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Putin Calls for `Unification' of Gas Exporter Gazprom, Ukraine's Naftogaz

Russian Prime Minister Vladimir Putin proposed uniting state-run OAO Gazprom and Ukraine’s state energy company, NAK Naftogaz Ukrainy, while seeking closer political and economic ties with the neighboring country.

“We talked about integration in nuclear energy, and we can do the same thing with gas,” Putin told reporters today in Sochi, southern Russia, after meeting with his Ukrainian counterpart, Mykola Azarov, for the third time on 10 days. “I propose unifying Gazprom and Naftogaz.”

Earlier this week in Kiev, Putin suggested forming a nuclear energy holding company between the two former Soviet Union republics after Russia agreed to invest as much as $45 billion in Ukraine in fuel subsidies in the next decade.

Ukraine moves about 80 percent of Russia’s Europe-bound gas exports via the Soviet-era transportation network. The world’s biggest gas company, Gazprom cut supplies to Ukraine, reducing flows to Europe, twice in the last four years because of pricing disputes amid strained political ties.

“This is part of Russia’s campaign to extend influence in Ukraine and would achieve its long-held ambition to control the transmission of gas,” Chris Weafer, chief strategist at UralSib Financial Corp., said by phone.

Asset Swaps

Russian and Ukrainian officials will meet after the May holidays to discuss merging the companies, Gazprom Chief Executive Officer Alexei Miller told reporters in Sochi. Gazprom is ready to consider asset swaps with Naftogaz, he said. To expand into global markets, Gazprom has swapped assets with Germany’s E.ON Ruhrgas AG and Italy’s Eni SpA.

Naftogaz has assets in gas production, transportation and underground storage, from exploration to end user, that interest Gazprom, Miller said.

Control over Naftogaz’s large gas storage capacity in western Ukraine would allow Gazprom to fine-tune flows to Europe according to demand, Mikhail Korchemkin, director of East European Gas Analysis in Malvern, Pennsylvania, said by phone. The Russian export monopoly meets about a quarter of European gas needs, and seeks to boost that to 32 percent.

The proposal to unify the companies was met “with an enthusiastic positive response” at a meeting of officials from the two countries today, Miller said.

Impromptu Proposals

The proposals weren’t discussed, Unian reported, citing the Ukrainian prime minister’s spokesman, Vitaliy Lukyanenko. The government will consider “the impromptu” and study specific proposals, the Ukrainian news agency said.

Naftogaz spokesman Dmytro Marunych declined to comment when called by Bloomberg News.

Russia last week pledged $40 billion to $45 billion of investment in gas supply subsidies during the next 10 years in exchange for Ukraine extending its lease to a navy base on the Crimean Peninsula to 2042. Putin cut the gas export tax for Gazprom to compensate for the gas price discount to Ukraine.

Putin called the agreement, reached two months after Ukraine elected Viktor Yanukovych as its new president, an “expensive” necessity.

Relations between the countries had grown strained under Yanukovych’s predecessor, Viktor Yushchenko, who had pledged closer ties with Europe and the North Atlantic Treaty Organization, angering Russia.

‘Absorption of Naftogaz’

“Russia wants to strengthen and develop its success on the political level with an economic success,” said Volodymyr Omelchenko, an analyst at the Kiev-based Razumkov Center for Economic and Political Studies. “This can only mean one thing - absorption of Naftogaz by Gazprom.”

The Russian gas export monopoly needs to work with Ukraine to keep transit fees low, allowing it to invest in its planned Nord Stream and South Stream pipelines to Europe, Omelchenko said.

South Stream, owned by Gazprom and Eni, may be unnecessary if Gazprom gets control of Naftogaz, Korchemkin said. Nord Stream, designed to link Russia and Germany under the Baltic Sea, earlier this month entered the construction phase.

Putin started pushing South Stream after the first gas dispute with Ukraine led to a cutoff to clients in Europe in 2006. Last week he traveled to Vienna to seal Austria’s participation in the project, which would bypass Ukraine by crossing under the Black Sea and up the Balkans to central and southern Europe.

Russia is on track with South Stream and may also increase capacity of Nord Stream, if needed, Putin said on Monday.

The yield on Naftogaz’s $1.6 billion, 9.5 percent bonds due in 2014 extended a decline, falling 48 basis points, the biggest drop in more than two months, to 7.582 percent by 5:10 p.m. in Kiev, according to Bloomberg data. Bond prices move inversely to yields.

Gazprom shares fell 2.4 percent to 170.33 rubles.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

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