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.

Legal eagles Obama and Medvedev swap notes

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

The Connection Between the Lawyer Presidents is More Curious than Medvedev Seems to Have Realized

When they first met, Russian President Dmitry Medvedev played up the common legal background he shares with U.S. President Barack Obama. And despite question marks over the veracity of Medvedev’s claim to have studied a “legal reference work” authored by Obama, the influence of the Russian president’s legal schooling is palpable, in his public statements, policies, and above all his appointments. But is his habit of hiring like-minded colleagues really a bid to consolidate the rule of law, or just good old-fashioned nepotism?

Relations between U.S. and Russian presidents are full of paradoxes. Since the collapse of the Soviet Union, each new Russian president has been paired with a new U.S. president – Bill Clinton and Boris Yeltsin, George W. Bush and Vladimir Putin, and now Barack Obama and Dmitry Medvedev. The previous two presidential pairs featured an unlikely personal bond, which nevertheless failed to prevent tensions escalating between the countries.

Obama, after his first meetings with Medvedev, seemed to deliberately avoid any sentimentality, emphasizing that he wants a relationship based on shared national interests, not personalities. In fact, Medvedev’s response to Obama was more personal than vice versa, inspired by his and Obama’s common background as legal scholars.

Following the two presidents’ first meeting at the G20 summit in London in March, Medvedev commented that “we have read the same books.” Following a bilateral meeting at the G8 summit in L’Aquila on July 10, the footnote swapping seemed to have gone one step further: Medvedev said he had previously studied a “legal reference work” co-authored by Obama. “This is curious to say the least,” Medvedev remarked.

The issue is actually even more curious than Medvedev seems to have realized: Obama, as a legal scholar, published nothing, except one research note to the Harvard Law Review as a graduate. Medvedev’s own publication record is far more impressive than Obama’s – having co-authored a standard work on Russia’s civil code in the 1990s.

What publication was Medvedev referring to, then? It could be that he meant the Harvard Law Review. Obama famously edited the prestigious periodical between 1980 and 1990 as its first black editor. These were also the years when Medvedev was completing his doctorate in St. Petersburg.

However, according to a number of sources, it is extremely unlikely that the journal was available at St. Petersburg State University until the late 1990s. Also it is unclear why Harvard Law Review could have been interesting for a Russian legal scholar at that time.

More likely is that Medvedev confused Obama’s editorial position at Harvard Law Review with his later teaching post at University of Chicago. University of Chicago law school publishes the famous journal “Law and Economics.” “Law and Economics” is the flagship journal of the neo-institutional economic school that analyses an economy according to its legal institutional framework, and as such is a key journal in Medvedev’s field of commercial law. Obama’s faculty friend and now top economic advisor, Austan Goolsbee, was lead editor of the journal in the 1990s.

Neo-institutional economics became mainstream in Russia in the second half of the 1990s, as it became clear that macroeconomic stabilization and privatization did not work if an economy lacked efficient laws and institutions. As a result, government economic reforms started to focus on the legal sphere. This shift was embodied by the appointment of legal scholar German Gref as a long-serving economy minister between 2000 and 2007. Gref studied and taught alongside Medvedev in the St. Petersburg law faculty in the early 1990s.

Medvedev must have studied this school of thought – and may (wrongly) think Obama edited its foremost journal when he taught at the University of Chicago. In fact Obama taught constitutional law, and was concerned with issues of race and citizens’ rights quite distant from Medvedev’s scholarly interests.

Civiliki: Network or norms?

Whatever the truth, Medvedev’s response to Obama demonstrates how strong his identity as a civil law scholar remains, despite years of working in the Kremlin and government. This is an identity he shares with other top officials and friends, nicknamed the civiliki, to distinguish them from Vladimir Putin’s ex-KGB network of siloviki.

This identity was underscored last week by a visit to his alma mater, St. Petersburg University’s law faculty, posted on his video blog on the Kremlin website, where Medvedev reminisces about his years studying and teaching there. Ilya Nikiforov, an associate lecturer at the civil law department, pointed out that “Medvedev even contributed a chapter for a civil law textbook, co-authored by members of St. Petersburg Law School, after having become president last year.”

Medvedev’s background in law does not just serve him intellectually, but as a source of personnel appointments. Besides Gref, who now heads Russia’s largest bank, the state-owned Sberbank, the new Minister of Justice Alexander Konovalov also studied and taught alongside Medvedev in Petersburg in the 1990s, where he lectured on Roman and civil law.

From among Medvedev’s undergraduate classmates (class of 87), Konstantin Chuichenko heads the Central Control Directorate in the presidential administration, Nikolai Vinnichenko is presidential envoy to the Urals Federal District, Artur Parfenchikov heads the State Bailiffs Service, Nikolai Gutsan is deputy prosecutor general, and Valeriya Adamova chairs the Moscow Arbitration Court. About a dozen other colleagues and classmates are scattered through the top echelons of the state as well as Gazprom.

Most civil among the civiliki, and the closest to Medvedev, is his longtime friend, former classmate, faculty colleague and textbook co-author, Anton Ivanov. Ivanov was catapulted to head Russia’s Supreme Arbitration Court, the country’s court of final instance in commercial disputes, also with prerogatives in norm setting, in 2005.

Like Medvedev, Ivanov has retained close ties to academia, as scientific director of the law faculty of Moscow’s prestigious Higher School of Economics. According to deputy dean of the faculty, Natalia Rostovtseva, Ivanov’s position is not a formality. “He plays an active role in the life of the faculty,” said Rostovtseva. “He teaches the second year course on the civil code, and examines. Moreover, he insists that students get practical experience by attending sessions of the Supreme Arbitration Court and completing internships there.” Ivanov himself complains that he now only has time for three or four publications per year.

Ivanov is notable for having taken a principled position against siloviki policy in the state sector of the economy. In June he called for a moratorium on the creation of state corporations such as giant defense sector and engineering holding Russian Technologies, headed by leading silovik Sergei Chemezov, a personal friend of Vladimir Putin’s. Ivanov argued that Russia’s civil code does not envisage any such hybrid form of private and state property, and demanded “common norms for all legal entities.”

Likewise, Medvedev’s rhetoric against “legal nihilism” and his calls to strengthen the rule of law obviously draw on his roots in jurisprudence.

On the other hand, the civiliki network might turn into a “jobs for the boys” club, ensuring the loyalty to Medvedev of what are meant to be independent institutions. On July 7, for instance, a former St. Petersburg law faculty member, Sergei Mavrin, was proposed by Medvedev as deputy chairman of the constitutional court. Prior to this, new legal amendments empowered the president to propose candidates, whereas previously judges had voted on new members. Mavrin is now widely tipped to head the constitutional court when current head Valery Zorkin steps down in 2012.

So the crucial test for Medvedev’s presidency could be whether his declared interest in strengthening legal norms is actually implemented, or whether his academic background will simply serve him as a source of cadres, equivalent to Vladimir Putin’s siloviki network.

Similarly in U.S.-Russian relations, a reset will only work if Obama’s and Medvedev’s shared legal background helps them move ahead with strengthening the rule of law in the international sphere. If their legal interest is simply used as a basis to build a personal relationship, the history of the previous two presidential pairs, where personal friendship failed to prevent escalation of Russian-U.S. tension, may be doomed to repeat itself.

Ukraine’s poisoned president launches doomed bid for second term

Graham Stack in Kiev

Ukrainian president Viktor Yushchenko, the world’s most unpopular president according to opinion polls, climbed Ukraine’s highest mountain Sunday July 19 to prove his fitness for a second term in office. At the summit of Mount Hoverla (2016m) in the Carpathians, with a view westwards to the Europe he aspires to, Yushchenko announced officially that he would run for a second term in office in elections in January 2010.

“I would like to officially announce here that I will be running for the Ukrainian presidency in January,” he said.

A small band of supporters who had followed him to the peak in beautiful summer weather struggled with tears after his announcement. Opinion polls give Yushchenko an approval rating of only 2% – less than the margin of error – meaning he is facing utter humiliation in the elections. Pollsters point out that his rating constitutes a world record for unpopularity. His motorcade regularly encounters a hostile cacophony of blaring horns as it winds through Kiev streets.

Yushchenko’s record-breaking unpopularity is astonishing considering his initial approval rating of over 60% on taking office in January 2005. Yushchenko was swept to power by mass protests against electoral fraud in late 2004, known as the Orange Revolution. In the run-up to the rigged elections, opponents poisoned Yushchenko with dioxin. The images of his severe facial scarring that resulted have become an icon of people’s struggle for democracy.

The scarring, the medical term for which is chloracne, and facial immobility are still very obvious. The subtext of yesterday’s ascent of Hoverla was not only symbolic, but also simply to prove that the president is physically fit enough for high office in times of crisis.

Poisoned chalice

Leading international toxicologists familiar with the case argue however that the poison has massively impaired the president’s performance. They dispute Yuschenko’s claim that his body has got rid of 95% of what was one of the highest dioxin doses in humans ever recorded.

“My belief is that he will suffer many ill effects of dioxin for many years, including possible brain damage,” says dioxin expert University of Texas professor Arnold Schechter. “His chloracne not only affects the face, but the whole body – as every single follicle may be involved in severe cases as the one of president Yushchenko is,” agrees Vienna’s Alexandra Geusau.

Yuschenko has traditionally said little about the effects of the still unsolved poisoning, except to claim he is in good health. Last month, however, he admitted he had undergone 26 secret operations in the first two years of his presidency. “Nobody knew about the operations, because they were carried out at the weekend, on Friday evenings, and on Monday I was already back at work,” Yushchenko told journalists, adding that each operation lasted over three hours.

Toxicologists say Yushchenko’s out-of-touch performance in office is a direct result of the poisoning.

During the Orange Revolution, the poisoning added fuel to the popular fury at stolen elections. But according to Valery Khmelko, president of Kyiv International Institute of Sociology, “following the poisoning, Yushchenko became more interested in his presidential palaces, amateur history and bee-keeping than in running the country.” Crisis-hit Ukrainians see their president as out of touch with reality and incapable of exercising power.

British toxicologist Alastair Hay of Leeds University lists lethargy, enervation, numbness, liver damage and weakened immune system as medium-term consequences of dioxin poisoning

“Yuschenko’s behaviour is what you might expect from someone exposed to dioxin in the quantities he was,” says Hay. “The chloracne indicates he is genetically susceptible to dioxins, so he may have many systems of his body damaged. It must have taken an effort of will to continue in his high-octane job.”

Now, in a bitter irony of history, the clear favorite to win the upcoming elections is the man whom the Orange Revolution prevented seizing power in 2004, pro-Russian former Prime Minister Viktor Yanukovych.

A further bitter blow is the decision on the part of Barack Obama’s new US administration to send only the vice president to Ukraine, while Obama himself visited Moscow last week without any stop-over in Kiev. Yushchenko has staked everything on a pro-US foreign policy aiming at NATO membership, and Obama’s rapprochement policy with Moscow is making this look like a dead end.

Earlier this week, Yushchenko’s foreign policy spokesman said pointedly that the main topic of discussion with Biden would be to negotiate a visit to Kiev by Obama himself.

Russia’s GDP reported to have shrunk 8.8% YoY in January

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

Interfax cited a Russian government official as indicating yesterday February 24 that real GDP fell by 8.8% YOY in January, following a 9.9% YOY decline in December 2008.

Last Friday February 20, Minister for the Economy Elvira Nabiullina announced that GDP contracted 2.4% MoM in January.

According to business daily Vedomosti, Russian exports dropped about 41% YoY in January to USD 20.2bn, with a 5.5% YoY decline in physical volumes. Oil and gas exports contracted 3.1% YoY and 41% YoY, respectively. Imports declined 34.2% YoY to USD 10.3bn in January, bringing Russia’s trade balance to USD 9.9bn. Real imports contracted 5.5% YoY.

VTB Capital’s Aleksandra Evtifyeva writes, “while the recent economic data and the PMI-based GDP Indicator suggest that economic activity almost froze in January, the 8.8% YoY decline in GDP still came as a negative surprise. Although fixed capital investment plunged 15.5% YoY, retail sales were still up 2.4% YoY last month.”

One reason Evtifyeva forwards for the sudden drop is Russia’s gas dispute with Ukraine, that saw a cut in Russian gas exports to Europe. Other analysts pointed to the “base effect” – the high rate of growth recorded in January 2008 of roughly 8 per cent year on year.

However, even if exports recover in February, Evtifyeva see “serious risks of consumption taking a lead from declining industrial production (which was down 16% YoY in January).”

According to Royal Bank of Scotland’s Head of CEEMEA research Timothy Ash, “these are pretty grim figures, and are showing the Russian economy is contracting at a much more rapid pace than expected; primarily related to the fact that it is commodity-based, and has been credit-fuelled in recent years. The commodity/credit underpinnings of the economy have been removed, hence the downturn.”

Ash argues this figure makes even the revised official forecasts for a 2.2% YOY contraction in real GDP over 2009 appear unattainable.

“The sheer extent of the slowing in the economy has obviously clear implications for the budget, as revenues are likely to subside, while spending pressures will increase, boosting the deficit, perhaps beyond the 8-10% of GDP currently being suggested by various government officials,” says Ash. “It also raises concern over the durability of the current 41 top end of the rouble basket. With growth in near-free-fall pressures will build for the CBR to relax its current relatively restrictive monetary policy, and to allow the exchange rate to bear a bit more of the burden in helping the economy come to a soft landing.”

“The more statist elements within the Putin/Medvedev administration are likely to become increasingly critical of the more orthodox reformers in the cabinet (Kudrin et al) and this could also suggest less orthodox policy responses; note comments last week by a prominent parliamentarian for the imposition of capital controls,” adds Ash.

Other analysts argue that the high interest rates the central bank is using to keep the rouble stable have also hurt growth. However, the rouble appears to have stabilised, at least temporarily, and authorities are hoping the banks will begin lending again, instead of hording dollars.