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3 May, 2012  ▪  Oleksandr Kramar

Naftogaz Up For Sale

On 13 April, the Verkhovna Rada passed an amendment to the Law On Pipeline Transport to Reform the Oil and Gas Complex, which provides for the re-organization of Naftogaz, currently a national joint stock company.

It was the first document sponsored by an opposition member that the pro-government parliamentary majority readily supported. Notably, the opposition did not, while the Cabinet of Ministers even recalled the draft law it had sponsored back in November 2011 allowing the privatization of the gas transit system. Back then, it had faced firm resistance from the opposition, who saw the threat of selling Ukraine’s gas transit system to tycoons with close ties to the government or Gazprom as the price for revised burdensome deals to purchase Russian gas.

Officially, the move is presented as the fulfillment of commitments Ukraine undertook as it joined the EU Energy Commonwealth. “There is nothing scary about this law that could threaten the privatization of the gas transit system but who knows how things will turn out in the future,” Oleksandr Yefremov, leader of the Party of the Regions faction in the parliament, commented vaguely on the measure. The government could be following a scenario tested when it passed the law on parliamentary elections, supposedly a compromise version that garnered support from the very same opposition that is now unilaterally amending it. Moreover, it looks like the propaganda machine of Ukraine’s “strategic partner” has had quite an effect on the ruling party, namely in planting the idea that “scrap metal collectors rather than gas experts” (as Yefremov once dubbed them) will deal with the gas transit system without the involvement of Gazprom in its stewardship or ownership.

Hence the question: what prompted the president to instruct the parliament to vote for an initiative sponsored by a member of the Dictatorship Resistance Committee that his partners in the BYuT and Nasha Ukrayina–Narodna Samooborona (Our Ukraine – People’s Self-Defense) parties did not support?

At this point, the law, sponsored by Our Ukraine MP Yuriy Karmazin and passed by the government, could be of certain value to those in power.

It allows the government to split Naftogaz into several segment companies that will extract, transport and sell gas. The ban on privatization that used to embrace Naftogaz and its subsidiaries will now only apply to companies that transport and store gas. This means that the rest of Naftogaz’s assets, including oil and gas extraction and sale, could easily be sold to tycoons connected to the government or Gazprom that have been daydreaming of monopolizing Ukraine’s domestic market in exchange for a discount in gas price after the re-organization.

One sign that Mr. Karmazin may understand the government’s intentions is his attempt to include an amendment into the draft law immediately before the vote that would ban the sale or transformation of government-owned Naftogaz subsidiaries into joint stock companies for the purpose of gas transit, storage, extraction or refinement. The parliament rejected the proposal.

Pressure from Gazprom is another reason why the government needs to start reforming Naftogaz. Firstly, this is an argument to convince European investors to start funding the upgrade of Ukraine’s gas transit system, and it could boost Kyiv’s confidence in gas talks with Moscow. Secondly, the restructuring of the transit monopoly presents a threat to Russia that could eventually force the country to revise its current deals with Ukraine as a result of Naftogaz’s possible bankruptcy, probably preceded by the withdrawal and partial privatization of all of its significant assets. The new law creates the necessary grounds for this.

At this point, it looks like the government feels no pressure to cancel the ban on the privatization or concession of Ukraine’s gas transit system given the uncertainty of potential deals with the Kremlin. Thus, Kyiv must have chosen to avoid frontal attacks and focus on tactical maneuvers instead. After all, the government is much more interested in distributing the pipelines out to its own buddies rather than giving them away to Gazprom. Having the ban recorded in law and an opposition that is resistant to handing the gas transit system over to Russia is not the worst trump card for economic and political bargaining with the Kremlin. 

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