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 American Business is Leaving Ukraine Because of Local Governments, Financial Times

AES’s inability to find common ground with local government regulators and its unwillingness to play by local rules, left it with no other choice but to leave," writes Financial Times.

"Ukraine energy sector insiders are quick to point out that energy giants that are now entering Ukraine to explore its potentially large, untapped hydrocarbons reserves - the likes of Royal Dutch Shell, Chevron and ExxonMobil - are coming on strong terms. A new package of production-sharing legislation has been adopted that better protects their investments. It includes so-called stability clauses, and agreements with Ukraine's government have clearly laid out prices and production sharing splits for the long-term.


But the experience of AES in Ukraine is a reminder that even the biggest investors can get bullied around hard by officials in countries such as Ukraine. And for them, it may not be worthwhile to watch in pain as smaller domestic groups churn out bigger profits in what are still murky business waters," writes Financial Times.

The US-based company announced earlier this month that it had agreed to sell two regional electricity distributors - Kyivoblenergo and Rivneoblenergo - to a Russian group called VS Energy.

With the purchase, VS Energy, which already controls a handful of Ukraine's 27 regional electricity distributors, considerably increased its control over Ukraine's electricity distribution business.

So, the stage is set for VS Energy to dominate the electricity distribution sector of Ukraine, a big economy with a population of some 46m, together with several other regional groups. They include DTEK, the energy group of Ukraine's richest man Rinat Akhmetov, and businessman Kontantin Grigorishin's Energy Standard Group.


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In a company statement this month, AES Executive Vice President Tom O'Flynn explained the decision to sell both Ukrainian assets as follows: "We continue to exit markets that are not part of our strategic vision. This transaction represents another step in the process to simplify our structure so we can focus on creating value in markets where we have a compelling competitive advantage."

That may be so, but the word in Kiev is that AES's inability to find common ground with local government regulators and its unwillingness to play by local rules, left it with no other choice but to leave.

In a February 28 note to investors, Alexander Paraschiy, analyst at Kiev-based investment bank Concorde Capital, wrote:

"AES's key problem was that it spoiled its relations with the state sector regulator from its first day in Ukraine (in fact, they started lecturing the regulator). Needless to say, with such behavior, the AES-related oblenergos ended up being discriminated by the regulator, which ultimately led to AES's exit from Ukraine with losses."

Ukraine energy sector insiders are quick to point out that energy giants that are now entering Ukraine to explore its potentially large, untapped hydrocarbons reserves - the likes of Royal Dutch Shell, Chevron and ExxonMobil - are coming on strong terms. A new package of production-sharing legislation has been adopted that better protects their investments. It includes so-called stability clauses, and agreements with Ukraine's government have clearly laid out prices and production sharing splits for the long-term.

But the experience of AES in Ukraine is a reminder that even the biggest investors can get bullied around hard by officials in countries such as Ukraine. And for them, it may not be worthwhile to watch in pain as smaller domestic groups churn out bigger profits in what are still murky business waters, concludes Roman Olearchyk.

 
 
 
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