Posts Tagged ‘oil and gas’


Naftogaz loses its monopoly (at last) – Ukraine

October 1, 2015

Legally, with effect from 1st October 2015, the opaque, budget burdening behemoth that is Naftogaz Ukrainy loses it monopoly within the Ukrainian gas market – and not before time.

So many are the entries within the blog going back many years calling for the butchering of this monopolistic monstrosity that there are simply too many to link to.  However an entry last year raised the question (again) over the restructuring of Naftogaz Ukrainy vis a vis bankrupting it, and starting again with an entirely new structure that falls squarely within Ukrainian obligations to the EU Third Energy Package.

“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?

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?

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.”

So where to go from here when 1st October marks a very significant legislative date regarding Ukrainian energy?

Theoretically and legislatively the liberalisation of the energy sector has now begun.  No longer will the State be able to control either prices or allocation.  The corruption that accompanied such practices will face difficulties going forward as long as new entrants step forward and regulators prevent cartels.  Certainly the corruption that occurred via arbitrage and the capping of domestic production via pricing look set to face challenges.


Market based prices will lead to energy efficiency rather than the wanton waste that currently exists.  Market based prices rely upon ending subsidies, bad debt write offs and endless recapitilisation to Naftogaz Ukrainy in order to create an open and free market – and not before time.

Naftogaz Ukrainy is Ukraine’s largest vertically integrated state-owned oil and gas producer, whose companies provide for more than 97% of domestic production of oil and gas.  Naftogaz Ukrainy is engaged in mining, oil and gas extraction, transportation and sale of petroleum products through its own network of filling stations.  Some clear and obvious dismemberment presents itself that would serve to fulfill the Ukrainian obligations to the EU’s Third Energy Package.

Firstly there is no alternative to separating the transit companies within Naftogaz Ukrainy from the rest of its subsidiaries.  Thus Ukrtransnefta (oil pipelines) and Ukrtransgaz (gas transit) legislatively and corporately are required to stand alone, no longer subservient nor part of Naftogaz Ukrainy, and legislatively proscribed to allow guaranteed transparent and equal access to their transport systems for all market players.  If the government of Ukraine continues to believe that the transit systems are jewels in the State crown and not to be sold, then it will be necessary to create an independent operator per the Third Energy Package.

Alternatively, the government of Ukraine should privatise these entities (which seems unlikely given the deep-seated belief within the political elite that the transit systems are a matter of national security).

Clearly the petrol stations owned by Naftogaz Ukrainy can and should be sold of – as should the trading subsidiaries of Naftogaz Ukrainy.

Is there any need to have a State gas producer having opened the gas market?  Probably not, so the privatisation of subsidiaries such as Ukrgazvydobuvannia (which would undoubtedly sell for many $ billions in and of itself) would be entirely in line with butchering this State monster.  A similar line is desirable within the oil subsidiaries of the Naftogaz Ukrainy.

However, as yesterday’s entry made clear, selling minority shares in these entities is not enough – in fact it could well be a backward step – “Quite simply, aside from other sovereign governments, or those eilite large companies with close relationships and direct channels within their governments, who is going to buy a minority share in entities that will be at the directional whim of the Ukrainian government of the day?

The answer is only those that can directly influence the Ukrainian government of the day – and that remains the existing oligarchy!

As foreign governments and large foreign corporations are not likely to be excited about buying minority shares ranging from 5% to 46% in Ukrainian State owned companies with the major shareholder (Government of Ukraine) being historically either unpredictable or predatory or both (and there is nothing to suppose that cannot return with any election) it seems likely that only an oligarchy that already influences the government will have any serious interest in buying minority shares in State owned enterprises.

After all, holding minority shares in State owned enterprises is nothing new for the oligarchy – and neither is using their influence within the Verkhovna Rada to insure that their interests overrule the interests of the State majority shareholder.”

At the very least, if the State is intent on retaining shares in any of the severed and dismembered parts of Natfogaz Ukrainy, then the State should hold a (significantly) minority share.

Of course, if Ukraine does not provide the right tax stimuli for producers and effective recourse for suppliers when buyers will not/cannot pay, then a legislative end to the Naftogaz Ukrainy monopoly is not going to create an active and vibrant Ukrainian energy market – de facto the monopoly will continue due to lack of competition.

“On October 1, the Law of Ukraine on the gas market will come into force, and it will radically change the system of coordinates and the gas market itself. Naftogaz Ukrainy will lose its monopoly both for the supplies and the sale of natural gas. In fact, we are building a fully European non-monopolized system of the natural gas market, when the supplier may personally determine to whom and where to sell, and when the buyer may personally decide from whom he wishes to buy” – Prime Minister Yatseniuk.

Let’s hope he is proven to be correct, if it is to be so then there are many necessary privatisation and taxation issues to be addressed to support any new market – together with statute guaranteeing any market entrant use of State retained transport systems.


Subsidising corruption

September 15, 2015

In a recent entry pondering the lack of adult to adult conversation between government and constituency over impending privatisations, the following paragraph appeared:

“Of the 1200 plus State owned companies, the vast majority are badly managed and subsidy dependent. The drain to the Ukrainian budget in subsidies is in $ billions for a nation whose GDP is measured in $ billions. Grim!”

Whilst the issues of subsidies and the privatisation of State assets (or perhaps in most cases more accurately described as State liabilities) are yet to be meaningfully discussed with the public, there appears to be one economic sector that is already in a position where substantial subsidies can be removed.

Of the subsidised sectors of the economy, the font of major league Ukrainian corruption – the energy sector – is a major drain.  A staggering 10% of GDP in 2014 is likely to have gone into the Ukrainian energy sector by way of State subsidies.


As subsidies exist to cover the difference between actual price and market price, that 10% of GDP may as well simply be given to the oligarchy that control the limited access energy market, for the benefits to Ukrainian society of these subsidies are now difficult to quantify.  With the IMF forcing the current government to move energy pricing to more than meet production costs there is surely an economic imperative to cancel all subsidies to the energy sector immediately.  Now.  Instantly.

When the energy sector is the gilded font from which so much economy warping corruption flows, how can any Ukrainian politician claim to be tackling corruption when in effect, the Ukrainian politicians are subsidising corruption to the tune of approximately 10% GDP in the energy sector alone?

Without completely removing subsidies from the energy sector it seems impossible to make any claims to be effectively combating corruption.  Therefore in continuing to subsidise the energy sector it is to continue to subsidise corruption, and thus the Ukrainian State is subsidising the undermining of the rule of law, and thus democracy – notwithstanding the Ukrainian economy.

Let’s be blunt, by immediately saving (approximately) 10% of GDP via the immediate and complete removal of energy subsidies, throwing about 3% of GDP in cash payments to the poorest Ukrainian constituents would be sufficient for them to cope with the rising unsubsidised energy prices and still leave the State with another 6% or 7% to invest in energy efficiency, or energy exploration – or something entirely unrelated to energy.

With the government dutifully fulfilling its agreement with the IMF and complying with its obligations regarding consumer price rises in energy, all subsidies for the energy sector have to end – for with ending those subsidies a significant amount of corruption will also be curtailed.

When the Ukrainian constituency begin to feel the effect of the long announced price rises as the colder months approach, it stands a chance of being shouldered and accepted with more understanding in the absence of all subsidies within the sector, a redistribution of some of those savings to the poorest to cover the costs, and the effective and transparent and well communicated investment of what remains into the development of the nation.

Subsidy removal within the energy sector is therefore perhaps a worthy benchmark when it comes to both energy and economic reform but also in combating corruption.  If nothing else removing subsidies from the corrupt energy trough means there is less to gorge upon for those with access.

We are perhaps left to wonder when there will be a governmental announcement that all subsidies within the energy sector have stopped – permanently and in their entirety.




United Oil Company of Ukraine? No – Back to the drawing board

July 10, 2015

A few days ago, Prime Minister Yatseniuk stated: “The state has an incredible asset of tens of billion U.S. dollars in hands. Ukrtransnafta is the state-run company. The state also has 51% shares of Ukrnafta, and 43% shares of Ukrtatnafta.  

Let’s go back to the idea of setting up a large oil company – the United Oil Company of Ukraine.

We will reduce the volumes of product import, we will enhance the Ukrainian economy, as we will process our own oil at our plant, which is partially owned by the state. And this will allow adjusting the price for oil products within the country and will ease sowing, for example.

We have to think about the next step, the capitalization of the company, investments in this company. We need the appropriate management. And this will be another real reform.”

Disregarding the ever deepening acrimony between the State and Privat Group that is a (large) minority shareholder in these enterprises making any deal somewhat prickly to negotiate, this idea may as well go back to the drawing board for a far more legislative reason.

That reason is the EU Third Energy Package that Ukraine is obliged to observe having become a party to the agreement.

“Among priorities of joint work with the European Commission is the implementation of provisions of the Third Energy Package, joint modernization and management of Ukraine’s gas transport system, and investments in increased production of energy resources inside Ukraine.”Prime Minister Yatseniuk 14th November 2014.

Ukrtransnafta has the monopoly on pumping oil through Ukrainian pipelines – thus incorporating it into a vertical State energy oil monolith is nothing other than contrary to Ukrainian commitments to the Third Energy Package – commitments it has previously been legislating to adhere to.


The policy of unbundled gas monopolies in accordance with the Third Energy Package, yet bundling together a vertical oil monopoly contrary to the Third Energy Package seems somewhat muddled – notwithstanding contrary Prime Minister Yatseniuk’s previous public statements.

So it’s back to the drawing board Prime Minister – or renege upon Ukrainian international commitments.


“The People’s” utilities

March 8, 2015

For those that have been following issues other than the “ceasefire” (which would be better described as a move from “hot” to “warm” warfare, not to mention the increasing internal turf wars between “anti-Kyiv” forces) within the “People’s Republics”/occupied territories in eastern Ukraine, the past fortnight has been somewhat interesting regarding utility supply – electricity and gas in particular.

On 27th February, Luhansk Governor Hennadiy Moskal stated ” “As of today, the self-proclaimed Luhansk People’s Republic has completely disconnected from the Ukrainian power supply.”  Thus Russia was supplying the territory that was not under Kyiv control with electricity thereafter.

Quite who was, or is, to pay for this electricity remains unclear – but the answer to who pays is important.

Around the same time, Russia began to supply gas directly to the regions that are not under Kyiv’s control – but nonetheless expecting Ukraine to pay for the gas delivered there, despite it having no control or any idea about how much was being delivered.

Kyiv promptly stopped gas supply to the occupied regions from Ukraine, claiming damaged infrastructure, and also unambiguously told The Kremlin and Gazprom it would not be paying for any gas directly delivered to The Donbas -because in supplying The Donbas directly, Gazprom was violating the “Winter Contract” mediated by the EU.

This chain of events prompted President Putin to state Kyiv’s actions “smells like genocide” – whilst simultaneously threatening to cut off supply to the entirety of Ukraine – which apparently wouldn’t be genocide, or even remotely smell like it.  Kyiv, Mr Putin and Gazprom insisted, had to pay for the unknown quantities of gas supplied directly to The Donbas regions outside of its control.

That position, however, changed following a meeting in Brussels last week.  “We’ve agreed that the amounts of gas that have been recently supplied by Gazprom to certain regions in Ukraine’s south-east will be now factored out. They will not be taken into account when calculating prepayment for the winter package, according to which gas is currently being supplied” – Russia’s Energy Minister, Aleksandr Novak.

Only the most naive of people believe the war between Russia and Ukraine is being conducted solely on the ground in eastern Ukraine.  It is raging politically, in the media space, diplomatically, and of course, economically – including energy supply.

Why then, has The Kremlin (via Gazprom) suddenly decided not to include gas it directly supplies to the occupied territories in the Ukrainian bill?

Direct supply to Transnistria and then sending the ever accumulating bill to Moldova, was done deliberately to provide yet another enduring bone of contention.  Why turn away from a previously successful tactic that produces long-term problems in Moldova, that could be equally as successful in eastern Ukraine?


The answer, it appears, can be found within far more “switched on” lawyers today, than could be found during the consolidating years of the “Transnistrian” infrastructure.

Indeed, as Professor Alan Riley points out rather clearly, (as law professors from law universities generally do,) there are legally troublesome issues for The Kremlin to be found within the Geneva Convention regarding current events in eastern Ukraine.

“The real danger for Moscow here was that Ukraine was accidentally by Gazprom’s pre-payment claims being given the opportunity to identify Russia as the ‘enemy occupier’ on its territory. Kyiv could have for instance invoked the Geneva Conventions arguing that Russia is refusing to undertake its obligations to the people under occupation. A state party to the Geneva Conventions can seek a Red Cross inquiry into the level of support provided to persons in the occupied territory. Kyiv could also have sought to widen its arbitration hearing proceedings in Stockholm to deal with the inclusion of gas used in occupied territories. This could lead to a ruling that eastern Ukraine was indeed occupied. Thirdly, and most dramatically Ukraine could have sought a vote in the General Assembly of the United Nations to submit a case to the International Court of Justice against the Russian Federation over its failure to protect persons under occupation contrary to the Geneva Convention.

Any such ruling or finding would have been a PR disaster for Russia. It could also have resulted in significant ongoing civil liabilities exposure, both to support the population and to repay Kyiv for any costs Moscow had sought to shift on to it.”

Ergo, a very swift Kremlin U turn, lest all those hundreds of millions of dollars spent on disinformation, misinformation and agitprop in the media space be completely wasted in light of an unfavourable ICJ ruling.

Ukraine now claims to have repaired the infrastructure that prevented gas delivery to the occupied territories, however the “People’s Republics” are publicly insistent that the gas they are receiving is coming directly from Gazprom and not via Kyiv – repaired infrastructure or not.

Thus Russia continues to supply gas (and electricity it seems) for free to the “People’s Republics”, for fear of falling foul of the Geneva Convention and subsequent litigation that would follow.

However, these are harder economic times in Russia, and whilst The Kremlin will not unnecessarily risk gaining the legal status of “enemy occupier”,  for the Kremlin’s domestic audience, supplying the Donbas regions under its de facto control free of charge, is perhaps not the impression it may want to portray at home.

Yesterday brought a statement from Alexander Zakharchenko of the “Donetsk People’s Republic” that the “DPR is actually ready to pay for the Russian gas.” which seems somewhat unlikely considering the condition of the economy (and theft) within the “People’s Republics”.  That notwithstanding the fact The Kremlin wants to keep “the republics” unquestionably within Ukraine, and by accepting any payments from the “People’s Republics” now, rather than the nation of Ukraine, it may also very well create legal issues for The Kremlin that it would (currently) want to avoid – similar to the apparent gas and electricity own goal above.

The humanitarian issues naturally concern the supply of utilities to the people of the region regardless of who supplies them – the legal issues regarding who supplies, picks up, and pays the bill, and under what circumstances, may well set the precedent for a lot of litigation to come.

The problem with hybrid warfare in eastern Ukraine today, is that it is likely to lead to a lot of hybrid lawfare at the ICJ tomorrow.  Who pays for what, or just as importantly, who is not asked or allowed to pay for what, will matter a great deal.


Third Energy Package & Ukraine

March 6, 2015

There are simply far too many historical entries on the blog identifying Ukrainian energy as a major font of corruption from which so many drink – directly and indirectly.  In every such entry over the many years the subject has been raised, albeit ad hoc, each one has called for the butchery of Naftagaz, the epicenter of energy corruption in the nation.

This testimony by Igor Kolomoisky yesterday, himself a beneficiary of nefarious energy deals, mergers, acquisitions – and ultimately corruption – is but the tip of the iceberg.  Indeed the testimony reveals nothing that wasn’t already previously known to those that follow the shenanigans surrounding energy in Ukraine.  It does however, at the very least, partially display the systematic, systemic, long standing, and occasionally complex/occasionally blatant dirty deals and bribery made behind the curtain.

It comes on the same day that the EU again called on Ukraine to make headway toward meeting the legal requirements of the Third Energy Package (legislation that is entirely abhorrent to The Kremlin).  Compliance with this legislation would at the very least require a “restructuring” of Naftogaz, which if not quite the much needed butchery, would certainly go beyond cosmetic surgery.

Ukraine is already a member of the Energy Community Treaty, which theoretically if actually implemented in full and enforced, when multiplied by the requirements of the Third Energy Package, would also put Ukraine in compliance with Chapter 15 of the acquis communautaire regarding “Energy”.

Chapter 15 of the Acquis underlines the EU energy policy objectives including the improvement of competitiveness, security of energy supplies and the protection of the environment. It also consists of rules and policies, notably regarding competition and state aids (including in the coal sector), the internal energy market (opening up of the electricity and gas markets, promotion of renewable energy sources), energy efficiency, nuclear energy and nuclear safety and radiation protection.

There is then the AA/DCFTA between the EU and Ukraine which refers to the above linked ECT, and created a four pillared approach relating to pricing (and dual pricing), transport and transit (per Art 7 of the ECT and Art V of GATT), independent regulators and non-discriminatory exploratory /production rules.

If Ukraine is genuinely to attempt EU membership over the distant horizon, compliance with as many acquis chapters as possible (and near compliance with others) would be wise – albeit a leap above what is required in the DCFTA, even prior to any application.  However, in the case of energy, regardless of any EU aspirations, in order to confront a major source of corruption, meeting DCFTA, Energy Charter, GATT and Third Package commitments is a worthwhile goal in and of itself.

The EU is right to press Ukraine over energy as a top priority.

However, as the (self-serving) testimony of Igor Kolomoisky indicates, it is going to be exceptionally difficult to accept the European energy legislative future, without dealing with the ghosts of Ukrainian Naftogaz energy past.

There are historical issues of illegal/very dodgy privatisations, sales, part privatisations, re-privatisations, outstanding assets and liabilities to numerous actors, the unpicking of some very intricate schemes, and the confronting of some very blatant corruption to deal with.

But where to draw the historical line over issues that have not become statute barred by time, and yet have genuine grievances either by State/Naftogaz against (nefarious) contractor/partner, or (nefarious) contractor/partner against Naftogas/the State?

It is a situation made no simpler when issues like the Naftogaz accounts show that Ukrnafta, in which Mr Kolomoisky holds a large share, is listed as “Unknown manufacturer” with $ billions listed, rather than under its corporate name.

How many other “unknown manufacturers” appear on Naftogaz accounts?  And who owns them (in full or in part)?  Do they owe, or are they owed?  How did the become contractors/partners?  Through fair means (unlikely), or foul (almost certainly)?

It all becomes a little bit Donald Rumsfeld-esque – “There are known knowns (Naftogaz). These are things we know that we know. There are known unknowns (Mr Kilomoisky/Ukrnafta). That is to say, there are things that we know we don’t know. But there are also unknown unknowns (the other “unknown manufacturers” who are systematically paid because they always have been paid, but are otherwise entirely unknown as to ownership or added value). There are things we don’t know we don’t know.”can

Few contracted parties will acquiesce when $ billions are in dispute, and will thus “lobby” (corral the MPs who “owe” them) in parliament, and litigate in court, to stall new any legislation whilst their vested interests remain unsatisfactorily resolved – even if they reluctantly accept that the “European legislative way” cannot be delayed forever.

In short, unless the nefarious history of Naftogaz is confronted and outstanding grievances/”issues” dealt with, it is going to be very tough going to get European harmonising legislation passed.  How this can of worms will be dealt with remains to be seen.

If and when these historical matters are addressed, then begrudgingly, resistance to legislation relating to the Third Energy Package, whilst simultaneously getting to grips with a source of billion $ corruption in Ukraine, may stand a far better chance of becoming law.  Perhaps no small amount of domestic political, and external diplomatic energy, will be well spent finding some creative solutions given the high importance of reforming all things “energy” in Ukraine.


And what of China in Ukraine?

February 25, 2015

Little has been written here about China and its activities in Ukraine for some time.  That is in part due to China doing what it does in its usual quiet and unassuming way – despite the Chinese Consulate in Odessa being by far the largest and best presented of the almost 30 consulates situated in the city.

Over the past few years, aside from China and Ukraine agreeing to conduct bilateral trade in national currencies (up to 30%) annually, China has been steadily investing in Ukraine.  Apart from R&D, space, weapons, fertilizer and chemical production, not to mention and raw materials, Eximbank has also invested $10 billion in Ukrainian agriculture, setting up a permanent working group to identify suitable projects in Ukraine.  An on-going theme since 2011.

China, it appears, is now about to assist Ukraine in breaking its dependency on Russian gas too.

The Ukrainian delegation that has just returned from China has managed to secure a $3.6 billion line of credit from the China Development Bank via the Chinese Ministry of Commerce specifically to do just that.

Upon his return from China, Volodymyr Demchyshyn, Minister of Fuel and Energy of Ukraine  stated “Our delegation has just returned from China, where we had a meeting with the representatives of the Chinese Ministry of Commerce and China Development Bank. The representatives of both organizations confirmed the readiness to open a credit line for our projects.

The projects identified being the modernization of thermal power stations, heating networks and, perhaps, for the construction of coal gasification plant in Odessa.  Whether the proposed coal gasification plant in Odessa will be built the European standards, and whether it will run on coal from the occupied territories of Ukraine, that of Ukraine, that of Chinese owned Ukrainian assets, or perhaps Polish coal, remains to be seen.  Questions for another day.

Whatever the case, there will be no Kremlin reaction to the Beijing decision, unlike the reaction to the Polish announcement to resume gas supplies to Ukraine of 23rd February, which met with the immediate Kremlin response of banning Polish cheese products that very day.

Simply put, The Kremlin is in no way capable of threatening or coercing China to change its decision – despite any assistance to help Ukraine escape from its Russian gas dependency obviously being seen as irksome/somewhat hostile by The Kremlin.  In any Kremlin-China relationship, now or in the future, it is not going to be a marriage of equals.  All the numbers are on the side of the Chinese, as both sides know.

The question, however, is why China has decided to finance and facilitate a further step toward Ukrainian energy independence from Russia?  Ukraine, to be blunt, would have accepted $3.6 billion across an entire range of commodity and/or infrastructure development.  There is a clear political dimension to this Chinese decision over and above “business” and monetary ROCE.  Why invest in/finance a sector that will knowingly irritate The Kremlin more than almost any other?

It is also clear that the Europeans have now got the message regarding such heavy reliance on Russian gas as well.  It seems almost certain that a reduction in – although there is no desire to remove – Russian gas from the energy mix and supply chain will occur over the next decade.  One of the side effects of Kremlin actions in Crimea and eastern Ukraine has been to cause the Europeans to focus upon, and speed up, the planning to reduce dependency upon a Kremlin that clearly sees the EU as a regional adversary.  That adversarial relationship now being realised in numerous European capitals, with thoughts of meaningful partnership duly being shelved under current Kremlin management.  A transactional relationship, with the lacking of goodwill to be anything more, will prevail for many years to come within some major European nations.

All in all, a net gains, directly or indirectly, for China in Ukraine continue to quietly accrue – as does Chinese strength vis a vis Moscow.  Is China, aware of the newly found European momentum to reduce Russian gas imports, viewing the investment in Ukrainian energy independence as mechanism to help force The Kremlin into a very asymmetric relationship with China?

The net winner of the current mess within the European continent will be China – (and quite probably Iran, but that’s another story).


14th January 2015 and the New York Convention 1958

January 10, 2015

Today there is a note in the dairy – It reads “ICA, NYC, $50B, Yukos” – Yes a written diary.  I also like books – printed books.  And quality fountain pens.  And other such antiquities in this modern era.

Anyway, having yesterday mentioned the gargantuan sum of $50 billion proposed by George Soros to throw at Ukraine, its economy and its reforms, today the figure of $50 billion remains relevant for the purposes of this blog, per the diary – but in an entirely different way, and with very little to do with Ukraine directly.

On the 18th July 2014, the International Court of Arbitration at the Hague, in three judgements – here, here and here – awarded damages/compensation from the Russian Federation to those who were formerly involved with the now defunct Yukos, totaling $50 billion.

The Kremlin/Rosneft/Russian Federation – if they can be separated in any meaningful way – naturally had the right to appeal and have all or part of the verdicts set aside.  Despite appeals, as of the time of writing, it has failed to do so and $50 billion remains the total award.

It goes without saying that it is unlikely that the Kremlin will pay the $50 billion, even in part – particularly as acknowledging wrongs done to – and compensating to the tune of $ billions – Mikhail Khodorkovsky will simply not be entertained.  Even more so as Mr Khodorkovsky is busily attempting to build up some institutional competence around him preparation – it appears – to return to Russia and save it when the fall of President Putin eventually arrives.

That Mr Khodorkovsky, just as fellow oppositionist Mr Navalny, are not what Russia needs to replace Mr Putin, for now is not the point.  Suffice to say replacing one personality cult with another is hardly likely to be helpful if a liberal democracy is the desired outcome.  If another Tsar with a slightly different philosophy is the desired outcome, then Messrs Khodorkovsky or Navalny indeed fit the profile.  Regardless, in the absence of any genuine liberal Kremlin opposition, these two men, together with Boris Nemtsov and Sergei Udaltsov are about all there really is.  (What ever happened to Udaltsov? – Very quiet of late.)

Whatever the case, it is extremely unlikely that The Kremlin will pay, which brings us to the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958” – or The New York Convention as it is better known.

As a result of its nefarious activities when applying rule by law to acquire and butcher Yukos – and then suffering when international rule of law is then latterly applied – there is also little to no chance of State owned/majority owned assets being seized in lieu of compensation within the Russian Federation – which is where the New York Convention comes into play for the aggrieved parties.

To keep things brief, The New York Convention obliges the 150 nations that are ratified to this international instrument to seize assets to fulfill the rulings of the International Court of Arbitration – less diplomatic missions and military assets.  However, planes, trains, ships, art, NBR assets, antiques etc., owned by the Russian Federation or its State owned enterprises can – and are obliged to be – seized to the total value of $50 billion, as stated by the court, from amongst the 150 ratified nations.

This obligation coming into effect 180 days after the final ruling.  Thus the 18th July Hague ruling comes into effect on 14th January – next Wednesday – on the proviso that all pending appeals have been dismissed.

On 16th December, the European Court for Human Right dismissed the Kremlin appeal – there being no courts of higher ranking in Europe, it would seem that is the end of that.  The only question now being, is the 180 day clock commenced from 18th July, or reset to that of the 16th December when the appeal was dismissed?  If reset, then that delays asset seizure until 14th June 2015 – at which point an already tetchy and irritable Kremlin will start to witness – if the process doesn’t begin on 14th January per original ruling date – its assets to the tune of $50 billion begin to be seized globally – and legally.

None of this has anything to do with Ukraine – unless it is requested to seize assets on behalf of the injured parties, which considering its own pending and continually mounting claims against the Russian Federation, it would not only legally be obliged to do as a ratified signatory to the New York Convention, but also morally, if it expects the same international willingness to enforce the law, when its claims against The Kremlin are eventually heard and court rulings delivered.

Regardless of whether 14th January, or 14th June be the effective New York Convention date, one wonders whether those representing the injured parties have already scanned the globe identifying Kremlin owned assets for seizure and all associated bureaucratic documentation is penned waiting only to be dated and submitted.

Interesting times, as they say.

A note made for 14th June in the diary stating “ICA, NYC, $50B, Yukos”has been made just in case – at which point this issue will once again appear in the blog a few days prior to bureaucratic and legal requirements having been fully observed.


Ambramovich selling his Ukrainian assets?

September 8, 2014

Whilst the ceasefire in eastern Ukraine is anything but, European and US sanctions are still to begin to bite properly, and the future of The Donbas looks at best to be set in some form of frozen conflict providing The Kremlin with de facto control of the region – other interesting things are happening amongst the Russian and Ukrainian oligarchy elite.

Amongst them, it would appear that Russia’s arguably most famous oligarchy, Roman Abramovich, is putting his Ukrainian assets in Dnepropetrovsk up for sale – or at the very least having them valued in preparation for sale.  Specifically work on an independent valuation of PJSC “Evraz Dnepropetrovsk Metallurgical Plant (DMZ), Petrovsky” (Dnepropetrovsk), Mining and Processing Plant (GOK) PJSC “Evraz Sukha Balka” (Krivoy Rog, Dnepropetrovsk region) and PJSC “Evraz Bagleykoks” .

That would essentially leave Evas Plc with Lanebrook Ukrainian Mining “Sukha Balka”, Petrovskogo  coke plants “Bagleykoks”, “Dneprokoks” and Dneprodzerzhinsky koksohzavod which it bought from Ukrainian oligarch Igor Kolomoisky in 2007.

In short, out of Ukrainian metals but staying in Ukrainian mining – more or less.

It may well be that preparations to leave Ukrainian metals is to do with envisaged gas and electrical shortages in the near future that will naturally affect production.  Certainly mining will be less affected.

It may also have something to do with the direction sanctions have been heading, and their effects now and in the longer term.  For sure, by the turn of the year, if left in place, they will truly begin to bite and The Kremlin will start to burn through its reserves in order to maintain the status quo domestically.  Nobody has ever accused President Putin of being either an economics or technology genius after all.

The move does, however, raise some matters for thought.


Firstly, if supply to the metal plants owned by Mr Abramovich cannot be guaranteed, it would seem to suggest for those that believe in “Novorussiya”, Dnepropetrovsk is a step too far – at least for now.

It also suggests that the chances of any resolution to the Russian-Ukrainian gas war is also unlikely – as expected.

It raises the prospect of who would buy these businesses too.  A valuation of assets is one thing – their real value sat within what may well become a “front line oblast” is another.  Buyers would be few – and far from risk aversive.

What of Ukrainian sanctions?  As yet, whilst the USA and the EU are now well into sanctions mode – no matter how small their direct immediate effect has been – Ukraine is yet to sanction any Russian or Russian business.  Relevant laws have been passed by the RADA, but appear to be awaiting presidential signature before they can come into effect.

Is the Russian oligarchy now expecting Ukrainian sanctions on their Ukrainian based assets?  After all, some Ukrainian oligarchs have over the past 10 days just witnessed their Crimean based assets get “nationalised”, whilst some assets in Russia are now being “arrested” and investigated.

Not as headline grabbing as the ceasefire that isn’t in eastern Ukraine, granted.  Interesting though nonetheless.

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