Firtash to take Ukraine to court over gas ban

By bne IntelliNews October 9, 2014

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Dmitry Firtash, the Ukrainian gas and chemicals oligarch, is to take Ukraine's government to court over its decision on September 29 to prohibit his chemical giants from using gas from underground storage or domestic production during the winter.

Boris Krasniansky, executive director of Firtash’s holding company Group DF, said the company would win the case, since the government decision "is absolutely illegal and infringes private ownership”. "It's the same as if the government told you: you can't live in the apartment you own this winter, so if you want to live in an apartment, buy a new one," he said, as quoted by newswires.

Group DF owns around 4bn cubic meters (bcm) of gas held in Ukraine's vast underground storage facilities, a quarter of all gas stored, which the government order prevents him from now using for chemical production during the winter. Firtash owns four of Ukraine's largest chemical plants, producing mostly fertilisers - Stirol, Severodonetsk Azot, Cherkasy Azot and Rivneazot - of which the former two located in East Ukraine have stopped production because of the war with Russian-backed rebels.

Natural gas is the main input in fertiliser production, accounting for around 80% of input costs, and Firtash' chemicals plants taken together are estimated to consume as much gas as all Ukrainian households use for cooking.

Besides Firtash' underground supplies, he is believed to control a swathe of Ukraine's domestic gas production. The government order of September 29 effectively switches off his chemicals production, in so far as Firtash fails to secure his own supplies from Russia. The government has said it would allow import of gas to supply the plants. 

The government ban on using gas from underground storage or domestic production is aimed at securing the country's energy supplies as it enters winter without Russian gas because of a dispute over Ukrainian payment arrears and future pricing.

"This could adversely affect the country overall," wrote VTB Capital analysts in a research note, "as Ukraine is already struggling to resolve its gas shortage for the upcoming winter, and lacking one third of its gas storage would add further uncertainty as to how the country is to get through the heating season. In this case gas transit to Europe could be under the threat," they add.

The case is also a litmus test for relations between Ukraine's new government and the old oligarchs such as Firtash. Firtash was initially a key pillar of the previous administration of Viktor Yanukovych, but latterly switched sides to support Yanukovych's ousting in February 2014, and is regarded as being loyal to the current administration of President Petro Poroshenko. 

Firtash’s influence has weakened since he was arrested in Vienna in March 2014 on request of the FBI in connection with alleged bribery in India, and he remains under house arrest in Vienna while Austrian courts process an extradition request. The government decision to ban his gas guzzling chemical giants from using gas underlines that his influence over the new government is weak despite his owning the country's major TV channel, Inter.

A further litmus test of oligarchs' relationship to the government will be a shareholders' meeting on October 10 of Ukrnafta, Ukraine's major oil producer and refinery. Ukrnafta is formally owned by the state, which holds more than 50% via energy company Naftogaz. However, oligarch Ihor Kolomoisky, governor of Dnipropetrovsk and co-owner of the country's largest bank Privatbank, controls more than 40% in Ukrnafta. Since under Ukrainian law there is a 60% quorum for shareholders' meetings, Kolomoisky has traditionally been able to use his 40+% stake to  exercise de facto control over Ukrnafta, by blocking shareholders' meetings taking decisions contrary to his interest. 

Ukrnafta shareholders' meeting will vote on paying out dividends on present and past profits, with prime minister Arseny Yatsenyuk having said that the government would demand the payout of the dividends, potentially an important source of revenue for the cash-strapped budget. 

Firtash and Kolomoisky have been lashing out at each other via their respective TV channels - Kolomoisky owns major channel 1+1 - so pundits will be scrutinising how the government deals with them for indication as to their relative strength. Kolomoisky has been a strong supporter of the new administration in Ukraine and has actively helped shore up the state via his work as Dnipropetrovsk governor. 

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