Naftogaz initiates split of Ukrnafta amid risk of multi-billion claims from minorities

Naftogaz initiates split of Ukrnafta amid risk of multi-billion claims from minorities
The management of Ukraine's state-owned gas company Naftogaz has started the process of splitting off its oil subsidiary Ukrnafta as the battle between the state and the oligarchs hots up / wiki
By bne IntelliNews February 4, 2021

The CEO of Ukraine’s national gas company Naftogaz, Andriy Kobolev, has started the process of separating the gas company from Ukraine’s leading oil company Ukrnafta as the battle between the state and the oligarchs heats up.

Kobolev sent a letter to the supervisory board asking its members to “study the possibility of dividing the company’s assets between two groups of shareholders,” Interfax-Ukraine reported on February 3.

The move is the latest in the government’s recent attempts to rein in the country’s powerful oligarchs that have inserted themselves into the structures of many of Ukraine’s most valuable assets. Oligarch Ihor Kolomoisky is a major shareholder in Ukrnafta and has run scams in the past to siphon off cash from things such as the state procurement of oil, a high-level Ukrainian official told bne IntelliNews, among other schemes.

“Kolomoisky, as a powerful minority shareholder in Ukrnafta, was always a headache for Naftogaz, so the intention of the state company to divorce itself from this group is natural. If the separation happens, this will add stability to Naftogaz's operations. However, the process does not promise to be fast: most likely it will take a couple of years,” Alexander Paraschiy of Concorde Capital said in a note.

The separation of Naftogaz and Ukrnafta comes only a week after Ukrainian President Volodymyr Zelenskiy launched an assault on Viktor Medvedchuk, the head of the Political Council of the Opposition Platform, For Life Party, by closing down several TV stations associated with the Ukrainian politician, who is a close personal friend of Russian President Vladimir Putin.

This week Zelenskiy issued sanctions by presidential decree – which can only be challenged by the Supreme Court and not the corrupt regular courts that are under the control of the oligarchs – against pro-Moscow MP Taras Kozak, who is the nominal owner of the TV stations associated with Medvedchuk.

Medvedchuk is also partnered with Kolomoisky and owns just under 25% of his media empire that includes the major broadcaster 1+1. Kolomoisky has been credited with putting Zelenskiy into office by using his media assets to back Zelenskiy's presidential campaign in 2019; however, it increasingly appears the two have fallen out as Kolomoisky lobbies to reverse the nationalisation of PrivatBank that he owned until 2016.

As bne IntelliNews reported, all of the countries of the Former Soviet Union (FSU) are suffering from “The Oligarch Problem”, which is especially bad in Ukraine.

Analysts speculate that following the first call with the newly installed Biden administration in the US, Zelenskiy has been promised support as part of the US campaign to meet what it sees as a Russian threat, but at the same time Washington wants to see some results in the fight against corruption in Ukraine that is embodied by the oligarchs.

Naftogaz owns 50%+1 shares in Ukrnafta and wants the board to consider dividing the company by business directions to further separate Naftogaz from a group of minority shareholders that are related to Kolomoisky, who owns with his partners at least a 41% stake in the company.

In his letter, Kobolev asks for the creation of a working group for the asset split, the hiring of one of the big-four audit companies to undertake an assets valuation and the appointment of a legal advisor that will conduct the process, Concorde Capital reports. Kobolev expects that such issues will be considered at Ukrnafta’s next shareholder meeting.

Interfax-Ukraine also reported on January 28 that Naftogaz had sent a letter to the minority shareholders of Ukrnafta calling for a shareholders meeting as soon as possible.

Minority shareholders aligned with Kolomoisky have already filed legal complaints against the Ukrainian government in 2016 demanding compensation for an alleged $4.67bn in losses. According to Ukraine’s Justice Minister Denys Maliuska, the Arbitration Court in Stockholm might rule on this case in February 2021. He estimated the potential loss for the government from the claim at about $6bn.

“Meanwhile, the claim of Ukrnafta minorities against the government, however absurd it could look at first glance, is a risk that should not be ignored. If the minorities win their claim in Stockholm, their leverage in Ukrnafta will significantly increase. Moreover, in such [a] case, it might happen that the government will have to compensate the minorities by providing them some shares in Ukrnafta, which would result in losses for Naftogaz,” Paraschiy said.

This is not the first time that the idea of splitting the two companies has come up. The government was toying with the idea in 2019, but dropped it in August of that year.

"Now the idea of splitting Ukrnafta between its shareholders is no longer relevant," Yuriy Vitrenko, the executive director of the Naftogaz group, said at the time. Vitrenko was recently proposed by Zelenskiy for the post of Energy Minister, but was rejected by the Rada, where oligarchs control almost 200 of the 422 seats.

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