected to the crude shipments, and is doing so in collusion with the Ukrainian firm Privat. From Kommentarii (my translation):

According to Kommentarii’s source, the supply chain of oil to Ukrtatnafta appears as follows: Rosneft — Gunvor — Rixo (a Turkish company, trading in mazut [low quality fuel oil] for thermal power plants). The key element in the chain is the transfer at the Odessa oil harbor of oil into railroad tankers to Kremenchuk for Ukrtatnafta. [see below]

According to Russian experts, the conductor of this operation is none other than the former colleague and friend of President Putin, Gennadiy Timchenko — 50% owner of the Swiss firm Gunvor. Through the firm are sent the majority of exports for Rosneft and Gazprom (its oil exports). As a result of the bankruptcy of Yukos, the assets of this company [Yukos] were obtained by Rosneft, and its exports–by Guvnor.

The article details the connection between Putin and Timchenko as beginning during a shared stint in the KGB’s foreign intelligence division, and reinforced through belonging to the same judo gym in St. Petersburg. Timchenko entered the oil trade in 1988 with the firm Kineks which grew to reach turnover of around $2 billion a couple years later. He later moved on to form Gunvor in 1997 with a Swedish partner Torborn Tornquist. In 2001, the firm moved its headquarters to a swanky banking district in Geneva, and business began to take off.

By 2006, Gunvor was exporting 60 million tons of oil and petroleum products, worth about $30 billion. That figure is expected to jump to $43 billion for 2007. According to Russian press, the growth of Gunvor’s oil trading activities corresponds to Putin’s ascension to power, as the firm was able draw upon its political connections to win beneficial contracts with state energy giants.

The Kommentarii article goes on to identify three possible reasons why the Russian government (via Putin’s links to Timchenko’s Gunvor) would help out Ukratatnafta — or at least, not prevent this assistance — despite harsh condemnations of the corporate raid:

• This is an attempt by the federal government to lower the influence of Tatarstan President Mintimer Shaymievym.
• This represents a desire by Putin to further entrench his agents within Ukraine’s energy sphere; similar to the introduction of Yurii Boyko and Igor Voronin in the RosUkrEnergo scheme, this would allegedly put a key Ukrainian energy asset at the whims of a close Kremlin ally.
• This is the result of cooperation between the Kremlin and the powerful Privat Group (led by Igor Kolomoisky), which has been lobbying for increased control in Ukraine’s oil market.

Here is a translation of the deeper explanation given for the involvement of Privat, which apparently stems from its efforts to entrench its recently-acquired holding Sintez Oil into the transferring and services sector at the Odessa oil port. (I am including the entire section — again, my translation — to try to give a fuller explanation of this theory.)

Implementing deliveries by tanker is practically impossible without interested partners who possess the necessary infrastructure and are interested in the conflict at the Kremenchuk refinery. Privat, whose representatives openly declared the firm’s participation in the conflict, is such a partner for the Kremlin. It shouldn’t be forgotten that this group controls the above-mentioned Odessa oil port.

The possibility of the collection of barter tariff payments (rather than monetary) for the services of port trans-shipment and loading of oil is one of the most attractive sides of the operation of the oil terminal at the port. Sintez Oil, the Cypriot International Petroleum Company [unclear…] and [Sintez’s partner] OAO Eximnefteproduct sell the whole spectrum of transit services: trans-shipment of cisterns [tankers] and their steam cleaning, use of the reservoir park for the loading of tankers, direct transfer of oil, along with services for the cleaning ballast water from the tankers.

The cost of this port service is high, since the market for the supply of large quantities of oil by pipeline and railway to Ukraine is extremely monopolized. It is dominated by two or three players. Control of the port would allow favored investors to enter into this market, escaping the risk of investing into refineries.

Only those that invest money into factories earn money on the import of oil in Ukraine. The circle of such investors is primarily narrow. At the same time, control of the port gives a peculiar free pass into the entrance of this club: who would argue about the importance of transit?

By receiving oil in payment for transit services, the managers of the oil port were able to avoid threats from major players in the market and enter into reprocessing at the Odessa refinery and into Ukrtatnafta, which are connected to the port by pipelines. From recent times, thanks to the new Zhulin-Nadrovnaya bridge, among these clients has appeared the Nadrovnyanskiy refinery of the group Privat.

Thanks to the inclusion of Nadrovornaya into the pipeline network, the firm received the opportunity to take from the Russian exports “natural payment” for the transit not in Odessa itself but, for example, in Brody or Mozyr. In fact, the scheme “transit in place of delivery” allows Privat to economize on the purchase of expensive imported oil.

Earlier, this economy allowed the former co-owners of Sintez Oil, Alexander Zhukov and Andrei Derkach to play a noticeable role in the Ukrainian oil products market. Their attempts to create an oil empire on the basis of control over the deliveries to the Kherson refinery and over the system of sales by Ukrnaftoprodukt came to an end in complete failure. Experts called the causes of the failure the weak connection with the owners of the Kherson and Odessa refineries.

Neither Lukoil nor the Bazhaev brothers from Alians [who controlled the refineries] trusted Zhukov or Derkach. It is unlikely that Privat will repeat the mistakes of its predecessors. After all, in the group [Privat] are two of its own smaller refineries, and not long ago Ukrtatnafta entered the orbit of the firm.

In sum, control over the last [presumably meaning Ukrtatnafta], along with control over the port, would allow Sintez to create a fully vertically integrated oil complex, which includes all technical chains “from the tanker and well to the filling station.” Over such a business stake in the large oil game that is now flaring up between Moscow and Kyiv, the Dnepropetrovsk-based Privat is fully capable of becoming the victor.

Apparently Privat is lobbying the Kremlin to allow these supplemental deliveries in order to cement both the role of Sinitez in the oil services sphere, as well as its newly-acquired influence over Ukrtatnafta. This combination would apparently bump up Privat’s stake in the regional oil market significantly. Where Moscow benefits — besides gaining a business partner (trustworthy or not) — is unclear.

Kommentarii’s source (backed up here) also says that 80,000 tons of crude from Rosneft was scheduled to be shipped from Novorossisk to Odessa aboard the SeaBravery tanker, but the shipment was delayed by last weekend’s storm. At the press time of the magazine (November 15th, or so), the ship had yet to leave port. By this point, it is still unclear if it has left yet. The prevention of further shipments from Novorossisk due to the storm’s aftermath may throw a wrench into Privat’s plans (if, indeed, this is all part of its grand plan), as it would presumably be forced to look beyond its sphere of influence for additional shipments to feed the Kremenchuk refinery. Undoubtedly, however, the group will develop a new scheme…

I’m still working on wrapping my head around these ideas, and am looking into some of the players. If anyone has further insight, feel free to add your own comments or send me an email.

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Russneft’s future in the air

After a Russian arbitration court today upheld the government’s claims of $145 million in back taxes owed by the 300,000 bpd oil firm Russneft, the company’s head, Mikhail Gutseriyev, is said to be in talks to sell to a Kremlin-friendly entity. Gutseriyev denies that he is planning to sell, however, suggesting his company is worth $8-9 billion, more than the $6.5 rumored to be offered by Oleg Deripaska’s investment firm Basic Element. Rosneft has also been suggested as a potential buyer, based on oil major’s recent acquisitions.

Gutseriyev, the former head of Slavneft, went on to create Russneft from a collection of small acquisitions around 5 years ago, made with the help of financing from the Swiss commodities firm Glencore. This winter, Russneft came under pressure from the Kremlin over back taxes owed by the company, culminating in a raid of its Moscow office in May followed by the tax charges.

Some say the accusations stem from Russneft’s association with the foreign firm Glencore. Others suggest that it has more to do with the manner in which Gutseriyev was able to so cheaply acquire the assets, particularly from Slavneft and the embattled Yukos. Indeed, it would seem that the Kremlin’s displeasure would derive more from the spirit of the deals, rather than their actual content, as Russneft remains a relatively small player in the Russian oil scene, accounting for about 3% of the country’s total production. However, Rosneft and Kremlin-controlled firms are inching their way towards 50% control of Russia’s oil sector, so any additions would add to that cause.

A press release by Russneft says that it “did not enter in any negotiations as to the sale of the holding’s shares and does not have any intention to. OAO NK “RussNeft” is not sold.”   It goes on to call the rumors of the impending sale as “a provocative act.”

Rosneft’s deal with Prana ties up a few loose ends

Prana, the mysterious company which won a May 2007 auction for the last remaining assets of Yukos, sold those assets to Rosneft earlier this month, closing out a few loose ends stemming from the unexpected ending of the Yukos saga. Rosneft apparently paid $3.4 billion for the assets, which included Yukos’ former Moscow office building, as well as a series of shell companies rumored to contain billions of dollars in their accounts (whether in debts or liquidity is unknown). This value was unknown to nearly everyone going into the May auction, but the high sale price (about $4 billion, nearly 5 times larger than originally expected) immediately caused interest and closer observation, which I wrote about earlier.

According to the Moscow Times article, Rosneft got the money by selling a 50% stake in its newly-acquired Tomskneft production unit–also bought at auction from Yukos this spring. Rosneft sold the stake to the state-owned Vneshekonombank for $3.4 billion, the exact same amount given to Prana for the last of the Yukos assets.

While this ties up parts of the Yukos saga–particularly symbolically, as Rosneft now literally owns the disintegrated company’s former headquarters–questions remain. Namely, who owns Prana? And why are they willing to part with the assets they bought two months ago for $500 million less than they paid? It still seems like something fishy is going on, and we’ll have to see who exactly is benefiting the most.

The mystery surrounding the end of Yukos

Now that Yukos has “expired,” we are left to ponder exactly what went on during the last auction lot, which was expected to raise only a few hundred million dollars from the sale (likely to Rosneft) of Yukos’ 22-story Moscow office building, but in actuality generated nearly $4 billion from an intense bidding war. From the FT:

…an obscure company bought an auctioned lot, including Yukos’s headquarters building, for almost $4bn (£2bn), in what looked at first glance to be the most expensive property deal in recent history.

The company, Prana, bid nearly five times the starting price of Rbs22bn (£430m) to head off state-controlled Rosneft in 707 rounds of bidding.

Observers were baffled by the price paid for the lot, which, at first glance, included only the office building…and acouple of shell companies.

Prana is, according to wikipedia, a sanscript word for “breath” or some such, used mainly in yoga practices–though some how I doubt that the office will be turned into a new-age workout studio.

It turns out that those “shell companies,” which apparently include trading and sales units, still held active (or recently active) accounts possibly worth a couple billion dollars themselves. The sale had been headlined by the office building (and its associated property–certainly a valuable commodity in Moscow, even if it isn’t right in the center of the city), which was valued at around $300 million. It is not exactly clear if the auctioneers realized the extra worth within the associated companies, or whether they were ignorant along with most every one else–except, apparently Rosneft and the mysterious Parna.

It could very well have been one last attempt at a “F-You” to Yukos by Rosneft, making off with the last of the fallen company’s sales for bargain-basement prices, behind the backs of critical outside observers. Instead, it raised about another $4 billion, pushing the total amount raised from Yukos’ auctions to over $30 billion. Yukos’ stock, long-thought worthless, also rose to 57 cents on news of the surprise sale, before closing at 52 cents (it’s now at 49 cents).

Here is the NYTimes article, Moscow Time’s coverage, and the Google news roundup of the story.

I’ll comment more after I read some of the Russian coverage, but it looks to be that one of the shell companies, “YUKOS-M,” was the main firm’s “purse,” acting as a lending and surplus vehicle. Just how much was left within the “purse,” is still unclear, however.

Update: According to Kommersant, it looks like Prana may have some obscure connections to Gazprom.  Russia’s anti-monopoly agency is threatening to vitiate the auction if the true backers behind Prana aren’t revealed, and this could be a legitimate threat given the precedence, but we’ll see.