Putin Merger Offer Sparks Uproar In Ukraine

MOSCOW, Russia -- Russia's latest proposal to merge its Gazprom gas monopoly with Ukraine's state energy firm, Naftogaz, has caused a bombshell effect in Ukraine, sparking a furious outcry from the opposition. Some analysts also suggest that the proposed merger would not be in Ukraine's interest.

Vladimir Putin

The Russian president’s proposal Friday to unite his country’s state-owned Gazprom with Ukraine’s state energy company, Naftogaz, has left Ukrainian politicians and some energy experts astonished.

Ties between Moscow and Kiev have warmed significantly since pro-Russian leader Viktor Yanukovych became Ukraine’s president in February. Both sides have already signed a deal on gas pricing and a landmark lease extension for a Russian naval base in Ukraine's Crimean Peninsula.

Russia's latest proposal, however, had a bombshell effect, sparking a furious outcry from Ukraine's opposition.

“We talked about integration in nuclear energy, and we can do the same thing with gas,” Putin told reporters on Friday in Sochi, southern Russia, after meeting with his Ukrainian counterpart, Mykola Azarov, for the third time in 10 days. “I propose unifying Gazprom and Naftogaz,” Vladimir Putin said.

Earlier this week in Kiev, Putin suggested forming a nuclear energy holding company between the two former Soviet Union republics after Russia agreed to invest as much as $45 billion in Ukraine in fuel subsidies over the next decade.

Ukraine allows roughly 80 percent of Russia’s Europe-bound gas exports to transit its territory via a Soviet-era transportation network. The world’s biggest gas company, Gazprom, has cut supplies to Ukraine – thereby reducing flows to Europe – twice in the last four years because of pricing disputes amid strained political ties.

“This is part of Russia’s campaign to extend influence in Ukraine and achieve its long-held ambition to control the transmission of gas,” Chris Weafer, chief strategist at UralSib Financial told Bloomberg by phone.

Asset swaps

Russian and Ukrainian officials will meet after the May holidays to discuss merging the companies, Gazprom Chief Executive Officer Alexei Miller told reporters in Sochi, adding that his company is ready to consider asset swaps with Naftogaz.

To expand into global markets, Gazprom has swapped assets with Germany’s Ruhrgas AG and Italy’s Eni.

Naftogaz has assets in gas production, transportation and underground storage from exploration to end users that interest Gazprom, Miller said.

Control over Naftogaz’s large gas storage capacity in western Ukraine would allow Gazprom to fine-tune flows to Europe according to demand, Mikhail Korchemkin, director of East European Gas Analysis in Malvern, Pennsylvania, said by phone. The Russian export monopoly meets about a quarter of European gas needs, and seeks to boost that to 32 percent.

The proposal to unify the companies was met “with an enthusiastic positive response” at a meeting of officials from the two countries on Friday, Miller said.

The proposals were not discussed, Unian reported, citing the Ukrainian prime minister’s spokesman, Vitaliy Lukyanenko. The government will consider “the impromptu” and study specific proposals, the Ukrainian news agency said. Naftogaz spokesman Dmytro Marunych declined to comment when called by Bloomberg News.

Ukrainian opposition leader Yulia Tymoshenko, however, said it was part of "a plan to destroy Ukraine."

Some analysts also said the proposed merger would not be in Ukraine's interest.

Former U.S. Ambassador to Ukraine Steven Pifer told Radio Free Europe/Radio Liberty, or RFE/RL, that Naftogaz would essentially be swallowed up by Russia's most powerful energy firm.

"I think the Ukrainians ought to be very careful about it. The reason is that if you look at Gazprom and if you look at Naftogaz, Gazprom is by far a much larger economic and business entity. It's in much better fiscal shape: it's making money, Naftogaz is not," Pifer said. "If they were to combine, the resulting entity would be very much dominated by Gazprom and Russian interests."

Russia last week pledged $40 billion to $45 billion of investment in gas supply subsidies during the next 10 years in exchange for Ukraine extending its lease to a navy base on the Crimean Peninsula to 2042. Putin cut the gas export tax for Gazprom to compensate for the gas price discount to Ukraine.

Putin called the agreement, reached two months after Ukraine elected Viktor Yanukovych as its new president, an “expensive” necessity.

Relations between the countries had grown strained under Yanukovych’s predecessor, Viktor Yushchenko, who had pledged closer ties with Europe and the North Atlantic Treaty Organization, angering Russia.

‘Absorption of Naftogaz’

“Russia wants to strengthen and develop its success on the political level with economic success,” said Volodymyr Omelchenko, an analyst at the Kiev-based Razumkov Center for Economic and Political Studies. “This can only mean one thing – the absorption of Naftogaz by Gazprom.”

The Russian gas export monopoly needs to work with Ukraine to keep transit fees low, allowing it to invest in its planned Nord Stream and South Stream pipelines to Europe, Omelchenko said.

South Stream, owned by Gazprom and Eni, may be unnecessary if Gazprom obtains control of Naftogaz, Korchemkin said. Nord Stream, designed to link Russia and Germany under the Baltic Sea, entered the construction phase earlier this month.

Putin began pushing South Stream after the first gas dispute with Ukraine led to a cutoff to clients in Europe in 2006.

Last week he traveled to Vienna to seal Austria’s participation in the project, which would bypass Ukraine by crossing under the Black Sea and up the Balkans to central and southern Europe.

Russia is on track with South Stream and may also increase the capacity of Nord Stream if needed, Putin said Monday.

Source: Turkish Daily News


wesley rodgers said…

Ukraine has many friends!!

This proposed merger by Vladimir Putin is not needed by Ukraine and it is now time for Ukraine
parliament leaders and other
civic leaders to be very

It is good that Ukraine and Russia
have stabilized relations and are
working for a better and friendlier relationship.
I think at this point it is obvious that the big BEAR of RUSSIA
is trying very hard to consume all
of Ukraines major assets and saying
lets be friends.
No dobut that friendsdhip exists
and mutual peace has stabilized but Putin now wants to sway Ukraine and its gas company officials to join Gazprom.

First most mergers are speculative
to begin with and Ukraine should be talking to other friendly neighbors also while it still has some assets.
The time is not right for all these changes just as the proposed union of Ukraine,Belarus and a couple other countries by Russia.
Yanukovich is trying quite hard to make Ukraine a stronger economy but it must be done in a
natural organic way and not be a contrived concession or synthetic.
I would like to see the newly
elected Ukraine president spread
his diplomacy around the region or with some western countries as well, so there is a strong balance of economy and internal security.

Professional observation by many
analysts is that he is in a wheeling and dealing mode like playing just one table in Las Vegas and a smart wheeler dealer moves his cards and game around and also works other tables of competition.
It should not be so easy and like a woman who lets more than one man pursue her,it enhances her value to each of those seeking her affection.
There are other countries Ukraine
should be talking with also and there is no great rush at this point.
Diplomacy and good relations are
victorious when both sides show
they have strength and independence.
Remember Ukraine is a strong nation and it should display its internal strength as well for
security if not for enhancing its
Remember when playing chess with Russia watch carefully otherwise your white knights could become red kings very quickly.
It has always been RED KING-WHITE KNIGHTS.
From Russia with love must be a two way affair to be real.
Either way, the game or love affair must be played very carefully.

Wes Rodgers