Too big not to fail? – Naftogaz

October 7, 2014

Having mentioned the EU 3rd Energy Package several times recently, and the restructuring of Naftogaz Ukraine that would necessarily imply, perhaps a few words are in order regarding Naftogaz Ukraine.

Unbundling the gas transport system from the gas production and the end user network is perhaps one way to restructure Naftogaz.  In doing so, it may eventually come to light as to just how this massively opaque behemoth actually manages to lose so much money every year – and when Naftogaz deficits can run at anywhere between 3.3% – 7% of GDP per annum, questions really do need to be asked about firstly how they are actually accrued, and secondly why successive governments continue to finance a structure that is simply a lead weight upon any annual budget?

The question arises in such extremely difficult economic times for Ukraine, whether simply restructuring this behemoth to meet the requirements of the 3rd Energy Package will be, or should even be considered, sufficient?

So big, cumbersome, opaque and costly is Naftogaz to the nation, it appears to have become too big not to fail if Ukraine is to survive economically in the current circumstances – and as the saying goes, “never waste a good crisis”.

Therefore, is restructuring Naftogaz a better option than making the most of the current crisis, and taking the opportunity to declare Naftogaz bankrupt – and then restructuring the hard assets into entities that would fall neatly within the EU 3rd Energy Package, whether those entities be entirely or partly State controlled, or indeed privitised entirely?

It could, of course, be incredibly messy.  Does anybody actually know who owes what to Naftogaz, or who Naftogaz owes within its opaque internal structures?  How many entities have contracts with Naftogaz?  Dozens?  Hundreds?  Thousands?  Who are they, What are they?

It is perhaps only Naftogaz’s foreign debts that are the easiest to ascertain.  Perhaps it would be necessary to clear all debts to The Kremlin prior to bankrupting Naftogaz, whilst other debts are restructured – for The Kremlin will not take kindly to the demise of Naftogaz due to its own nefarious interests.

For Ukraine bankrupting Naftogaz and in effect starting again within the parameters of the EU 3rd Energy Package, would not only provide much needed transparency within the future successor entities born of Naftogaz, but also allow for better annual budgeting rather than being hit with an unknown percentage of GDP to be thrown down the Naftogaz toilet every year.

Whichever route the new government of Ukraine takes regarding Naftogaz post RADA elections in just over a fortnight, Naftogaz is now so big, opaque, unwieldy and economically unbearable, restructuring is an absolute requirement.  The question presented to any new leadership is therefore whether partial dismantlement or complete obliteration of this behemoth will be the answer they arrive at.  Whether that answer will be the easiest answer, or the best answer, is perhaps a different question.




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