Publication: Eurasia Daily Monitor Volume: 4 Issue: 208

Russia’s top officials are loudly complaining about Kyiv’s tactics in a bitter dispute over Ukraine’s Kremenchug refinery, pledging to defend the interests of the Russian shareholders there. The incident is just the latest irritant in an already uneasy energy relationship between the two neighbors.

“I believe the incident came as an outrageous development, and we should not leave it unnoticed, because our policies prioritize the protection of Russian business interests outside the country,” Russian First Deputy Prime Minister Sergei Ivanov told a cabinet meeting on November 2. Ivanov urged Ukrainian authorities to discontinue what he described as their “inaction,” adding that the dispute entailed “clear and significant harm” (Interfax, RIA-Novosti, November 2).

Ivanov ordered Russian Industry and Energy Minister Viktor Khristenko to monitor the situation. The Ukrainian authorities, with their 43% stake in the refinery, have good reason to solve the dispute, Khristenko said.

Furthermore, Khristenko reiterated that Russia’s Tatneft oil company has halted crude deliveries to the Kremenchug refinery, adding that other Russian oil suppliers “will have no interest to supply oil to this company before the conflict is settled.” Ivanov endorsed Khristenko’s statement (Interfax, Itar-Tass, November 2).

The refinery, also known as Ukrtatnafta, in the Ukrainian town of Kremenchug was built during the 1970s to process crude oil pumped in Tatarstan, which is part of the Russian Federation. In 1995 the Tatarstan authorities, Tatneft, and the Ukrainian government agreed to form a joint venture at the Kremenchug refinery, which controls nearly 40% of Ukraine’s gasoline market. Tatneft was supplying some 6 million tons of crude a year to Kremenchug and has shipped about 4 million tons so far this year.

According to the joint venture agreement, Ukraine’s state-run oil company, Naftohaz, had a 43.035% stake in Ukrtatnafta, the property ministry of Tatarstan region held 28.778%, and Tatneft controlled 8.613%. In June 1999 an 18.296% stake was transferred to U.S.-registered Seagroup International and the Swiss-registered Amruz Trading, companies with reported links to Tatneft.

Naftohaz never accepted the transaction, and in May 2007 the 18.296% stake was handed over to Naftohaz. However, Russian shareholders resisted attempts to remove pro-Tatneft CEO Sergei Glushko and appoint a pro-Naftohaz management team. But on October 19, Pavel Ovcharenko, former CEO of the Kremenchug refinery, supported by armed security personnel, took over the plant, citing a ruling by Ukraine’s Sumskoy court.

Russian shareholders responded by cutting oil supplies. In late October Tatneft first deputy CEO Nail Maganov claimed that the Kremenchug refinery was loosing $4–5 million a day because Tatneft had halted crude supplies. The plant was processing just 7,000 tons per day, compared with 18,000 tons per day before October 19, Maganov said.

On November 1, Tatneft said it expected no direct financial losses, as it had stopped supplies for the Kremenchug refinery. Tatneft pledged to sell its extra volumes of oil in Russia or keep the crude in storage facilities, owned by Tatneft (with a capacity of 700,000 tons) or by Transneft (with a capacity of 6 million tons) (Interfax, November 1).

Meanwhile, the plant’s new management responded by accusing Tatneft management of criminal wrongdoing. On November 1 Ovcharenko sent an open letter to Tatarstan President Mintimir Shaimiev, claiming that Maganov and Glushko had conspired to embezzle assets from the Kremenchug refinery. “The current nervousness of Tatarstan shareholders is unjustified and is caused by wrong assessments of the situation,” he wrote.

Ovcharenko described the sale of the 18.296% Ukrtatnafta package to Seagroup and Amruz as a major fraud and alleged that both companies were, in fact, controlled by Maganov’s accomplice, Nurislam Syubayev. Ovcharenko also claimed that crude oil from Tatarstan was being sold to the Kremenchug refinery via shell companies, specifically Russian-registered Tais and Ukraine’s Taiz, allegedly controlled by Maganov.

Tais was buying oil below cost, Tatarstan was loosing hundreds of million of dollars a year, while Maganov was pocketing the proceeds, according to Ovcharenko. Maganov and Glushko allegedly conspired to increase the refinery’s debts to Tais to nearly $300 million by October this year, aiming to force the plant into fraudulent bankruptcy and take over it, Ovcharenko claimed (Interfax, November 1).

On November 2 Ovcharenko sent another letter, this time to Ukraine’s Security Service (SBU), claiming that the plant’s former management had tried to make the refinery close. In January-September 2007, the plant reported $25 million in losses, despite a good market, he wrote. In April-September, the plant’s former management also dodged Ukraine’s value added tax, he claimed (Interfax, November 2).

The same day Ukraine’s First Deputy Prime Minister Nikolai Azarov ordered Fuel and Energy Minister Yuriy Boyko, in cooperation with the Justice Ministry and the State Property Fund, to settle the dispute with Russian shareholders. Azarov also ordered assurances that the Kremenchug refinery would operate at levels as high as before October 1, 2007. Also on November 2, Ukraine’s Naftohaz indicated plans to process crude from the state reserves at the Kremenchug refinery, adding that it controlled a 61.3% stake in the plant.

Russian and Ukrainian officials appear to disagree about stake-holdings in the Kremenchug refinery. On November 2, Russia’s Khristenko said that Ukrainian authorities controlled 43% of the plant, while Naftohaz insisted it had a 61.3% interest. Therefore, the dispute focused not on the management change at the refinery on October 19, but on the questionable June 1999 sale of the 18.296% stake in the plant to Seagroup and Amruz. In other words, Russian officials actually moved to defend a suspicious deal to transfer a sizable stake in Ukraine’s major refinery to obscure foreign entities with ill-defined affiliations.

The Ukrainian authorities have also criticized other energy dealings with Russia, involving non-transparent dealings by overseas firms. Under the complex January 2006 agreement between Russia and Ukraine, all Gazprom gas supplies to Ukraine have been funneled via Swiss-registered RosUkrEnergo. Gazprom holds a 50% stake in RosUkrEnergo, Ukrainian businessmen Dmitry Firtash owns 45%, and Ivan Fursin holds 5%. UkrGazEnergo, a joint venture between RosUkrEnergo and Ukraine’s Naftohaz, acts as a sole gas importer into Ukraine.

On November 2, President Viktor Yushchenko suggested that Russian gas supplies to Ukraine should become simple and transparent. Ukrainian authorities have nothing to do with RosUkrEnergo, it was not Kyiv’s initiative to form this company, he said, adding that Ukraine is interested in direct relations with Gazprom without intermediaries.