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Sticking to the Rules of the Game – an Important Factor in Investment Attractiveness in Serbia

Sticking to the Rules of the Game – an Important Factor in Investment Attractiveness in Serbia

Interview with Gazprom Neft Deputy CEO for Foreign Asset Management, Kirill Kravchenko

Sibirskaya Neft magazine Kirill Kravchenko

NIS CEO (and Gazprom Neft Deputy CEO for Foreign Asset Management) Kirill Kravchenko talks to us about the current situation surrounding the company.

—How far had the announcement of an investigation into the privatisation process of NIS been expected by senior management?

— The announcement from the head of the Ministry of Internal Affairs, Nebojša Stefanović, came as a complete surprise to both the management and leadership of NIS. After all, it’s been five years since the transaction was completed, and in all that time the Serbian government had never raised any questions as to its legitimacy. Naturally, the government — which controls around 29 percent of the shares in the company — has every right to raise questions, and to find answers to these. But such steps are better taken together — as the old Serbian saying goes, “Two heads are better than one”. It has to be said though, that we’ve already been given to understand that any potential claims concern not the nature of the transaction nor the management of NIS, but, rather, what happened within the company prior to its coming under the control of Gazprom Neft.

— But questions are also being asked as to the level of MET, and as to the mechanism for distributing profit ...

— The rate of MET was three percent, until such time as a return was achieved on the investment made in modernising the refinery at Pančevo: these terms were fixed in the sale—purchase agreement for the acquisition of a 51-percent holding in NIS. This document, in turn, forms part of the inter-governmental agreement on strategic cooperation in the oil and gas sector, signed by the governments of Russia and Serbia. In the circumstances, we are simply implementing agreed policy, and expect a similar approach from our Serbian shareholder. I would remind you, the intergovernmental agreement was unanimously supported not only by Serbia’s Cabinet of Ministers, but also by the country’s parliamentary representatives; I would also remind you that the country’s current leadership voted in favour, at that time.

— And your own investment obligations have been met in full?

— Yes, in full, and on time. The modernisation of the Pančevo refinery was completed — a cost of EUR500 million — by the end of 2012: it’s now the most cutting-edge plant in the Balkans. And it is thanks solely to such modernisation that NIS has been able to switch all production to Euro-5-standard fuels — something that has allowed the company to supply markets in neighbouring countries, in sharp contrast to the majority of local refineries. This helped the company become one of Serbia’s top-three exporters in 2013, with the company taking second place on the basis of 2014’s first half-year results. So I think we’re entitled to assume that our partners will stick to the terms of the agreement.

— And as regards distribution of profit?

— Up until 2013 any profit at NIS went towards clearing the debts and credit facilities accumulated prior to privatisation — the total of which exceeded EUR1 billion. On the basis of the unanimous decision of the company’s directors, we began paying dividends: more than EUR37 million being transferred to the Serbian treasury, and something in the order of EUR35 million this year. I would point out that company policy on the payment of dividends (supported by Serbian shareholders in NIS) allows us to limit the disbursement of dividends to 15 percent of total net profit, although we have, for the second year running, and on the basis of a unanimous decision, allocated 25 percent of earnings for dividends. And it shouldn’t be forgotten that this profit is being used to liquidate the company’s bank debt — the size of which we are consistently reducing.

— And now, five years after the event, do you still think the decision to acquire a controlling stake was the right one?

—Without a doubt, although the risk was enormous. As soon as the assets were privatised they stagnated, to put it mildly. Certainly, only two indicators were growing — losses and debts. Seriously, the full stoppage of NIS’ refining plants was being debated — a number of government ministers at that time believed it would be simpler to abandon independent refining, much less invest in it. We managed to turn the situation around in just three years. We transformed a domestic, loss-making company, in a closed market, into a cutting-edge energy group, which began successfully operating in highly competitive markets not just in Serbia, but also in the countries surrounding it — Bosnia, Bulgaria, and Romania. The company got listed on the Belgrade exchange, and today is the only national “blue chip”, with the share price doubling since 2010. In my view, that’s surely a sufficient basis on which to judge the management of the company.

— And is this positive trend still ongoing?

— Our financial indicators are stable, the economic crisis and ever-increasing tax burden notwithstanding. But the main driver in taking the decision to begin operations in Serbia was, in fact, the favourable investment climate. In point of fact, Gazprom Neft was the first genuinely major investor to successfully manage the privatisation of a loss-making state enterprise in Serbia. It didn’t work out for a colleague at US Steel, for example — the receipt of various concessions from the Government of Serbia notwithstanding; after several years of work they were forced to abandon their Serbian assets. And the terms of their operations certainly compared favourably to ours — US Steel got the enterprise at a knock-down cost, with the state taking on company debts in the order of more than $300 million ... Now, under the conditions of the economic crisis, it’s very important for Serbia to maintain the image of a stable country, that looks after its investors. Particularly in view of the fact that foreign business is very wary of entering the Serbian market. For example, IKEA has been operating in Hungary for a long time now, and has started up in Croatia, but not in Serbia, thus far. It’s the same with German supermarket chain Lidl, which entered Slovenia ages ago, but which is only keeping an eye on Serbia. For these, evidence of the government sticking to the rules of the game will be a very important signal.

— How closely is NIS tied to the Serbian economy?

— Maintaining the company’s profitability is important not just for Gazprom Neft, but also for the Serbian state budget: NIS’ annual tax contributions have doubled over five years, and now stand at more than EUR1 billion — that’s about 14 percent of all budgetary revenues. You have to appreciate, any attempt — by one means or another — to destabilise NIS’ work reduces the availability of budgetary funds, giving rise to problems in how these can be used. The strongest, most dominant factor in the region for NIS is not just the economy, but strengthening of the economic situation in Serbia, restoring its place among the regional players, strengthening the country’s prestige.

— And if the achievement of mutual understanding doesn’t happen?

— We’ve never considered such a scenario. Up until now we’ve always been able to find a solution acceptable to both parties. But if we’re talking hypothetically, a negative scenario would lead, predominantly, to lower investment. We are, already, experiencing major difficulties in implementing the investment programme for the current year — mainly due to the growing tax burden, and the ever-increasing indebtedness of state enterprises, which already stands in excess of EUR500 million and which strikes us as a serious risk factor. Changing the parameters of the company’s operations, already fixed under the terms of the sale—purchase agreement of the 51-percent holding in NIS, would complicate the situation still further — the company would lose the momentum it has built up in terms of development, production volumes would drop, and with them, tax revenues.

I have no doubt that our partners in the Serbian government are fully aware of this prospect. In addition to which, we have unique experience in the implementation of joint projects. I mean, in terms of campaigns for the sale of subsidised fuels for farmers, through a special pricing policy from our strategic partner, HIP Petrochemija: the cost of straight-run (directly distilled) gasoline from HIP was, from 1 November, $24 per tonne lower than the price at which NIS was offering it on the Central European market. All of which was possible thanks to the support of a second shareholder so that, while far from straightforward, working conditions in Serbia are, nonetheless, stable. If they change, they change — as will, in all likelihood, our scope for supporting our partners.