The past month has seen two efforts to create CIS national oil and gas champions. Where Russia succeeded, Ukraine failed.
The success is the merger of Gazprom and Rosneft. It consolidates most of the state's oil and gas holdings, with the exception of its stake in LUKoil, into a single company managed by a single person – Gazprom CEO Alexei Miller. This will help it to manage its energy policy and engage with multinationals such as TNK-BP, Exxon-Mobil and Chevron-Texaco, as other CIS countries have done.
Kazakhstan began the merger of Kazakh Oil and TransNefteGaz in 2002, to create an efficient state-owned energy company capable of competing and cooperating with the super-majors active in the country. Kazakhstan felt it had not fully served its own interests in deals struck with super-majors in the early 1990s.
Russia wants to follow suit. Prime minister Mikhail Fradkov, speaking in Astana last month, said: “Combining the [state's] oil and gas assets is needed to improve competitiveness on foreign markets.” The enlarged Gazprom “would be turned into a trans-national company of world significance”.
The move has raised some concerns that the government is tightening its grip on the commanding heights of the economy. Jeffrey Woodruff, a director at Fitch Ratings, says: “Is there something larger at stake, such as the new company's ability to take a share in Yukos assets?”
Marshall Goldman, a professor of Russian economics at Wellesley College, was among several Russia-watchers who met president Vladimir Putin early last month. Goldman reports that Putin said Rosneft was not big enough to take over Yukos's oil assets, which will be auctioned this year to pay Yukos's tax bills. “However,” says Goldman, “Rosneft and Gazprom probably will be big enough to absorb Yukos' assets.”
But if the market was concerned, about state control of the energy sector, it didn't show it. The merger paved the way for the liberalization of Gazprom shares.
Vadim Kleiner, head of research at Hermitage Capital, says: “It's the most significant piece of news in the stock market, other than Yukos, for the last two years.”
At the moment, Gazprom shares trade in a two-tier structure. A limited proportion are available as ADRs on the New York Stock Exchange, while others are listed in Russia on the RTS. Foreign participation in RTS-listed shares is limited by the government.
The difference between the two prices is huge. At the moment, local shares cost $2.30 and ADRs cost about $33. But foreign investors can only invest in local shares through grey trading schemes provided by some local brokerages, who set up offshore structures that give the foreign investor the benefit of the local shares without ownership.
Because they are not strictly in the spirit of the law, such schemes are subject to political risk. In August, when a Duma deputy declared the schemes were illegal in a letter to the head of Russia's state security organization, the FSB, Gazprom lost about $6 billion in market capitalization in one day.
The government has long said that it intends to give the market a boost by liberalizing Gazprom's share structure. But Putin has said a precondition is increasing the government's 39% stake in Gazprom to a controlling stake. It wants to swap Rosneft for 10.7% of Gazprom shares, which are held by the company's treasury.
Whether Rosneft is worth 10.7% of Gazprom shares is a moot point. Any analysts who think not are unlikely to complain loudly, given all the new business they will get from Russia's new blue chip.
Liberalization will attract new foreign capital into the company. The new share will be by far the largest stock in Russia, and one of the largest in the emerging market universe, pushing Russia's weighting in the MSCI index from 30 basis points to 300.
Putin has successfully balanced several aims – consolidating state energy assets, creating a potential bidder for Yukos assets, and taking the stock market's mind off jailed oligarch Mikhail Khordorkovsky. “Mikhail who?” as one trader joyfully put it.
Meanwhile, Ukraine's efforts to set up a vertically integrated energy company have stalled. The Ukrainian government is worried about high oil prices, and about over-dependence on Russian oil companies like LUKoil and TNK-BP, who own many of its petrol stations.
A plan was floated in February to consolidate three oil refineries, Halychyna, Naftokhimik Prikarpattya and Ukrtatnafta, into Ukraine's largest oil company, Ukrnafta. The government owns 50% +1 share of Ukrnafta. The Privat Group, owner of Privatbank, owns about 42%.
Ukrnafta already owned 32% of Halychyna and 75% of Naftokhimik, and intended to buy a controlling stake in Ukrtatnafta and expand the number of petrol stations it controlled to 1,000 to rival the Russian firms' retail network.
However, last month the plan unravelled. Analysts say the presidential administration approved the deal, but it was blocked by the parliamentary deputy who controls the government's stake in Ukrnafta.
Dmitri Tarabakin, director of Dragon Capital, says: “There are two governments in Ukraine – the presidential government and the parliamentary government. The Privat Group is close to the former, but some deputies are against them.” Tarabakin still expects vertical integration to happen. “It's still a relatively new idea.”