In light of the upcoming presidential election in Ukraine, it was obvious that the whole business of creating a vertically integrated oil company (VINK) would be rather intriguing. The actual events, however, surpassed all expectations. The implementers managed to bring practically all the players in the oil market into conflict, while trying to unite all the state assets [in oil extraction and refinery] under one management.

Many felt ill at ease when even the loyal Tatars were affected. As a matter of fact, up to three billion tons of oil, which is the lion’s share of the oil processed at the Kremenchuh oil refinery, comes from Tatarstan and is supplied by Tatneft. The Halychyna oil refinery also processes non-Ukrainian oil.

It is very easy to destabilize existing oil supplies. As a matter of fact, it is actually happening now. Resistance at the Halychyna oil refinery lasted for a few days, and the situation with the oil supplies at the Kremenchuh refinery was significantly involved, to say nothing of the fact that the appointment of Serhiy Hlushko as Ukrtatnafta’s acting board chairman became an obvious scandal. He was appointed to the post in violation of every rule which could possibly be violated, and of many rules which could not be violated at all.

Indeed, according to Ukrtatnafta’s statute, its supervisory board can charge another board member with the duties of the board chairman. However, only at a meeting of stakeholders are they authorized to appoint new board members, as is clearly stated in the new Civil Code.

So the problem is that Serhiy Hlushko has never been on Ukrtatnafta’s board, which means that he could not be appointed its chairman without a decision at the stakeholders’ meeting. Moreover, he was appointed in disregard of Ukrainian courts’ rulings banning any supervisory board meetings and any appointments or dismissals of board members. Instead, the lawyers for Naftogaz representatives gave their “guaranties” that such bans would soon be lifted.

According to the head of the supervisory board of Ukrtatnafta, Ravil Muratov, “a judicial game is in process, aiming to disrupt the meeting of the supervisory board. Such measures are taken to prevent the board from deciding to fulfill the owners’ will.” Obviously, one can simply ignore the existing court decision under such conditions. It is strange, however, that in May, Muratov unconditionally agreed to a decision by a regional court banning Ukrtatnafta from holding a stakeholders meeting, and cancelled it.

The thing is that one must observe the law even if one does not like it. It is not the rule of law if the parties fulfill only those decisions they like, and go so far as to say that there will be no problems with the court passing the appropriate verdict.

Basically, it was not a secret that Tatar stakeholders were not happy about the prospect of diluting their stock in Kremenchuh oil refinery. Ukrtatnafta is a closed corporation, so a change in its ownership can only take place with the agreement of the other stakeholders. Any of the proposed options, whether it would be Naftogaz or Ukrnafta, as was initially planned, would mean a change in ownership.

The argument that Naftogaz is a state-owned company and that it is only a matter of changing the name is not really convincing. Naftogaz Ukrainy is a regular business unit, similar to, say, Tatneft. Moreover, Ukraine successfully proved last week in a Canadian court that a state and a state business enterprise are two different things. The situation with Ukrtatnafta is similar to that with the Ukrainian aircraft Ruslan, seized in Canada for the debts of a different state-owned corporation; so if there is a scandal the Ukrainian Foreign Ministry will deal with it. Will it offer a different outcome in the case with Tatarstan?

The Ukrainian National Stock Company Naftogaz Ukrainy is a new stakeholder in terms of corporate management, so it must get the agreement of the remaining stakeholders to join the corporation, or they give up their right to purchase the shares of the stakeholder that leaves.

In this particular case, in early August the Tatars insisted that the procedure for the transfer of a 43.05% state stake in Ukrtatnafta, which should take place as a result of the establishment by Ukraine of a national vertically integrated company (VINK) should be negotiated with them. The first deputy prime minister of Tatarstan and the chairman of the supervisory board of Ukrtatnafta, Ravil Muratov, said this in his letter to the chairman of the State Property Fund of Ukraine, Mikhail Chechetov, and the chairman of the Ukrainian National Stock Company Naftogaz Ukrainy, Yuriy Boiko.

He emphasized that “the Republic of Tatarstan as well as other Ukrtatnafta stakeholders have the right to take part in the development of the mechanisms of implementation of the decree, through consultations and agreements within the framework of the law of Ukraine, and to complete this work by signing an agreement between the stakeholders of Ukrnafta (this refers to the first decree of the President in which it was expected to transfer the stake in the oil refinery to the oil extracting company - author), the National Stock Company Naftogaz Ukrainy, and the stakeholders of Ukrtatnafta.”

He stressed that “infringement of Ukrtatnafta stakeholders’ interests would be undesirable for both the stakeholders and for further operation of the company, as it could possibly entail conflicts and trials… The transfer of the shares will be legally correct only if it is completed upon notification of all stakeholders and upon receiving their refusal of their property rights for the shares to be transferred.”

It is interesting that initially the State Property Fund of Ukraine agreed to observe the priority property rights of the rest of the stakeholders, and sent notification to them. In response, Tatneft stated its intention to buy the shares in Ukrtatnafta for $ 180 million instead of $ 160 million, as was estimated by the Fund.

It is not clear what made Chechetov later make another statement saying that there was no need to notify anybody since no change in ownership took place, as well as what made Muratov thank the Ukrainian President at a news conference on September 16 2004, having “forgotten” about the priority right for the shares and Tatneft’s statement.

The State Property Fund withdrew from the case as it usually did. It is not clear now whether the stock has already been reregistered for Naftogaz Ukrainy, but the procedural problems have already become obvious. For example, when and how should the authorized capital of Naftogaz be increased? The stake in Kremenchuh refinery alone is worth 889.5 billion hryvnias, and one would struggle to get a reasonable evaluation of Halychyna stock. Thus, it cannot be ruled out that the State Property Fund will have to attend various courts, including international ones.

The Fund may, however, get a rather unexpected ally. In September it became clear that differentiation between the interests of the state and of a business unit is also a common practice in Tatarstan. Ravil Muratov took a significantly different stand from that of Tatneft.

He indirectly confirmed this by saying that Serhiy Hlushko would get enough votes to be approved as board chairman at the stakeholders meeting on November 12, since Ukraine has a 43% state stake (without specifying the name of the owner) whereas the Tatar government has only 28%. Experts pointed out that the Tatar high official made a public distinction between the interests of his republic and the other stakeholders (Tatneft, the US based SeaGroup International Inc. and the Swiss based AmRUZ Trading AG). Thus, half of the stake traditionally perceived as the consolidated Tatar one was left out.

In any case, following the adoption of Kuchma’s decree on transferring the stake to Naftogaz, the parties made rather differing statements. Muratov welcomed the decree, while Tatneft confirmed its intention to buy out the shares due to the change in the ownership.

This last fact must be given special attention. Formally, the Tatar oil producers own a rather small stake - only 8.63 %, but it is they who supply oil to the plant. Moreover, the remaining two companies vote with Tatneft, thus confirming the fact that they are controlled by Tatarstan. So one would hardly be able to ignore this position as well as the potential of going to the US and Swiss courts.

Thus the chosen way of establishing VINK has turned out to be a ticket to conflict. And while the western Halychyna front was practically unavoidable, the opening of the eastern Kremenchuh front should be credited to Naftogas. It concerns Ukraine’s major oil refinery, which plays the key role in supplying diesel oil for autumn farm work. Neither Ukraine nor Tatarstan is able to say whether there will be enough time to correct this mistake…