Graham Stack in Kyiv -

On the first anniversary of his inauguration as president of Ukraine, Viktor Yanukovych has remembered at least one of his election promises - to increase state control over Ukraine's largest oil and gas producer Ukrnafta. He is doing so by appointing the head of investment bank Renaissance Capital Ukraine, the Belgium Peter Vanhecke, as the new chairman of the Ukrnafta management board.

The move, announced by Energy Minister Yuriy Boyko at a press conference following an Ukrnafta shareholders' meeting, could break years of deadlock around Ukrnafta, in which the state formally owns a majority 50% plus one share, but was largely under the control of Ukrainian oligarchs Igor Kolomoisky and Gennady Bogolyubov, joint owners of Ukraine's largest bank, PrivatBank Group.

Privat controls nearly 42% in the company, and Ukrainian law requires a 60% quorum for shareholders' meetings, meaning that Privat could block company decisions not to their liking by simply not turning up, as they did eight times in a row through 2009. In this way, they were able to determine who held top posts in the company, and through them control cash flows.

But since the change in government in February 2010, state officials had been sounding tougher over Ukrnafta, and threatened to put through legislation reducing the quorum requirement to 50%. This threat may have pushed Privat towards compromise. Two months ago, Ukrnafta ceased what analysts regarded as transfer pricing for the benefit of Privat's oil refining and retailing structures. Now the neutral Belgian, who will be the first western executive to head a post-Soviet state-owned company, would seem to put a buffer between Ukraine's oligarchs and Ukraine's bureaucrats, to seek compromise on issues such dividend payments.

Privat has insisted on maximum dividend payouts, with almost all the company's profits 2006-2009 finally paid out as dividends in January 2010 after nine failed shareholder meetings. According to Prime Minister Mykola Azarov, this has meant the company has lacked funds to invest, and annual oil and gas production volumes have fallen to 3m tonnes of oil and 4bn cubic metres of natural gas. Significantly, today's meeting paid out only 30% of net income for 2010 as dividends.

On the other hand, according to investment bank sources, Renaissance Capital has worked closely with Privat in the past, and Vanhecke is unlikely to allow the government to use the company as a cash cow to plug holes in the budget, although it will certainly look for higher royalty payments.

According to Phoenix Capital analyst Serhiy Petrenko, the appointment of a western investment banker points to a 2012 IPO following a restructuring of the company to be initiated at a shareholders' meeting March 25. "It now appears that shareholders are heading due west with their plan to float a vertically integrated company on a western stock exchange," he says.

Konstantin Golovinsky, vice-president of Renaissance Capital Ukraine, agrees: "Peter [Vanhecke] knows how capital markets work and what investors expect from a company like Ukrnafta. He figuratively speaks the same language as investors."

But a lot of work needs to be done before any IPO can take place, and the potential for conflict is ever present. One of the challenges will be dealing with Ukrtatnafta, Ukraine's largest oil refinery at Kremenchuk. The government owns a 43% stake and Privat 19%. The remaining shares returned to the treasury account at the end of 2009 and, according to law, have to be sold within a year. Privat independently owns over 1,000 filling stations and another oil refinery in West Ukraine.

The government wants to integrate Ukrtatnafta into Ukrnafta to create a vertically-integrated national champion prior to IPO, but to do so will require bargaining with Privat- historically one of the toughest operators in Ukraine. So the new Ukrnafta CEO Vanhecke will have to show he is not just a Western investment banker, but also sufficiently Ukrainianised to swim in these shark-infested waters.