IN THIS ISSUE:

* Putin-linked Surgut Neftegaz seizes stake in Hungary's MOL
*...while Hungary's MOL and parliament resist takeover by Surgut Neftegaz
* Ukraine abandons hopes for liberal visa regime with EU
* Ankara contemplates democratic reforms to promote EU membershi

Major Russian Oil Company Secretly Buys Into Hungary's MOL

Vladimir Socor

The Kremlin-connected oil company Surgut Neftegaz has surreptitiously bought Austrian OMV's entire 21.2 percent stake in Hungary's MOL Oil and Gas Company. European Union authorities, the privately owned MOL, and Hungary are aghast at Surgut's move and OMV's collusion with it. Budapest and Brussels were kept in the dark until Surgut and OMV announced the accomplished fact on March 30 on their websites and through the mass media.

This move -if approved by EU regulators and the Hungarian government- would turn Surgut into the single largest shareholder in MOL, with a potential to further increase that stake. Russian Prime Minister Vladimir Putin is keenly interested in Surgut. According to "market rumors" Putin is believed to hold as much as 37 percent of the company's stock, directly or through intermediaries such as Gennadi Timchenko's Gunvor company (Interfax, March 30; Wirtschaftsblatt, March 31). Surgut's ownership structure includes 42 percent in treasury shares held by an undisclosed company or companies, with the remainder in an obscure system of cross-shareholdings (Vedomosti, Wall Street Journal, March 31).

Headed by Putin's long-time confidant Vladimir Bogdanov, Surgut is evidently interested in MOL's refining capacities, which are rated as the most efficient in Central Europe. But the Russian move is fraught with wider strategic implications. MOL is a partner in the EU-backed Nabucco natural gas transport project, as well as a partner-in-waiting in the liquefied-natural-gas project on the Croatian Adriatic coast, both designed to reduce European dependence on Russian gas. By seizing a big stake in MOL, the Kremlin evidently would like to peer into information and decision-making processes of significance to European energy security.

The stake in MOL would be Surgut's first important acquisition abroad. It fits within a pattern of incremental expansion of Russian oil producing companies into the refining industries on EU territory. Surgut produces oil mainly in western Siberia, at an annual rate of slightly over 60 million tons, with a trend towards lower output. It owns Russia's single largest refinery, at Kirish in Leningrad region; but is able to process only a little more than a third of its own crude in its own refining capacities, and supplements those by using refineries in Belarus.

Due to its policies of underinvestment in production and minimal borrowing in recent years, Surgut has accumulated cash reserves estimated in the range of $20 billion, larger than those of any Russian oil company. These are now available to support the Kremlin's strategy to buy up European refining capacities. Deputy Prime Minister Igor Sechin (overseer of Russia's energy sector as well as board chairman of Rosneft) characterizes Surgut as "Russia's best privately-owned company," which may be mere flattery to Putin and Timchenko, considering their rumored role in Surgut. The Kremlin is said to be considering some form of tie-up between Surgut and the officially state-owned Rosneft. Possibly preparing for such a tie-up, the government has nominated Bogdanov for a seat on Rosneft's board (Vedomosti, March 31; Wall Street Journal, March 31, April 1).

Austria's OMV, a state-dominated company, had built up its stake in the privately-owned MOL in 2007-2008 as a prelude to a hostile takeover. OMV was forced to give up the takeover attempt in August 2008, after the European Commission had indicated that a takeover would contravene the EU's anti-monopoly legislation. Moreover, MOL and the Hungarian parliament built effective corporate and legislative defenses, respectively, in 2008 to resist that hostile takeover attempt.

It was widely assumed at the time that a takeover of MOL by OMV would result in OMV's re-selling a part of MOL's highly efficient oil-refining and fuel-marketing business in Central Europe to a Russian company. OMV denied such intentions at that time and even pretended that its takeover of MOL would avert a Russian takeover. OMV's CEO Wolfgang Ruttenstorfer gave public assurances to this effect any number of times (The Times, March 24, 2008; Austrian Press Agency, August 5, 2008), although not necessarily taken at face value. Now, however, OMV's decision to re-sell its entire stake in MOL to Surgut would seem to confirm the earlier suppositions about OMV's real intentions (Die Presse, March 31).

Hungary Blindsided By Russian Entry Into Oil and Gas Company

Vladimir Socor

Surgut Neftegaz appears to have vastly overpaid for OMV's stake in MOL. The Russian company bought the 21.2 percent stake for 1.4 billion Euros on March 30 on the Budapest stock exchange. The average purchase price per share was 19,200 Hungarian Forint, almost double the closing price of 9,940 Forint on March 27 (Austrian Press Agency, Wirtschaftsblatt, Bloomberg, March 30, 31). No company accountable to its shareholders would or could have deliberately paid double the market price. A Russian state-connected, company lacking in transparency could do this, however.

Overpaying to this extent reflects intentions either to prepare a takeover attempt against MOL by Surgut itself or to re-sell part of Surgut's overpriced stake to other Russian state-connected entities (Rosneft and Lukoil have been mentioned in this regard). Such a re-sale could more than double Russian voting power in MOL, under the company's existing articles of association. Market analysts also mention the possibility that the overpayment is a Russian "incentive" to Austrians to support the South Stream project --the rival to Nabucco. The Kremlin wants to collect the Austrian government and OMV, along with other governments and companies, for signing agreements on South Stream at a summit within the next few weeks.

Surgut availed itself of the American investment bank, J.P. Morgan, to handle this bizarre transaction. Meanwhile, members of the Western "brokerage community" in Moscow underscore the Kremlin's backing for Surgut's move, contrary to Russian public relations channels portraying Surgut's move as an ordinary "market" transaction. Moscow evidently hopes that EU regulators would dogmatically interpret the EU's own principle of "free flow of investment capital" so as to open Europe's floodgates to Kremlin-controlled predatory capital.

In an elliptic announcement, Surgut characterized its move on MOL as designed to achieve "vertical integration" and also "maximum proximity to end users of the oil products." The announcement also quotes Bogdanov as saying that this move creates a "firm basis for the start of long-term cooperation between our companies" (Interfax, March 30, 31). Such language reflects Surgut's intentions to advance beyond an ordinary financial investment and set the stage for a subsequent Russian takeover in one form or another.

The privately-owned MOL as well as the Hungarian government and parliament are considering their responses. The Hungarians have reason to feel deceived because the Kremlin concealed the information from them. As recently as March 10, Prime Minister Ferenc Gyurcsany had led a governmental delegation to Moscow for the signing of the bilateral project agreement on South Stream. Also in Moscow on that date, MOL signed an agreement with Gazprom to build a gas storage site in Hungary. (While the government has signed up for South Stream, MOL remains loyal to Nabucco and has been careful to separate the gas storage project's business plan from the South Stream project (EDM, March 12). Russian President Dmitry Medvedev, Prime Minister Vladimir Putin, and relevant government ministers held talks with the visiting Hungarians. All the available evidence thus far, suggests that the Hungarians were told nothing in Moscow about Surgut's imminent move.

Gyurcsany resigned on March 21 amid the economic crisis and loss of public confidence in the Socialist government. Nine days later the Surgut-OMV deal was announced, blindsiding Hungary and the EU. In an initial response, MOL announced that it had learned about that deal from press coverage. Emphasizing that there had been no prior consultation with MOL, the company's statement flatly rejected Surgut's insinuation about the start of some strategic partnership (see article above). MOL asserts that it would continue to follow its own, pre-existing strategy, which has ensured continuous growth. Moreover, "There have not been, nor are there, any strategic or operational relationships between Surgut Neftegaz and MOL. Therefore, the intentions of Surgut Neftegaz, formulated in its statement, are not clear" (MTI, March 30, 31).

In an emergency parliamentary hearing on April 1, called by the opposition Fidesz party, a cross-section of parliament and several officials from the acting government made clear their intentions to defend MOL's continued independence (MTI, Vilaggazdasag, April 1, 2).

European Union's Eastern Partnership Plan Disappoints Ukraine

Pavel Korduban

President Viktor Yushchenko was vexed when European Commission President Jose Barroso suggested that he and Ukrainian Prime Minister Yulia Tymoshenko should make peace for the sake of Ukraine's stability. "I don't want to get advice on what to do anywhere in Europe, this is humiliating," said Yushchenko, reacting to Barroso's peaceful initiative at the summit of the EU's right-of-center People's Party, which Yushchenko and Tymoshenko attended together in March (www.glavred.info, March 19). Yushchenko's reaction betrayed the degree of disappointment with what is widely seen in Ukraine as betrayal by the European Union of the past-Orange Revolution hopes for faster integration into the EU.

On his election as president in 2004, Yushchenko set the goals arguably too ambitious for both Ukraine and the EU to meet. The then head of his administration, Oleg Rybachuk, spoke about joining the EU within five years, and EU membership was one of Yushchenko's main promises to his voters. As Yushchenko is approaching the end of his presidency with a personal rating of just 2-3 percent, it must be especially painful for him to realize how naïve his European dream probably was.

The economic crisis has made the EU perspective for Ukraine even more distant. The richer European neighbors are afraid that cheap labor and commodities from the east would exacerbate their problems, unemployment first and foremost. Ukraine hoped that the EU initiative for the integration of the eastern neighbors, Eastern Partnership (EP), would help Ukraine attain EU membership faster. However, the EU apparently saw EP differently from the very start. It was originally meant to complement the Northern Dimension and the Union for the Mediterranean by providing a forum for discussing visa agreements, free trade deals and strategic partnership agreements with Ukraine, Armenia, Azerbaijan, Georgia, Moldova, and Belarus. By proposing EP, the EU hoped to avoid the topic of eventual accession to the EU for the eastern neighbors.

EP was formally launched on March 20, and the declaration by the European Council - the EU's top political body - that accompanied the event was a big blow for Ukraine, again because it expected too much. Yushchenko's aide Andry Honcharuk bitterly criticized the "corrections" made to EP. He said that, unlike the EU's December 3 proposal to set the goal of political association and political integration for EP members, the March 20 declaration spoke only about "creating the necessary conditions" for that. Also, unlike earlier documents, the declaration provides only for visa facilitation agreements rather than cancelling visas altogether, according to Honcharuk. Last but not least, he said, there is no mention of future EU membership in the new document (www.president.gov.ua, March 24).

Ukraine's former Foreign Minister Borys Tarasyuk, who chairs the parliamentary committee for EU integration, noted that the EU provided for allotting only 600 million euros ($800 million) to EP for four years while the same amount was foreseen for the facilitation of Turkey's EU integration in 2009 only. He said EP would have little practical meaning if the EU did not revise its approach (Ukrainska Pravda, March 31).

The Ukrainian Foreign Ministry expressed its concern over the EU's proposal to introduce a more liberal visa regime instead of granting a visa-free regime to Ukraine. That proposal "does not correspond to the level of relations between Ukraine and the EU," said Vasyl Kyrylych, the ministry spokesman (Uryadovy Kuryer, March 25).

Yushchenko got more confirmation of the failure of his hopes on visas during his recent visit to the Czech Republic, which currently holds the EU rotating presidency. His secretariat head Viktor Baloha said that Yushchenko did not receive any positive signal on visas. He suggested that Ukraine should re-introduce visa requirements for the EU, which were withdrawn in the wake of the Orange Revolution in 2005. Baloha said that "profits of several million hryvnyas from the visits of European tourists cannot even partly compensate for the enormous discomfort awaiting Ukrainians travelling to Europe." According to Baloha, the number of EU visitors in Ukraine doubled since 2005 while the number of Ukrainians travelling to the EU halved (www.president.gov.ua, March 26).

The disappointment with the EU's visa policy in Yushchenko's camp is shared in other parties. Parliament deputy speaker Mykola Tomenko - one of the leaders of Tymoshenko's party - asked the Foreign Ministry to re-introduce visa requirements for the EU in February due to the EU's failure to liberalize its own visa regime (Interfax-Ukraine, February 19). The Communists demanded immediate re-introduction of visas for the EU and the US in the wake of the March 20 declaration on EP (www.proua.com, March 26).

A recent incident at the German passport control, involving heavyweight boxing champion and politician Vitaly Klichko, added insult to injury. German customs officials decided that a bag and a watch that one of the world's richest athletes carried were too expensive and confiscated them. Klichko csalled his lawyers and reported the incident to the German press. "I can defend myself but what would a compatriot of mine who is not famous and has no connections feel in my case?" Klichko speculated in his blog (Ukrainska Pravda, March 27). Klichko happens to be a senior Kyiv city councilor and a long-time ally of Yushchenko's.

Democratic Reforms Imminent in the Wake of Turkey's Local Elections

Lale Sariibrahimoglu

The local elections in Turkey on March 29, widely regarded as a referendum for the ruling Justice and Democratic Party (AKP) as well as for its Prime Minister Recep Tayyip Erdogan, raised questions over whether democratic reforms will now be initiated. Oli Rhen, the EU Commissioner responsible for enlargement, said that he hoped the election results -showing a sharp decline in the popularity of the AKP- would not weaken the governing party's earlier pledges to carry out democratic reforms (Sabah daily, April 1).

While the AKP won the local elections, their share of the vote contracted for the first time since it came to power in 2002. It won around 38.9 percent of the votes in the provincial assembly elections, representing a two-point decline from the previous local elections in 2004 and an eight-point drop compared with the 2007 general elections. Though the pro-Kurdish Democratic Society Party (DTP) won only 5.5 percent of the vote at a national level, it now controls eight provincial municipalities in the east and in the Kurdish-dominated southeast, doubling the number of the municipalities it won in 2004.

"Though the Turkish voters gave a clear mandate to the AKP in the 2007 elections, winning about 47 percent of the votes, it failed to resume the reform period of 2003. But I am optimistic that despite a setback in the AKP votes in Sunday's elections, Ankara will live up to its commitments and start the reform process. Turkey cares about the EU and in meeting its democratic criterion," said an Ankara-based Western diplomat in an interview with Jamestown Foundation.

Turkey's relations with the EU soured after Brussles partially suspended membership talks in 2007 following a dispute over trade with Greek Cyprus -which Turkey refuses to recognize. Though Ankara declared that it remained committed to transforming the country as part of its bid to join the EU, little progress has been made on reforms since then.

In an attempt to ease concerns that the AKP's local election setback might reduce its appetite for reforms, Nihat Ergün, the head of the AKP's parliamentary group, suggested that the party will in fact institute systemic reforms to advance its EU membership plans. Ergün also ruled out a snap general election as a response to the AKP's poor performance in the local elections. "We will assemble a new plan that will include some amendments to the Constitution," Ergün explained, while adding that a complete overhaul of the constitution will probably not be on the government's agenda (Today's Zaman, April 2).

On April 2 an EU diplomat told Jamestown: "The Government has enough time until the national elections to push for reforms. All parties should evaluate the election results. We, the EU have been expecting a less confrontational and more cooperative spirit to emerge for reforms. The opposition parties should also swallow a bit of pride and support the reforms."

A general consensus is not expected to result in a complete amendment of the 1982 Consitutiton, owing to continued public divisions. According to Salih Kapusuz, the former head of the AKP's parliamentary group, the government might opt for early elections only in response to failing to implement constitutional changes. Meanwhile, Kapusaz believes that adjustments to policy as well as the administrative structure of the party might enable the AKP to regain its lost pulic support (Today's Zaman, 2 April).

Neither the main opposition Republican People's Party (CHP), which received 23.1 percent of the votes, an increase of 2.3 percent compared to the 2004 local elections, nor the Nationalist Movement Party (MHP), which has increased its votes to 16.07 percent compared to 10.5 percent in 2004, said they favored an early election.

The government appointed a deputy from the AKP, Egemen Bagis in January 2009, as the Minister of State responsible for the EU negotiations, as a sign that Ankara would tackle the reform process seriously. This task had long been the responsibility of Foreign Minister Ali Babacan.

In December 2008 Turkey's Parliament approved a 400-page National Program (NP) which outlined the political and the economic reforms Turkey will pursue to comply with the EU criterion. However, Ankara has avoided giving a timetable to fulfil the EU political criterion for membership. These areas include the normalisation of civil-military relations, as well as standards for human rights and the judiciary. Whereas the NP provides a specific timescale for making the required legislative changes in the economic sphere.

As one Western diplomat advocated, in an interview with Jamestown, the political criterion should ideally refer to specific laws and strict deadlines should be set for these alterations. This indicates the lack of high level consensus within the country on reforming its most sensitive areas that require an overhaul to the amendments in the 1982 Constitution. In the aftermath of the local elections, during which none of the political parties made substantial pledges to reform, expectations are high that a push for reforms could commence.

As a start, the government is expected to sign a loan agreement with the IMF, which had been postponed until after the elections, to ease the soaring economic crisis where the official unemployement figure has risen to around 13.6 percent. In a related development, Turkish public support for EU membership has seen a 21 percent increase. The DAP polling agency revealed on March 29 that 75 percent of Turks support Turkey's EU membership, which involves pursuing further democratic reforms. (Taraf, March 29).

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