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Russia’s Lukoil keeps on pumping in Europe — for now

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Almost a year after Moscow’s full-scale invasion of Ukraine, most Russian energy companies are pariahs in the EU — except for Lukoil, which continues to run hundreds of gas stations, refineries and a trading arm as well as still being part of industry lobby groups in Brussels.

But the EU prospects for Russia’s second-largest oil company are increasingly under threat as sanctions against Russian crude and oil products swing into effect, and suspicion of any business linked to Moscow grows.

The first 10 months of the war were pretty good for Lukoil.

While the EU rained sanctions down companies including Gazprom Neft, Rosneft and Transneft, privately held Lukoil remained largely unscathed.

“Lukoil has very good lobbies … they have enablers in Brussels and across Europe,” said Martin Vladimirov, senior energy researcher at Bulgaria’s Center for the Study of Democracy think tank. “They have convinced European policymakers that Lukoil is supporting Ukraine and the management of Lukoil is against the war.”

It posted a net profit of 648 billion rubles (€8.6 billion) in the first nine months of last year, more than twice as much as for the same period in 2021.

But survival has involved some delicate footwork in both Moscow and Brussels.

The company has been publicly lukewarm about the war. In a March statement, Lukoil’s board of directors expressed their “deepest concerns about the tragic events in Ukraine” and called for “soonest termination of the armed conflict.” It restated those views in an email to POLITICO.

“There is a tension between the Kremlin and Lukoil,” said Vladimirov, “but I’d never in my dreams call Lukoil a dissident company — there’s no Russian oil company that’s not received its status without protections from the Kremlin.”

Lukoil founder Vagit Alekperov received an Order of Merit to the Fatherland from Russian President Vladimir Putin in May, a month after stepping down as CEO following sanctions from a host of jurisdictions including Australia and Canada as well as the U.K.

Although neither Alekperov nor Lukoil have been targeted by EU sanctions, the company has been under U.S. sanctions since 2014.

In September, Lukoil Chairman Ravil Maganov fell out of a window of a Moscow hospital on the same day that Putin was visiting. The company said only that he “passed away following a severe illness.”

“One can probably conclude that the current management will be even more aligned with the Kremlin,” said Adnan Vatansever, a senior lecturer and Russia energy expert at King’s College London.

Lukoil rejected being under the influence of any country, saying in a statement: “Lukoil is an international privately-owned company with no state stake. It does not participate in any political process in any country of its presence.”

Hiding in plain sight 

It’s clear that Lukoil is being treated differently than its state-owned rival Rosneft, which has been hit with an EU ban on debt financing and whose CEO Igor Sechin is under EU sanctions as “one of the most powerful members of the Russian political elite.”

While big Russian energy companies are the subject of internal EU discussions on sanctions, “currently, we do not have such debates” about Lukoil, said a diplomat from an EU country involved in such talks. A second diplomat confirmed talks on Lukoil had stalled.

Lobbyists from Russian entities have been suspended from the EU’s transparency register and formally banned from directly accessing the bloc’s institutions, but Lukoil is still an indirect presence.

The company is part of at least three EU member associations, according to the Commission’s transparency register, the most prominent of which is FuelsEurope, the industry lobby group.

FuelsEurope communications manager Alain Mathuren confirmed that Lukoil was still on the group’s decision-making bodies, actively involved in policy working groups and contributed a regular members’ fee.

But he said the company has been “extremely discreet” since Russia’s invasion and “has not been trying to take advantage of being a member to push anything forward” related to the war. After Lukoil published its March statement there has been “no further discussion” about booting the company from the lobby, Mathuren said.

“The Commission has no role on how external organizations choose to develop their membership,” an EU official said, adding: “The rules are clear — only registered interest representatives can meet with our key decision-makers and such meetings are published online.”

Lukoil said it “engages in dialog with state actors in the countries of its activity exclusively on the issues related to its core business, environmental and social aspects of it, as well as energy security” in compliance with the law.

Well-refined strategy

Before the war, Lukoil was well-placed in the EU market, owning three major refineries in Italy, Bulgaria and Romania and a 45 percent stake in another in the Netherlands, hundreds of gas stations from Romania to Belgium, and a profitable Geneva-based trading arm called Litasco.

But that business changed when the war started.

An ex-Litasco employee described to POLITICO how on February 24 the trading company’s now-former CEO Nazim Suleymanov “came onto the trading floor … and made a speech saying … ‘It’s going to be a rough time,’” but added that the firm had made it through the turbulent 1990s in Russia and that this “was going to be less tough.”

Litasco was “deeply impacted” by the war as banks withdrew their credit lines, which created a gaping liquidity crunch, the insider said. Lukoil was forced to shell out “$1 billion or more” to clear its trading arm’s liabilities. The company now only trades Russian fossil fuel products and is eyeing a full-time move to Dubai, he added.

The staffer eventually quit, saying: “I don’t want to be … working for a pariah state,” and added that most employees in Switzerland have also left.

Litasco didn’t respond to a request for comment.

Lukoil has been one of the most prominent Russian retail presences in Europe thanks to its chain of gas stations emblazoned with the company’s red logo.

That activity has also come under fire.

The NGO Promote Ukraine sent protestors to Lukoil petrol stations across Brussels to raise awareness about its Russian ties. “In general [consumers] didn’t even know this is a Russian company,” said Oksana Bulda, a campaigner with the NGO, adding that once people found out, many said they’d stop tanking at Lukoil.

“We don’t have anything to do with what’s happening” in Ukraine, said the owner of a Brussels Lukoil station, adding that his business has largely been unaffected by the war. However, station owners do pay Lukoil royalties.

The owner said he’s not considered changing brands, which would be difficult due to a franchise agreement. “It’s a good opportunity,” he said.

The anti-Lukoil campaign has had some success; the Belgian city of Leuven in September revoked the licenses of local Lukoil stations.

The refinery business has also taken a hit.

This month Lukoil sold off its Sicilian ICAB refinery under pressure from Italian Prime Minister Giorgia Meloni, who had readied plans to place it into a state-controlled trusteeship if it wasn’t sold.

In Romania, Lukoil is reportedly mulling the sale of its refinery.

The Bulgarian exception

Lukoil’s position has been the most secure in Bulgaria, where it has long operated as a quasi-monopolist with enormous political power.

The company “is often considered an instrument for channeling the Kremlin’s geopolitical agenda” due to its “powerful networks of influence [and] monopolistic position” in the country, said Ivaylo Mirchev, a Bulgarian lawmaker from the liberal Democratic Bulgaria party.

When EU countries last year agreed to ban seaborne imports of Russian crude starting on December 5, Bulgaria fought hard to win a two-year derogation, which “was granted to ensure the security of supply” of the country, an EU official said.

Vladimirov called the exemption “a violation of EU competition law,” that will boost Lukoil’s profits and added: “Over the last two decades Lukoil has epitomized state capture in Bulgaria.”

Lukoil’s Burgas refinery — which supplies 50 percent of Bulgarian fuel consumption and accounts for 10 percent of the country’s GDP — will be a “goldmine” once the EU’s sanctions against Russian refined products go into effect on February 5, said Eugene Lindell, head of refined products at the energy consultancy FGE.

However, fuels and oil products are meant for the domestic market and can only be exported to Ukraine. Vladimirov said Lukoil is selling 32,000 barrels of gas oil — a type of diesel — to Ukraine a day, and warned there is a “very high risk” of smuggling to other EU countries. Lukoil said: “The Company does not track where its products go once sold.”

But even in Bulgaria, times are changing for Lukoil.

This week, the Bulgarian parliament passed a law allowing the government to take control of the Burgas refinery in the event of a threat to national security.

Even though “it could be argued that this … has significantly decreased Lukoil’s position of power,” Mirchev said, the government initiative to control the refinery is “the most conservative approach possible” with a complicated implementation.

In November, Lukoil struck a deal with the government to transfer the accounting of its Bulgarian operations from Switzerland to Bulgaria and begin to pay higher taxes in the country. In 2021, Lukoil paid just 3.5 million lev (€1.8 million) in taxes, while this year the government expects between 600 million lev and 700 million lev.

The Bulgarian government didn’t respond to a request for comment.

Ultimately, it will be difficult for Lukoil to maintain its European assets in the mid-term, said Alexandra Prokopenko, an independent analyst and former Russian central bank official.

“Oil companies are huge taxpayers in Russia and I don’t feel that European customers and European authorities will tolerate that a Russian-rooted company makes profits in Europe and then pays taxes in Russia … it’s impossible,” she said. “I’m not sure that Lukoil can remain in Europe without cutting its Russian roots.”

Sarah Wheaton contributed reporting.

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