The death of a State behemoth. A return to Naftogaz Ukraine

I wrote about the break up and partial spin off of Naftogaz Ukraine divisions a few days ago.

As I stated at the time, such a break up is being loudly championed by the investment arms of the IMF and EBRD amongst others in a bid not only to reduce the drain on the public purse that it has historically been, but also so the specific divisions are far more transparent and accountable.

I predicted several divisions of the existing Naftogaz Ukraine will go through the IPO process and the oligarchy will concentrate on buying up the regional suppliers who deal with the behemoth that is Naftogaz.

It would make sense for all those divisions being spun off to be debt free and looking rather healthy, thus some part of Naftogaz Ukraine will have to become a bad asset dump, particularly as Naftogaz Ukraine enjoys a less than perfect contract with Russia for gas.  That said Naftogaz Ukraine enjoys a State guarantee, or certainly it did when the contracts were signed.

Now whilst the new government of Ukraine has been trying to renegotiate what is not a particularly good gas contract with Russia to no avail, it will not have escaped Russian attention that parts of Naftogas will be spun off through IPOs.  In the mean time Ukraine has said it will continue to honour the existing contract whilst also putting it before an international tribunal for mediation.

It seems the plan is to spin off the attractive parts of Naftogaz Ukraine and ultimately kill off the beast and create something new.  One has to imagine that will have ramifications for the existing Russian contract although it seems likely there will be some mitigation by allowing Russia a stake in the replacement entity.

Will this include the GTS (gas transport system) that Russia currently relies upon to transport some gas to the EU?  At present it doesn’t seem likely at least bilaterally rather than multilaterally, as Slovakia, Germany and France have all expressed an active interest in the GTS.

Very interesting to watch how this will develop.