Almost eighteen months after Moscow's full-scale invasion of Ukraine, energy giant Lukoil has maintained a comfortable position within the European Union, due to its efficient lobbying and strong market position in some of the member states.
Most Russian energy companies are pariahs in the EU, while Lukoil continues to run hundreds of gas stations, refineries, and a trading arm. After February 2022, Brussels rained sanctions down on companies like Gazprom Neft, Rosneft, and Transneft. Privately held Lukoil remained largely unscathed. Still, Lukoil’s activity generates profits that are feeding Russia’s public budgets and the war effort. Moreover, Putin’s power vertical is using Lukoil in its hybrid war against Europe, as a multi-tool Swiss army knife, which can impose energy blackmail, spread political corruption and propaganda, or be used for covert active measures.
At the beginning of August 2023, Lukoil is still part of industry associations within the EU, the most prominent of which is FuelsEurope, the industry lobby group. 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 through such groups. There is not any mention of Lukoil in the EU sanctions list linked to Russia’s aggression against Ukraine, which comprises more than 1,500 individuals and 244 entities.
“Lukoil has very good lobbies ... they have enablers in Brussels and across Europe,” said Martin Vladimirov, a senior energy researcher at Bulgaria’s Center for the Study of Democracy (CSD) think tank, quoted by Politico. “They have convinced European policymakers that Lukoil is supporting Ukraine and the management of Lukoil is against the war.”
But survival has involved some delicate footwork in both Moscow and Brussels, according to an analysis published by Politico in January. Lukoil has been publicly lukewarm about the war. In a statement in March 2022, Lukoil's board of directors expressed their “deepest concerns about the tragic events in Ukraine” and called for the “soonest termination of the armed conflict.”
“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 2022, a month after stepping down as CEO following sanctions from various jurisdictions including Australia, Canada, and the U.K.
But the EU prospects for Russia's second-largest oil company are increasingly threatened as sanctions against Russian crude and oil products swing into effect, and suspicion of any business linked to Moscow grows.
Although neither Alekperov nor Lukoil has 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. 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.”
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.
Litasco was “deeply impacted” by the war as banks withdrew their credit lines, which created a gaping liquidity crunch, according to an inside source quoted by Politico.
In January 2023, 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. Lukoil sold its Italian refinery to an Israeli-backed private equity fund G.O.I. Energy, backed by Geneva-based trading giant Trafigura. Its Russian counterparts have suffered far more, as Germany confiscated Rosneft’s Schwedt refinery last year and Gazprom unit Gazprom Germania, preventing them from simply divesting.
Media in Romania have reported that Lukoil could sell its business there as well as its other operations in the neighboring Republic of Moldova. Lukoil owns 315 filling stations in Romania along with a refinery in Ploiești, and is the third largest player in the country’s fuel sales market. In the Republic of Moldova, it occupies about 20% of the retail fuel market, and also handles 40% of diesel imports and over 30% of gasoline imports into the country.
The Bulgarian pivot
The most difficult situation is in Bulgaria, where Lukoil has a quasi-monopolist position 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. "Over the last two decades, Lukoil has epitomized state capture in Bulgaria."
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”. Lukoil's Neftochim refinery in Burgas supplies 50 percent of Bulgarian fuel consumption and accounts for 10 percent of the country's GDP. Fuels and oil products are meant for the domestic market and can only be exported to Ukraine, as part of the derogation compromise.
At the beginning of the year, Lukoil was selling 32,000 barrels per day of gas oil (a type of diesel) from the plant to Ukraine, although there was a “very high risk" of smuggling to other EU markets, according to Politico. From January to November of last year, Bulgaria exported €700mn of fuels to Ukraine, data published by the Bulgarian National Statistical Institute showed.
But even in Bulgaria, times are changing for Lukoil and the developments are quick.
In November 2022, 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 leva (€1.8 million) in taxes, while this year the government expects between 600 million leva and 700 million leva. Since at least 2006, the company has regularly reported yearly financial losses with few exceptions. In 2020, that loss was a whopping 500 million lev ($292 million), according to data published by Radio Free Europe. No declared profits mean no income taxes paid into Bulgaria's state coffers.
In January, 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.
On July 21, the MPs of the new Western-oriented grand coalition GERB-UDF/CC-DB passed the vote on revoking the contract with Lukoil for the concession of the port of Rosenets. On August 4, Radio Bulgaria announced that the Russia-leaning President Rumen Radev referred the termination of Lukoil’s concession of the port to the Constitutional Court, invoking the speedy procedure which would be contrary to the principle of the rule of law, to the interests of consumers, who would risk a rise in fuel and commodity prices, and the risk of legal action against Bulgaria.
The bill passed by the Parliament rules that the control of the port will return to the Bulgarian state, and Lukoil will pay fees for using it. Lukoil-Bulgaria's concession was extended without reason for another 24 years last October by the caretaker government appointed by Radev. The leaders of the coalition brought some strong reasons for terminating the contract: Russia has declared Bulgaria an enemy country; all key infrastructures should be under Bulgaria's control, especially those along the border, as the Schengen Area target is a priority; aligning with EU sanctions against Russia; stopping the smuggling, as a part of the oil that is imported is not declared to the Bulgarian state, while the revenues realized by Lukoil go to support Russia in the war.
On July 30, the governing coalition tabled draft legislation that would halt the supplies and processing in Bulgaria of crude oil originating in or exported from Russia. This would come closer to the term of the derogation, which is December 2024. The bill, however, will not be considered before early September, when the legislature will reconvene after a summer recess.
Delyan Dobrev, MP of GERB-UDF and chair of the Energy Committee said that Russia will cease to be financed as a result of scrapping the derogation. "Since the derogation was introduced, the only ones profiting from it have been Lukoil and Litasco, Bulgarian consumers do not gain anything," he told BTA. Lukoil’s refinery in Bulgaria is nominally owned by a Switzerland-registered company. Dobrev argued that, under the law, the refinery has been supposed to pay into the Electricity System Security Fund 70% of the excessive profit it is making thanks to the derogation, starting from January 24, 2023, but no payments whatsoever have been made so far. "In my opinion, we have tolerated Lukoil long enough, they have taken advantage of this derogation for their benefit only," the MP argued.
Dobrev added that there is not a shred of evidence to prove that the Burgas refinery cannot run entirely on non-Russian oil, thus contradicting Russian propaganda that any move against Lukoil will affect consumers and bring penury to the market.
In a separate analysis for Euractiv, Martin Vladimirov and Ruslan Stefanov, Chief Economist at the CSD, argued that Bulgaria should lift the derogation, as the financial and political interests served by this derogation are not those of Bulgarian consumers, but those of Lukoil and the Kremlin. The Neftohim refinery can operate normally without processing any Russian oil. The country can get supplies of crude oil and other feedstock from non-Russian sources. It can also get refined products if those are needed. The derogation has not significantly lowered prices, as its backers had claimed, or brought higher corporate tax revenues. Instead, Lukoil generated at least $2.4 billion in surplus profits in 2022 on the back of the steep discount it gets on buying Russian crude.
”Bulgaria has long been one of the most vulnerable countries in Europe to Russian economic and political influence. Lukoil has helped entrench powerful state capture networks influencing strategic decisions (…). With this political background, there are no economic or even technical reasons for Bulgaria to maintain the derogation of the EU oil embargo that has prevented the process of strategic decoupling from Russia in the energy sector”, according to the analysis.
