Russia ogles Europe’s oil refineries

Graham Stack for Russia Profile (October 5)

 

It’s official Russian policy to push oil companies to acquire downstream assets outside of Russia, and with a wave of M&A set to sweep European refineries, opportunities are looming. But European governments are not enthusiastic – and neither are many Russian companies.

 

Igor Sechin, chief “silovik” in former president Vladimir Putin’s Kremlin, now deputy prime minister for the energy sector in Putin’s government, revealed his dream to the Wall Street Journal earlier this year – a rather modest plan for the man who is believed to have masterminded the dismantling of Mikhail Khodorkovsky’s Yukos. “My dream is for Russian oil to be refined in Russia or by assets controlled by Russian companies,” he confided.

 

Sechin’s plan might be close to realization, as analysts agree the European oil product market is facing a wave of M&A. According to Jürgen Doetsch, co-owner of German oil trader Erich Doetsch, “the European downstream market is facing a structural shift,” as margins shrink due to falling demand and rising oil prices. “The golden decade when refineries in Europe earned big money is ending, and refineries could return to being loss-makers as they were for 25 years before the turn of the century,” says Doetsch.

 

The shift is marked by big 6 supermajors such as British-Dutch Shell, French Total S.A and U.S. ConocoPhilips divesting or mulling divesting refineries. Shell is looking to sell one UK and two north German refineries, and ConocoPhilips uncertain about the future of its Wilmershaven refinery in Germany.

 

Total S.A CEO Christophe de Margerie specified September 22 that Russian companies could be among the buyers: “they have a market to develop in Europe and may be interested to buy when we are interested to sell,” he told  Bloomberg. His statement followed hot on the heels of Total’s sale of a 45 percent stake in its Dutch Vlissingen refinery to Russia’s Lukoil in June for $725 million.

 

The selling is not just limited to the multinationals. Polish petrochemical national champion PKN Orlen, owner of Europe’s largest chain of filling stations, is said to be looking to divest a 63% stake in strategically significant Czech Unipetrol and an 87% stake in Lithuania’s Mazeikiu Nafta, in order to pay down $3.2bn worth of debt.

 

Governments are also getting in on the act. Specifically, Belarus government is mulling privatization of its strategically significant Naftan-Polymir refinery complex, the country’s largest, supplied by the Druzhba pipeline. Belarus has been in talks with Russian majors Rosneft and Lukoil over a sale, but is dragging its heels. “If you have money and willingness, then please come. I am ready to support the programme of privatizing the Belarusian oil refining association,” Alexander Lukashenko said September 16, evaluating the total complex at nearly $3bn.

 

Another dark horse is Venezuelan president Hugo Chaves and the Venezuelan national oil company PDVSA. PDVSA owns stakes in a number of German refineries as partner in a joint venture with BP, Ruhr Oel that controls around a quarter of German refinery capacity. Ever since coming to power in 1999, Chavez has said he will divest PDVSA’s overseas assets and in 2003 PDVSA was in talks to sell to Russia’s Alfa Group, co-owner of oil company TNK-BP, but these talks came to nothing.

 

September, however, also saw the signing of an upstream tie-up between a consortium of Russian oil companies and PDVSA to prospect and extract in Venezuala’s Orinoco regions. The partnership could reasonably also entail asset swaps seeing transfer of Venezuela’s downstream stakes in Europe to Russian companies.

 

Pipeline pressure

 

Russian companies however face considerable political resistance to plans to buy into European refineries, especially of strategic significance. Analysts thus expect the ongoing M&A wave to trigger a number of political spats between Russia and individual European countries, and also bring pipeline politics to the fore.

 

Leonid Fedun, vice president of Lukoil, Russia’s second biggest oil company and most active acquirer of foreign assets, complained to the Financial Times in April 2009 that, “some countries in eastern Europe have an extreme level of political antagonism towards Russian investments.” In the same month Russia’s President Dmitry Medvedev complained of “idiotic” fears in Spain of Russian investment in the energy sector.

 

Fedun’s comments come a week after privately-owned Russian oil company Surgutneftegaz Mol in a surprise move acquire 21% in strategically important Hungarian energy group MOL. Hungarian politicians reacted with fury and responded in dramatic fashion: the Hungarian courts allowed MOL to delay registering the new shareholder until poison pills had been adopted in the company’s charter that left decision-making power with the government-backed board of directors at the expense of shareholders.

 

Poland watched the MOL episode with equal consternation. Despite owning only a 27% stake in petrochemical giant Orlen, the government forced through similar poison pill changes to Orlen’s charter in July, “removing all chances of PKN becoming a takeover target in the future,” according to Wood analysts.

 

Such tactics may however cause the Kremlin to up the ante rather than back off. Russia has gained bargaining power vis-a-vis the Central European refining sector supplied by the Druzhba pipeline, following the start of construction in August 2009 of the Baltic Transport System-2. BTS-2 will reroute Russian oil from Druzhba around Belarus to Russia’s new Baltic port of Ust-Luga in Leningrad Region, and thus increase flexibility of export routes. Refiners remember that Lithuanian refinery Mazeikiu has its oil supply shut off by Russian pipeline operator Transneft after it fell to Polish hands instead of Russian in 2007.

 

The East Central European countries for their part put their hopes on the Odesa-Brody pipeline running through Ukraine from the Black Sea, planning to extend it to the Polish refinery of Plock, Orlen’s biggest plant. The pipeline would then ship Azeri oil to Central Europe. However the feasibility of the plan is not yet established, and the pipeline is continues to be used in reverse mode to ship Russian oil to the Black Sea.

 

Reluctant imperialists

 

The weak link in the Kremlin’s strategy could be the Russian oil companies themselves. With the noticeable exception of Lukoil, they have shown little interest in expensive acquisitions in Europe’s downstream sector.

 

Lukoil is open about pursuing downstream expansion, with major acquisitions in Italy in 2008 along with the Dutch acquisition from Total this year. However, Lukoil’s ambitions predate Igor Sechin’s watch over Russia’s energy sector. In fact the fully private company, in which US major ConocoPhilips holds a 20% stake, counts as one of the most free from Kremlin influence. And the company’s strategy of overseas downstream expansion was evident as early as the 1990s, when it purchased a chain of filling stations in the USA.

 

On the other hand, state-owned Rosneft, Russia’s largest oil company, has still to make a large foreign acquisition, and is focused on capital-intensive upstream expansion in the Arctic and Pacific shelf, with little resources left for acquisition abroad. At the most Rosneft might acquire the Belarus refineries. Gazpromneft, the oil division of state-controlled gas giant Gazprom “doesn’t really have the scale for European acquisitions to make much sense,” according to Ron Smith, head of research at Alfa Capital.

 

Surgutnefegaz, the transparency-challenged private oil company named by Igor Sechin “Russia’s best privately-run oil company” would seem the most likely acquirer of European assets. The company is believed to be sitting on a cash pile and potential war chest of $20bn, and in April this year bought 21% of Hungary’s energy company MOL for $1.4bn from Austria’s OMV, causing outrage in Hungary.

 

At the time, however, many commentators believed the move was requested by the Kremlin for political reasons, namely to stymie the Nabucco gas pipeline project in which MOL is a participant, rather than being part of Surgutneftegaz strategy. “They are very tight and unambitious with their massive pile of money, the MOL thing notwithstanding. It would be completely out of character,” according to Smith. In addition, Surgutneftegaz are more focused on downstream investment in Russia, with large investments in the Kirishi refinery in Leningrad Oblast

 

Finally, TNK-BP held talks with PDSVA on acquiring the Venezuelan companies refinery stakes in 2003, but the talks ended without any results. Analysts say TNK-BP is very focused on adding value, and the returns on European refining are not sufficiently compelling. TNK-BP is more focused on Russian downstream, having just overhauled its Ryazan refinery, one of the largest in Russia.

 

This means leaves Lukoil with a clear field in making acquisitions downstream in Europe, as far as governments allow, and, in conjunction with the ConocoPhilips 20% stake, well on its way to becoming a true oil multinational.

Germany’s elections and Russia’s gas

Graham Stack for Russia Profile (www.russiaprofile.org)

 

Despite the rhetoric, Germany’s likely new coalition may slowdown nuclear power phase-out, but will not cut back on Russian gas.

 

If, as is likely, Germany’s September 27 national elections result in a new governing coalition between incumbent chancellor Angela Merkel’s Christian Democratic Union (CDU) and the small liberal Free Democratic Party (FDP), the planned phase-out of nuclear power in Germany will be slowed indefinitely, ostensibly to reduce dependency on Russian gas. However, analysts say the shift will make no significant longterm impact on German demand for Russian gas. Moreover, FDP head Guido Westerwelle as probable foreign minister is likely to be as Russia-friendly as his social democrat predecessor Frank-Walter Steinmeier, the loser of the election.

 

The man almost certain to be Germany’s new foreign minister did not mince his words when drawing conclusions from the Russian-Ukrainian ‘gas war’ January 2009, which saw supplies to Europe halted for a number of days.  “We Europeans have to do everything to free ourselves from dependency on a single supplier of energy,” Guido Westerwelle told Poland’s Gazeta Wyborcza in March, referring to Russia. “In Germany the government has made the mistake of phasing out nuclear power for ideological reasons. That makes us vulnerable to foreign energy suppliers. Germany should do what most of our European neighbors are already doing: achieve a reasonable energy mix, with renewable energy such as solar and wind power, fossil fuels such as oil, coal and gas, but also nuclear power.”

 

Westerwelle’s call to postpone nuclear power phase-out to reduce dependency on Russian gas found an echo in one of the minor scandals that livened up an otherwise lethargic election campaign in September: a detailed election-campaign PR strategy apparently commissioned by Germany’s large energy concern E.ON, subsequently leaked to the press, advised lobbyists to actively harp on the population’s “historically rooted fears of Russia.” “E.ON can draw on these fears for its own benefit,” read the leaked PR plan.

 

With Chancellor Angela Merkel’s CDU also in favour of slowing nuclear power phase-out, this coming shift in German energy policy might seem to be one of the immediate implications for Russia to come out of yesterday’s elections.

 

Russia currently supplies 37% of German gas imports. Germany relies on gas for 12% of electricity production and around 25% of total energy needs. Nuclear power, originally to be phased out by 2022 and replaced by renewable sources, counts for around 25% of power generation and 12% of total energy requirements. These figures give rise to fears that renewables will not be able to fill the space left by decommissioned nuclear plants, leading to even greater reliance on Russian gas.

 

However, analysts claim that much of the anti-Russian rhetoric is merely a political strategy to make slowing the phase-out more acceptable to voters, while it will in fact hardly impact on projected Russian gas deliveries to Germany.

 

“I do not think that a possible postponement of the envisaged nuclear phase-out is related to fears of increasing dependency on Russian gas,” argues Marcel Viëtor, Head of Foreign Energy Policy Program at the German Council on Foreign Relations. “Rather this fear is being developed by the atomic lobby to argue for the postponement. Fear of dependency on Russian gas imports is rhetoric but not factual since the Russian companies are mutually dependent on European gas markets,” says Viëtor.

 

Pierre Noel of the European Council on Foreign Relations also argues that the real reasons behind the coming policy shift is lobbying from German energy companies, who earn good money with nuclear power, together with growing electricity demand in Germany and carbon emissions reduction goals.

 

Furthermore, Russian analysts doubt that the move will even impact significantly on the projected volume of gas supplied to Germany from Russia.

 

According to VTB Capital’s gas analyst Lev Snykov, “such a move would not impact my long-term forecasts for Gazprom’s exports to Germany. Long-term Russian gas exports to Germany will grow at a low single-digit rate, although the market share may deteriorate due to a strong push towards LNG.” Similarly, energy analyst at Renaissance Capital, Alexander Burgansky, believes that, “German demand for gas may not now grow as fast as some people had expected, but Gazprom’s supplies are anyway protected by the minimum off-take commitments under the long-term contracts.”

 

Analysts also point out that Germany’s largest energy companies such as E.ON, although lobbying domestically for a suspension of nuclear power phase-out, are also heavily involved in Russia’s gas sector. EON’s CEO Wulf Bernotat is in fact a member of the Gazprom’s Board of Directors, as the company holds a 6.5% in the gas giant. E.ON and German chemicals giant BASF are also taking stakes in the major Siberian Yuzhnoe-Russkoe gas field.

 

Thus it was logical that Thursday September 24 EON was among a group of the world’s largest energy companies addressed by Russia’s ex-president, now prime minister, Vladimir Putin, in the town of Salekhard on Russia’s Yamal peninsula. Putin called on the international companies to invest in gas production in the region, destined to become Russia’s main production region in the long term, as older fields decline. Gazprom estimates total investment needed at $100bn.

 

Germany has particular interest in the massive Yamal development, according to UralSib energy analyst Viktor Mishnyakov. “Yamal is of strategic importance for the Russian government and for Gazprom as this gas will be the source for the Nord Stream pipeline project.”

Nordstream pipeline is a controversial Gazprom-led project to bring Russian gas directly to Germany via the Baltic Sea bypassing transit countries such as the Baltic countries and Poland.

 

There has been vociferous opposition from Poland and Baltic states to the pipeline. But, according to Marcel Viëtor, this is one energy policy that definitely won’t be changed under a CDU-FDP coalition.

 

“The CDU has shown different, more critical rhetoric on Russian domestic
issues than SPD did – but it has supported NordStream and German companies
cooperating with Russian companies, investing in Russia, just like SPD did,” says Viëtor. ”In a CDU-FDP-coalition this attitude is most likely to be continued.”

 

Russia – “Europe’s natural partner”

 

Apart from adjusting energy policy, the new German government’s Russia policy is likely to remain pragmatic and constructive, including disavowing Ukraine and Georgia’s bid to join NATO. With Westerwelle almost certain to become new foreign minister, the influence of SPD elder statesman Gerhard Schroeder in shaping Germany’s Russia policy will cede to the influence of FDP elder statesman Hans-Dieter Genscher, the Federal Republic of Germany’s legendary foreign minister from 1974 to 1992.

 

With 20 years marked since the fall of the Berlin Wall this autumn, events in which Genscher played a crucial role, an FDP-led foreign ministry will be especially minded to take a pragmatic and measured policy towards Russia, considering Moscow’s support for German reunification 1989-1990. Awareness of the Kremlin’s constructive role towards unification twenty years ago has even been heightened in recent weeks by archival revelations of how bitterly European leaders such as then British Prime Minister Margaret Thatcher and French President Francois Mitterand were initially opposed to the idea.

 

Outside of energy policy, the FDP regards Russia, in Genscher’s words, as “Europe’s natural ally, not natural enemy.” Added to this is the generational factor: 47-year old Westerwelle sees himself as one of a new generation of politicians that includes US president Barack Obama and Russian president Dmitry Medvedev. Westerwelle is thus an enthusiastic supporter of Obama’s “reset” policy of improving relations and cooperation with Russia. “If President Medvedev emphasizes he is a moderate politician and wants to reform his country and pursue disarmament, we should take him at his word,” he told Gazeta Wyborcza. “He is a young politician, and together with the US president, who is also young, he will have the chance to go down in history in a positive fashion.”

Taking stock of Russian growth prospects

Graham Stack for Russia Profile (www.russiaprofile.org)

Rumours of imminent growth may be exaggerated by sketchy inventory statistics. A chorus of analysts are attributing Russia’s 10% GDP contraction this year to companies selling down inventories rather than producing, and are gung ho about growth restarting as soon as inventories empty. But others are warn against drawing strong conclusions from Russia’s sketchy national statistics on inventory levels.

 

Alexei Moiseev, macroeconomic analyst at Renaissance Capital, speaks for a number of analysts arguing that Russia’s astonishing GDP collapse of 10.2% – in the first half of 2009 was the result of huge selling down of inventories by industrial enterprises rather than demand collapse.

 

“Very expensive money resulted in massive de-stocking in fourth quarter 2008,” he argues. “The trend intensified in the first quarter of 2009, with the negative contribution to GDP in this quarter exceeding 7 percentage points of a total decline of 9.8%.” 

 

Similarly, Anton Nikitin of UralSib argues, “the fall of GDP and slowdown in industrial production was mostly driven by the huge disposal of inventories” which started late 2008 and continued into early 2009. Citibank’s Elina Ryvbakova also estimates that at least one third of the collapse in production in the first half of this year resulted from destocking.

 

Since GDP is a pure production statistic, it plummets when enterprises en masse stall production lines to sell down inventory, even if turnover stays steady. And the harder they come, the harder they fall: overheated growth in 2008 brought about unprecedented stockpiling due to anticipated future demand. “Spiraling costs of raw materials 2007-2008 also caused companies to massively build up their inventories,” says Rybakova. Moisseev speaks of “a crisis of overproduction” starting in the first quarter of 2008, with inventories at 150% of their 2007 value.

 

If destocking rather than demand collapse was so much to blame for the economic disaster this year, then logically when inventories are empty stalled production will start up again. According to Moisseev, “some of the damage done to the economy has resulted from overheating in 1H08, and some of the damage will be easy to recover. Unfortunately, inventory statistics come with a significant delay, so we have no way of knowing what has been happening since, but historical experience suggests de-stocking cannot last for longer than two-to-three quarters”

 

Shadowy statistics

 

As Moiseev admits, the catch with betting on emptying inventories to kickstart growth is that no one knows very much about them. The problem is that Russian Federal State Statistics (Rosstat) reports inventory statistics only sketchily, on a quarterly basis and aggregated across the economy. The next figures won’t appear until October, meaning that forecasting growth on their basis is very speculative.

 

“The question of inventories has advanced to be the one of the key questions, especially because the economy ministry has focused on it,” explains Vladimir Sal’nikov of the Centre of Macroeconomic Analysis. “But the problem is that inventories are not counted directly and there is a high level of statistical error involved. It is very difficult to separate the real inventory level from the margin of error.”

 

According to VTB Capital analyst Aleksandra Evtifyeva, “Rosstat only provides quarterly aggregate inventory figures that don’t allow close analysis. The Economy Ministry has a wider base of statistics available and said in August that inventories were drying up. However we don’t know for instance if oil companies are included in their statistics or not.”

 

Business daily Kommersant has reported that Bank of Moscow analysts report that inventories have remained stable over the last three quarters, and that as a proportion of turnover inventory has grown by a third compared to 2006-2008. If true, this would point to demand collapse that Sal’nikov also feels has been underestimated. “It seems to us to be the case that markets have contracted more strongly than is reflected in statistics,” he says.

 

Citi’s Rybakova admits that the quality of inventory statistics provided by Rosstat is very poor. However, she says  “the magnitude of the production collapse in the first quartern 2009 is hard to explain by any other factor. It was more severe than in 1998.”

 

“Restocking however won’t be a panacea to cure the economy,” she adds. “Instead, we are seeing an adjustment down to a new production level, meaning inventory will never return to pre-crisis levels.” Rybakova believes restocking could add 1-3% to annual GDP growth, but not before 2010. Instead, she believes that consumer demand will pull Russia back up, if it strengthens. Sal’nikov also prefers demand as a growth factor – but tips deferred demand for investment goods instead of consumers.

 

With the government still holding out for growth driven by an end to destocking, skeptical voices are growing stronger. The Finance Ministry forecast for August was for 1.5% growth, but the result disappointed at 0%. Electricity consumption statistics, a proxy for industry, show demand still contracting.

 

Timothy Ash of Royal Bank of Scotland is consequently dismissive about the talk of growth. “Brokers seems to be jumping over themselves at the moment to talk up the Russia story, that recovery has begun, and that Russia will bounce back quickly. While favourable base period effects should come into play in the final few months of the year, the data flow is far from convincing,” he says.

Unistream money transfer network expands despite crisis

Graham Stack in Hamburg for Business New Europe (bne)

 

Unistream, the biggest player on the money transfer market in the CIS, tells bne the crisis has not impacted on operations, and the network is set to expand into Germany.

 

One year ago, as the economic crisis struck, it seemed the Central Asian countries would soon plunge into crisis as the remittances from Russia they depend upon dried up.  However, Suren Ayriyan, president of Unistream bank, the biggest operator of money transfers in the CIS region, tells bne that the money transfer volume has remained stable on the year. “After a short blip, transfer volumes are back to their level of one year ago,” says Ayriyan.

 

Unistream is the Western Union of the East, with a share of 27% of  the money transfer market for the CIS corridor at the end of 2008, according to the Russian Central Bank. With remittances from Russia accounting for 20-45% of GDP for the countries of the Caucasus and Central Asia, the severity of the crisis descending on Russia at the end of 2008 seemed to bode ill for Eurasia. Alarmist scenarios predicted even state collapse in Tadzhikistan as workers returned home empty handed.

 

“Nothing like this has happened,” says Suren Ayriyan, president of Unistream. “Money transfers did fall at the start of 2008, but recovered by the spring. People simply did not return home even if they lost their jobs,” Ayriyan explains. “They stayed in the country, and found other work, even if only in the informal economy. No one went anywhere.”

 

Another factor supporting money transfer volumes during the crisis: with fuel prices staying high, the cost of transport home has become unaffordable for many migrant worker. “That’s why, although the average amount of a single transfer has fallen, the number of transfers has risen,” explains Ayriyan.

 

This means that despite the 30% dip in the market in the first quarter, money was quickly flowing again as things stabilised. With Russian companies looking to cut costs, cheap immigrant workers outcompete Russians on the Russian labour market. Tadzhikistan, Uzbekistan and Kyrgyzstan are among the few CIS countries to have experienced growth this year, not least due to the stable level of remittances facilitated by Unistream.

 

Unistream’s total volume of transfers in 2008 was $4bn (at current dollar rates) and in 2009 is looking to reach $4.5bn, despite the crisis.

 

The Unistream network has snowballed. With a turnover of $760m in 2005, the company reached $1.85bn volume in 2006, and $3.7bn in 2007, with the number of customers soaring from 870,000 in 2005 to 3.7m in 2007,

 

In 2008, the company took 57% of the market in Armenia , 45% in Kyrgyzstan , 41% in Moldavia , 25% in Tajikistan , and 22% in Uzbekistan.

 

Unistream is not just about remittances: Russia being the size it is, and the banking system still underdeveloped, Unistream’s Russian in-house network adds up to more than 40% of the system’s total turnover.

 

The particularly strong showing in Armenia is not coincidental. Both Ayriyan and co-owner of the bank Gagik Zakarian are of Armenian origin, one of the historic diaspora nations. “$4bn flow to Armenia from Russia annually,” Zakarian tells bne, “and about another  $500m from the US.”

 

Going German

 

The awareness of the West as a source of remittances is now prompting Unistream to roll out its system in the EU countries, including Britain and Greece, but first and foremost Germany.

 

“Today more than three million of the country’s residents are economic migrants from the CIS, which, given the decidedly high standard of living in Germany , is inevitably a dynamic growth driver for the money transfer market,” says Ayriyan.

 

Analysts at Unistream estimate that Germany’s money transfer market in all directions will be annually worth more than $12bn even in the immediate post-crisis period, which is absolutely colossal, bearing in mind that the Russia-CIS corridor added up to a total $15bn in 2008. The Germany-CIS corridor’s value is around $4bn. Unistream is looking to take 10% of this corridor’s volume in the mid term, according to Ayriyan.

 

A particular challenge to setting up in Germany is the toughness of the money laundering laws and general supervisory requirements of financial sector, that make obtaining a license a time-consuming and exhausting process. Despite strictness of personal identification rules for money wires, the extent of Internet coverage here means Unistream is developing an online service. “At the same time, taking into account that many migrants in Germany from the CIS are of the older generation, it is important to have a physical presence including Russian speaking staff,” says Ayriyan.

 

Powerful backing

 

Unistream is owned by its founders Georgii Piskov and Gagik Zakarian, with a 26% stake spun off to Aurora private equity group in 2006. Piskov and Zakarian were the founders and owners of Russia’s Uniastrum Bank, until selling 80% of the bank to the Bank of Cyprus in 2008 for 447m euros, months before the financial crash. This means the Unistream owners have deep pockets with which to finance the further expansion of the system, which was not included in the deal.

 

“Unistream is a highly solvent, highly liquid system,” Piskov tells bne, “which does not need any extra financial support presently. However, any funds it requires for business purposes will be forthcoming.”

 

Piskov makes no bones of his ambitions in the money transfer business. “We want to go global, and expand beyond the CIS corridor. When you have created such a system, it’s simply logical to roll it out in country after country,” he says.

Post gas war, Ukraine’s gas market remains a can of worms

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

Ukraine’s Prime Minister Yulia Tymoshenko touted January’s gas agreements between Russia’s Gazprom and Ukraine’s main energy company Naftogaz Ukraine as creating transparency in the sector by eliminating the gas trader Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is a far as ever from transparency – and Naftogaz Ukraine is far from being the only provider of gas to industry.

“Naftogaz has cut off our gas since May 5th, the plant has completely stopped working,” a source close to management of Rivneazot, West Ukraine’s largest nitrogen fertilizer producer, told bne. “And the reason is the Prime Minister [Yulia Tymoshenko]’s personal feud against Dmitry Firtash. We have no debts to Naftogaz.”

Dmitry Firtash was the man who until January 2008, as co-owner of Swiss-registered gas trade Rosukrenergo, appeared to hold all the strings in Ukraine’s notoriously opaque gas industry. For this reason he was the personal bete noir of firebrand Prime minister Yulia Tymoshenko.

In 2008, she declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Ukraine’s domestic energy operator Naftogaz and Gazprom in January 2009, ending a stand-off between Russia and Ukraine that saw gas supplies to Europe interrupted. The agreement stipulated that Gazprom would in the future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.

In May, the conflict then took another twist, when Naftogaz cut gas supplies to three chemical companies owned by Firtash – Rivneazot, Crimean Soda Plant, and Crimean Titan. Supplies to the Crimean plants, but not to Rivneazot, were later restored. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they has purchased earlier.

Demonstrating how politicized Ukraine’s gas market has become, Naftogaz’ decision to restore supplies to Firtash’ Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports that were confirmed by Rivneazot. “Tymoshenko demanded his head for the decision,” said bne’s source.

The episode with Firtash’ companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but it has not created the hoped-for transparency.

In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry. Supplying gas to industrial customers is the only profitable part of Ukraine’s gas sector, with gas supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove intermediaries, part of the idea was to improve Naftogaz’s hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers.

But in times of crisis, having a state-run and budget-subsidized company supply energy to cash-strapped industrial customers has one huge disadvantage: any decision to cut off gas to a major industrial plant, because of debts, becomes a political decision taken at highest level, opening the door to populism, cronyism and corruption and cronyism. Government officials ultimately decide the fate of tens of thousands of workers, and of their oligarch employers.

According to Ukraine’s Centre of Energy Studies, industrial companies’, excluding utilities, payment discipline is at 86.1%, with total debts of $2bn.

So while Firtash’ chemical companies had their gas switched off for (alleged) debts of less than $1m, other oligarchs can run up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by oligarch’s Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine June 10 showed that Naftogas’s deputy head Igor Didenko had directly ordered supplies to be continued to IUD plants, despite IUD having run up nearly $51m in debts.

N.B: Vitaly Gaiduk also just happens to be head of Tymoshenko’s advisory service, and Naftogaz head Oleg Dubinin, until moving to Naftogaz Ukraine in December 2007, was CEO of IUD-owned Dzherzinsky Metallurgical Combine. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is still due in 2009.

Privat Group’s private gas supply

Privat Group, co-owned by billionaire Ihor Kolomoyskiy, is another oligarch structure for which Tymoshenko is said to have a soft spot for. In 20005, since she backed Privat in its attempt to take Nikopol Ferroalloy Plant from Viktor Pinchuk in scandal that led to her first exit from government.

Privat is also, via Ukrnafta, Ukraine’s largest oil and gas producer, owner of a large stockpile of gas estimated at being from 3bn to 10bn cubic meteres held in underground storage. Ukrnafta. While the state in fact holds a 51% stake in Ukrnafta, Privat group, with a 42% stake exercises operational control over the company via management appointments.

Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 timed lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta’s gas, which is where the stockpile comes from.

But when in late February 2009, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts held it only a question of time before Ukrnafta’a gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading structure insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.

Analysts agree that Ukrnafta has been selling its oil for artificially low prices to Privat-affiliated companies. Since the Privat group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this has not been confirmed.

Gazprom Sbyt of the action

The biggest winner from Tymoshenko’s elimination of Rosukrenergo as intermediary is, potentially however, Gazprom itself, in the form of its fully-owned Ukrainian subsidiary, Gazprom-Sbyt Ukraine, as well as a possible direct supplier of Ukraine’s chemical sector itself.

According to the gas agreements signed between Naftogaz Ukraine and Gazprom, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cubic meters to industrial customers. According to Gazprom Sbyt’s CEO Anatoly Podmishalk’skii, the company aims to sell 4-5bn cubic meters in 2009,

“It’s a myth that Tymoshenko got rid of intermediaries,” Bogad Sokolovsky, adviser to President Yushchenko on energy issues, told bne. “What is Gazprom Sbyt, if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?”

Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, it crucially has the resources to offer considerable more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract the more solvent companies that can afford to pay the mark-up to get the added payment flexibility, where Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross who are struggling to pay their bills.

It is however not just Gazprom Sbyt that is filling the void left by Firtash. Big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry – with the Ukraine’s crisis-stricken chemicals plants serving as a bridgehead.

Ukraine’s industry minister Volodymyr Novitsky announced June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. “Nitrogen fertilizer producers are in a very special position,” a source in Ukraine’s Union of Chemical Producers, which was involved in lobbying the resolution, told bne. “Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs”.

“The suppliers could be famous Russian companies,” the source explained. “This would be a step towards demonopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?”

But the move has prompted apprehensions that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government’s attempts hitherto to privatize Odesa Portside Plant, Ukraine’s most strategic chemical asset, and one of the companies on the list. Russia’s largest petrochemicals holding, Sibur, is a Gazprom affiliate.

“The whole thing seems unclean,” Bogdan Sokolovsky says, referring to the government announcement. “It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogas as monopoly importer. How will it then be possible?”

Would the real Ukraine please stand up?

Graham Stack in Kyiv for Russia Profile (www.russiaprofile.org)

Opinion polls show Ukraine to be a Russian-leaning country very different from the one described by Western media and Ukrainian foreign policy elites.

“If we were to fantasise, and pretend that {Russian Prime Minister} Vladimir Putin would run for the post of Ukrainian president, then according to opinion poll results he would win right off,” says analyst Alexei Lyashenko of Kyiv’s polling institute Research & Branding (R&B). “His only serious competitor would be {Russian President} Dmitry Medvedev.”

The R&B poll published May 25 show that for all the rhetoric about westwards-bound Ukraine breaking free of Russia’s malign influence and Putin’s imperialism, the reality on the ground is very different.

“In fact, Vladimir Putin’s rating in Ukraine is nothing new, but quite steady,” adds Lapshen. “It was over 50% even during the Orange Revolution.”

Opinion poll results published in May indicate that 58% of Ukrainians have a positive relationship to Vladimir Putin, and 56% to current Russian President Dmitry Medvedev. 21% have a neutral relationship to the Russian PM and ex-president, and 16% negative, with the respective figures 25% and 14% for Medvedev.

R&B’s survey also finds that 35% of Ukrainians would like to see Ukraine united with Russia, Belarus and Kazakhstan, compared to 22% who wished to join the EU, and 10% who wanted a restored Soviet Union.

These results were confirmed by a poll published June 17 by the Kyiv International Institute of Sociology (KIIS). According to KIIS president Valery Khmelko, 23% of Ukrainians desire full unification with Russia – compared to only 12% of Russians wishing the same.

Doubtlessly due to the 2008-2009 political and economic crisis wracking Ukraine, the number of Ukrainians desiring ‘reunification’ has risen over the last year from 20% to 23%, and the number of Russians in favour has fallen from 19% to 12%.

“These findings also indicate that the ‘prevailing willingness of Russians to append Ukraine to their country forming one state’ is an erroneous idea as the overwhelming majority of Russians do not want such a union,” notes KIIS president Khmelko.

While only a quarter of Ukrainian respondents want full unification with Russia, 68% want an EU-style border-free regime with Russia, with Russia and Ukraine being ‘independent but friendly states’ without a visa regime or custom controls.

Only 7.8% of respondents were in favour of Ukraine’s relations with Russia becoming the same as relations with other countries, i.e. with border controls, customs and visas.

This in fact contrasts even with sentiment in Russia, where respondents are far more cautious about union with Ukraine. Perhaps due to the Ukrainian leadership’s antagonistic policies towards Russia, amplified by the Russian state-controlled media, only 50% of Russian respondents want to see a border-free regime between the countries. 29.1% want relations with Ukraine to be the same as for other countries.

“Ukrainians’ attitude to Russia is much better than Russians’ attitude to Ukraine; over 90% of people in Ukraine have a positive attitude to Russia – and it has become even better over the past year,” points out Khmelko.

According to Lyashenko, the Ukrainian affection for Putin and Medvedev is most concentrated in East Ukraine, where 75% are positive. However, even in the West Ukraine districts where Russian is hardly spoken, around 25% of respondents described their relationship to the Russian leaders as positive.

Surprisingly, in contrast to geography, age group does not influence the attitude towards Russia and its leaders, according to the polls.

“Ukrainians preference for Russian state-controlled television, and the desire for strong leadership in crisis times, also play a role,” says Lyashenko.

“But the main cause that Medvedev and Putin score so high,” he adds, “ is the endless conflicts and score-settling in Ukrainian politics that make them look good.”

None of the current Ukrainian leaders can compete with Putin and Medvedev in terms of popularity. Pro-Russian head of opposition Party of Regions Viktor Yanukovych currently enjoys a 25% rating, Prime Minister Yulia Tymoshenko 14%, and new face Arsenyi Yatsenyuk 13%.

Only 2% of Ukrainians would vote for President Yushchenko, the most anti-Russian top Ukrainian official, in upcoming elections January 2010.

Neither do Ukrainians have much sympathy for Georgian President Mikheil Sakhashvili, whom Yushchenko vocally supported during the country’s conflict with Russia over South Ossetia August 2008. According to Lyashenko, 45% have a negative opinion of Saakashvili, and only 11% a positive opinion.

According to an opinion poll published in Polish daily Rzeczpospolita in March 2009, 56% of Polish respondents fear Vladimir Putin, and 58% believe that Russia is conducting a foreign policy that endangers Poland’s national security. This despite the fact that Poland has no border with Russia, excluding Kaliningrad, and is a member of both NATO and the EU.

Problems bubble up as Tymoshenko cooks Ukraine’s books

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Naftogaz’ payment difficulties could be first sign that Tymoshenko’s budgetary house of cards is folding.

“We have doubts about Ukraine’s ability to pay,” said Russian President Dmitry Medvedev on Friday, May 22, referring to whether Ukraine’s gas monopoly Naftogaz would find the $4bn Medvedev says it needs for stockpiling of gas for the winter.

Medvedev’s comments were hardly off the cuff: he was speaking at a press conference together with EC President Jose Manuel Barroso following the EU-Russia summit in Khabarovsk. He went on to call on the EU and Russia together to syndicate a loan to cover Ukraine’s gas needs.

Naftogaz has had cash flow problems all this year, but these were a problem of hard currency liquidity. With liquidity problems receding in Ukraine, and considering the strategic significance of summer gas stockpiling for energy security in winter, the new payment problem points instead to Ukraine’s overstretched state budget. Naftogaz is massively dependent on direct and indirect state subsidies, so much so that the International Monetary Fund (IMF) wants its finances consolidated as part of the budget

How overstretched is not yet clear. Naftogaz has apparently settled a large part of its April gas bill against future 2009 transit payments from Gazprom, meaning the company is already burning up future revenue flows.

“The government is concealing the fact that Naftogaz cannot collect the money from consumers to pay for the imported gas it is using. In these conditions, the company is forced to turn to Gazprom to get an advance against future services in transporting gas to European customers,” said Roman Zhukovsky, head of Ukraine’s Main Service of Social-Economic Development, in documents published on the website of Ukraine’s president Victor Yushchenko in May.

“Naftogaz is not paying for the gas it receives from Russia, and instead settling up against future transit fees, which means basically that it is running a deficit,” authoritative former finance minister Viktor Pinzenik told Ukrainian weekly Zerkalo Nedeli May 16. Pinzenik resigned his post in February on questions of principle regarding a budget for 2009 he regards as wildly unrealistic.

“The country cannot continue continue to sell gas to the population at a price several times cheaper than it buys it for. But that’s exactly what it does, creating a huge hole in the budget,” Pinzenik added.

Cooking the books

If Naftogaz can’t find the cash to stockpile crucial gas for the winter, this is the first indicator that the Ukrainian budget is in big trouble, despite or because of the government’s attempts to paper over the cracks.

Prime Minister Yulia Tymoshenko, who recently declared her candidacy for presidential elections in January 2010, has been fighting tooth and nail to protect an expansionist budget, and the high level of vote-winning pension and social payments it contains. The budget remains predicated on 0.4% GDP growth assumption for 2009, despite an economic collapse of 8% of GDP on the year in fourth quarter 2008, and accelerating in the first quarter of 2009.

The method she has used to do this, according to critics and experts, is essentially the same as used for Naftogaz – using future revenues to prop up current finances, leaving a budget black hole gaping later in the year.

As a result, Sergei Buryak, head of the State Tax Administration, could announce May 13 to general disbelief that tax revenue collection plans as laid down in the 2009 budget had been fulfilled and even exceeded in the first four months of the year.

However, ever the killjoy, President Viktor Yushchenko weighed in against these claims. The Presidential Secretariat published on its website an in-depth analysis of the manipulations employed by the government to attain these miraculous results.

Their analysis of how Tymoshenko has cooked the budget books is widely accepted by experts.

“Everyone was surprised by the tax collection rate, but after we saw the analysis done by the Presidential Secretariat, we understood what was happening. I largely agree with their analysis,” Renaissance Capital’s Anastasia Golovyakh told bne.

“If you take the Secretariat’s view, along with the quasi-neutral view put forth by ex-Finance Minister Pinzenik, and add in the unwillingness shown by the government to report first quarter GDP results, all signs point to an attempt to present the books in a better light,” agrees brokerage Galt & Taggart’s analyst Danylo Spolsky.

Even the Tymoshenko government seems to agree with the Secretariat’s analysis – it promptly imposed a statistics embargo on the Presidential Secretariat following publication of the detailed report.

The basic argument of Yushchenko’s number-crunchers is that the government boosted its revenues in the first four months of 2009 at the cost of revenues in the second half of the year: by having companies make advance payments on taxes due in 2009, (i.e. having companies pay tax due for the whole year straight off); delaying payment of VAT rebates for exports; having the National Bank of Ukraine (NBU) pay its entire annual contribution to the budget straight off in the first quarter; and one-off customs charges on gas owned by gas trader Rosukrenergo and now transferred to Naftogaz.

In addition, media have reported that the State Tax Administration has been overtaxing companies at the end of each month, booking the cash, and promptly returning the difference in the next month, thus inflating revenues.

The Secretariat’s analysis also details that payment of Pension Fund contributions is off track: the Pension Fund has simply revised downwards monthly collection targets to avoid registering a deficit. This means the sum remaining to be collected later in the year rises.

The motivation for such short-term machinations is apparently to create superficially acceptable parameters allowing the IMF to sign off on the second and third tranches of its $16.5bn stabilization loan.

The IMF seems to have turned a blind eye to the manipulations, and is otherwise showing unprecedented patience with Ukraine. Despite its articles specifying that funds be used to only tackle balance of payments problems, it has even agreed to cover part of Ukraine’s planned 4% budget deficit – a first for the IMF.

Ukraine’s government has also found an unprecedented way of helping the IMF help it. It has delayed publishing its GDP data for the first quarter of 2009 until July. By postponing publication until after the IMF has reached a decision on the second and third tranches, the government ensures that the 4% deficit will be measured for the last available GDP figure – for the fourth quarter of 2008.

Estimates of subsequent GDP collapse in the first quarter of 2009 range from 10% to 25% ,=meaning that the actual budget deficit as GDP proportion will be considerably higher.

Kazakhstan’s BTA loses control over top Ukrainian insurer

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

Kazakhstan’s BTA Bank, nationalized in February by the country’s sovereign wealth fund, looks like losing all influence over top Ukrainian insurer Oranta. This is despite the fact that BTA paid $100m for a stake of 25% plus one share only two years ago, and reportedly controlled 85% of Oranta as late as mid-2008.

Ukraine’s competitive privatisation of a blocking stake in its top insurer Oranta in December 2007 was hailed as a landmark deal. BTA paid $100m for the stake, valuing the company at $396m. But far from being a breakthrough deal, the privatization turned out to be Ukraine’s last large privatization deal to date. And it’s now being overshadowed by the inauspicious end to BTA’s investment in Ukraine as control over Oranta shifts murkily to Ukraine-based IMG Holding, previously affiliated with BTA as a structure managing the Kazakh bank’s international assets.

As late as June 2008, according to a report authored by Renaissance Capital analyst Vladimir Dinul, BTA controlled 85% of the insurer, with companies affiliated with BTA having acquired additional stakes totalling over 45.3%. But in April of this year, following Kazakhstan’s nationalization of BTA in February and the ousting of former BTA management under Mukhtar Ablyazov, Oleg Spilakh, chairman of Oranta’s supervisory board, told newswires that BTA now only controlled 14% of Oranta. This means BTA’s current stake is less even than the 25% stake it had bought directly in 2007. The company’s website in fact still lists BTA as owning the blocking stake. The 38-year-old Spilakh said in the same interview that control over Oranta now lies not with BTA, but with IMG Holding, which he also heads. Ukraine-registered IMG Holding was established in 2008 to manage BTA’s Ukrainian and other international assets.

BTA’s incredible shrinking stake in Oranta contradicts statements made by former chairman Ablyazov as late as December. In an interview with Interfax, he reiterated BTA’s commitment to its Ukrainian investments and was committed to its Ukrainian subsidiary bank BTA-Ukraine. However, BTA-Ukraine announced abruptly in April that its parent bank’s stake had been reduced from 49.99% to 9.99%. The parent bank’s new state-appointed management claims its stake remains unchanged at 49.99% and has filed criminal charges in Ukraine against the changes.

According to Renaissance analyst Milena Ivanova-Venturini, “asset stripping just before Samruk-Kazyna [Kazakhstan's sovereign wealth fund] injected capital, effectively taking over BTA, has been one of our concerns for a while. The legal complexity and the web of ownership structures across BTA subsidiaries is anything but transparent, and we may yet hear of more such ‘changes’.”

Ivanova-Venturini also suggests that BTA’s former management might be seeking to retain control over BTA’s foreign assets: just days before the February nationalisation, BTA’s shareholders approved as new supervisory board members of BTA-Ukraine Roman Solodchenko, former BTA CEO, and Khalil Kamalov, former financial director of BTA.

BTA’s spokesperson Valentina Vladmirskaya told bne she did not know when BTA’s 25% stake had been reduced to 14%. But IMG spokesperson Alena Kulakova says BTA’s stake in Oranta fell as a consequence of a rights issue in 2008. She denied that IMG Holding, now managing over 50% of Oranta shares, had links to BTA’s former management.

Next steps

Ukraine’s insurance sector has boomed in recent years, and Oranta along with it. However, that boom was predicated almost entirely on the cheap credit bubble, and with the bubble bursting, Oranta and the rest of the sector are in trouble.

The credit bubble boosted the insurance sector by the surge in car ownership it induced, as well as the growth in bank retail lending, which constituted a major sales channel for insurance products. Car-related products accounted for 64% of the total gross written premiums in Ukraine in 2008. Compulsory third-party liability and voluntary damage insurance grew in 2007 at an estimated 74% and 113% on year, respectively. The logic behind this growth is very clear given that growth in the volume of new car sales in 2007 was 46%.

But the crisis has seen Ukraine’s car sales drop by an astonishing 70% on year in the first quarter. Accordingly, the drop in car insurance premiums exceeded 30% in the first quarter, according to an April 29 cry for help penned by the Ukrainian Insurance Federation, of which Oranta is a founder member. Overall, insurance premium collection in January to March 2009 fell by over 20% from the year before. Adding salt to the wound, payments on claims rose by 10% over the same period, due to the hike in the cost of imported spare car parts following the steep devaluation of the hryvnia.

Ukraine insurance companies were not only exposed to the credit boom through car insurance, but through reliance on banks’ retail credit operations as a sales channel. “About 30% of the insurance business in Ukraine was funnelled via commercial banks, but now this source of business has dried up,” says Foyil’s Agshin Mirzazade.

Moreover, according to the Ukrainian Insurance Federation, insurers are also suffering from Ukraine’s stricken bank sector not paying out on insurance company deposits, thus causing insurers to delay their own payments on policies.

Analysts estimate that two-thirds of Ukraine’s 495 insurance companies will quit the market as a result of the crisis. Oranta’s chief five competitors are all foreign-owned, including Generali Vienna Insurance Group, Allianz and Vesko Insurance, and there is speculation that Oranta will need a strategic investor to retain its position.

Oranta’s shareholders decided on a rights issue at the annual general meeting on April 17 to increase shareholder equity 4.4 times and bolster the company in the face of the storm. BTA representative Pavel Prosyankin said BTA hasn’t yet decided whether to participate.

Ukraine cities given extra time for Euro 2012

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

European football’s governing body UEFA decided May 13 to confirm only Ukraine’s capital Kyiv as a host city for the Euro 2012 football championships, with three other cities being given a deadline of November 30 to prove their suitability. A face-saving, two-venue solution is looking increasingly likely for Ukraine come the final deadline in November.

Newswires have been quoting French sports journalist Eric Champel, confidante and biographer of UEFA President Michel Platini, saying that Platini felt let down by Ukraine, and was ready in Bucharest to slash to a minimum the number of Ukrainian venues hosting Euro 2012.

Champel had reported before the UEFA decision that the organisation would name four Polish cities and only two Ukrainian – Kyiv and Lviv. Champel proved to be spot on about the Polish cities, and is now sticking to his guns about Ukraine, despite UEFA giving three candidate cities – Donetsk, Kharkiv and Lviv – until November before a final decision on their suitability is made.

UEFA in fact only confirmed capital city Kyiv as a host city – and did so grudgingly at that, mentioning a number of significant shortcomings that need to be rectified. Before the decision, Platini had made clear that if the capital city failed to qualify as a venue, the country as a whole would lose its right to host the prestigious championships.

Backing up Champel’s version of events, Ukraine’s business daily Delo quoted a source from Ukraine’s delegation to UEFA alleging that UEFA was originally intending to make a final decision naming Kyiv as only Ukrainian venue. According to Delo, only a letter personally addressed to Platini, signed by Ukrainian President Viktor Yushchenko, Prime Minister Yulia Tymoshenko and Parliamentary Speaker Volodomyr Lytvin, giving a guarantee of improvements to Ukraine’s preparation staved this off, saving Ukraine’s four-four parity status for now. However, the “4+2″ outcome is looking most likely. Platini pointedly stated in the run-up to the decision that Euro 2012 could take place in as few as six host cities.

Lviving it up

Champel’s naming of Lviv as potentially the only Ukrainian host city besides the capital Kyiv sounded initially strange. Picturesque but poor, Lviv has been widely criticized for its backwardness in preparations, connected with its inability to find investors for a stadium and airport. There were expectations that reserve city Kharkiv would burst through to knock Lviv off the list

However, if UEFA were to scale down Ukraine’s participation to only two cities, as Champel suggests, Lviv would for purely logistical reasons be the natural second Ukrainian venue. The formerly Polish city is located close to the Polish border, with close transport connections to Polish venues. A single eastern Ukrainian venue, on the other hand, whether Kharkyv or Donetsk, would be logistically isolated from the main body of the event.

Opting for Lviv according to this logic would, however, be tough justice for eastern Ukraine, the heartland of Ukrainian football, and arguably way ahead of Lviv in terms of preparation for Euro 2012. Kharkyv and Donetsk are having their stadia and airport infrastructure modernised by the image-challenged oligarchs who also own the local football teams and have bankrolled their clubs’ impressive run of European victories this year.

In UEFA’s decision, Kharkiv even made the jump from reserve city to candidate host city, not least thanks to backing of oligarch Aleksandr Yaroslavskii, owner of DSN holding and of Kharkiv’s Metallist team, who reached the UEFA cup quarter finals this year. “It would be hurting if Kharkiv were not to be chosen,” Elena Derevyanko, adviser to Yaroslavskii, tells bne. “Michel Platini promised that the cities would host Euro 2012 that were best prepared to do so. Kharkiv is better prepared than all the others, because no other Ukrainian city has made so much progress in all respects. In some cities there is a stadium, but it needs improvement, and there’s no financial guarantees for airport reconstruction. In some, there are hotels, but neither a stadium nor an airport, and no investors willing to build them. Only in Kharkiv are all ingredients present.”

Kharkiv and Donetsk, however, are roughly as near to Moscow as to Kyiv, let alone Lviv, let alone the Polish venues, and, in the event of Euro 2012’s centre of gravity shifting west to Poland, this will inevitably count strongly against them. But preference shown by UEFA to western Ukraine on geographical grounds is unlikely to go down well in Ukrainian football’s Eastern heartland.

Moldovan wine goes upmarket

Graham Stack in Chisinau for business new europe (www.businessneweurope.eu)

Beyond the clamour and colour of Moldova’s “Twitter revolution” in April, a silent revolution in the tiny ex-Soviet country’s wine industry might change the country more fundamentally. A 2006 Russian ban on Moldovan wine forced leading wineries to raise their sights and aim for western markets.

First the bad news: Moldova’s thousand-year-old wine culture has suffered three severe set backs over the last century and a half. At the end of the 19th century, it was devastated by phloxera. Then, under Mikhail Gorbachev’s Perestroika-era anti-alcohol campaign, 50% of vines were grubbed up. The latest affliction came in 2006 in the form of a Russian prohibition on wine exports, motivated by Moldova’s flirting with Nato.

Considering that winemaking accounts for 20% of Moldovan GDP, 28% to 30% of export revenues, employs around 27% of the labour force, and that around 85% of Moldovan wine was exported to Russia, this was more than a major problem. By January 2007, Moldova had lost an estimated $180m in sales. Wineries soon found themselves unable to service their bank debts, and 30% of them had been taken over by banks or were facing bankruptcy.

The good news, though, is that Moldova’s leading private wineries used the shock to “desovietise” and began switching their focus from the Russian market to European markets, changing their product and whole business approach in the process.

More of an odour than a bouquet

Every second bottle of Soviet wine was Moldovan, but this spoke about quantity not quality. Wine in Soviet times was little more than alcoholic fruit juice to be swashed down before the real drinking began, packaged in gimmicky bottles, and vinified semi-dry or semi-sweet. Quality dropped further in the nasty 1990s. Former top Georgian politician Irakli Okruashvili infamously described the wine that Georgia exported to Russia as “shit,” and the epithet could equally have applied to Moldovan produce at that time.

With economic growth restarting in 2000, Moldovan wineries started to invest in western equipment. The closing of the Russian market in 2006 then forced them to go the whole hog and try their luck on Western markets. “In 2007, six wineries formed an association, the Moldovan wine guild, to position themselves more strongly on foreign markets,” says Dumitru Tcaci, marketing director of winery Château Vartely and also of the Moldovan Wine Guild. The other members include Acorex Wine Holding, DK-Intertrade, Lion-Gri, Vinaria Purcari and Vinaria Bostavan.

“These six companies constitute one-third of Moldova’s total wine exports,” says Tcaci. “We want to become a strong marketing organization and boost the international competitiveness of each individual member. The six companies are the leaders in supplying Moldovan wines to the European market, and have all won awards in prestigious international contests.”

The Moldovan wine guild was supported by USAID, the US economic assistance agency. According to Douglas Griffith, the chief consultant employed by USAID to refocus Moldova’s wine industry towards European consumers, marketing alone wasn’t enough. “The product has to change as well and our work consisted of helping the wineries develop new skills and adopt new practices for producing new internationally recognized styles, such as the younger, fruitier wines produced in Australia, California, and Chile.”

“The newly founded Moldova Wine Guild demonstrates the commitment of seven major Moldovan wineries to create a category of high-quality Moldovan wines that can compete internationally; and it is already putting Moldovan wine on the map.,” believes Griffiths.

The basic shift was from Soviet-style sweet wines to the dry reds acceptable to European palates. This was coupled with developing internationally appealing brands. DK-Intertrade’s Firebird Legend is now widely available across Eastern and Western Europe, with a UK listing. Acorex developed the “Taking root” brand.

According to Tcaci, 12% of the value of Moldovan wine exports in 2008 went to the EU, up 27% on 2007. Admittedly, almost 40% of this amount went to Poland. But the Moldovan wine guild is also aiming to break through to Western European markets. UK sales doubled from 2006 to 2007, albeit from a low base.

Moldovan wine is also gradually finding its ways back to Russia after the import restrictions were eased in late 2007. Sales to Russia grew by 50% in 2008. However, a strict new regulatory regime means additional expense, so that Moldovan wines have moved up a price category. Now they compete in the same price category as the Bulgarian, Argentinean and Chilean wines that replaced them on Russian shopshelves during the ban.

In addition, market research shows that Russian tastes are changing from Soviet to European, ie. from sweet to dry wines. So the virtues developed by the Moldovan wine guild members will be just as needed to regain their previous share of the Russian market as to crack Western markets.