European Commission Disapproves of Croatian Restrictions On Hungarian MOL

The European Commission has pronounced against the Croatian government’s changes to the law on ownership of INA, the Croatian oil and gas company. The changes would have reserved for the government alone the right to own 49 percent or more of INA’s shares. The government’s move clearly targeted Hungarian MOL, which holds nearly 49 percent of INA shares and seeks to acquire additional shares in open trading. Croatia’s financial market regulatory agency, HANFA, blocked that process by the simple expedient of suspending trading in INA shares on the Zagreb stock exchange six months ago. HANFA acted hand-in-hand with the government’s drafting of legislation targeting MOL (see EDM, April 12, October 3).

The European Commission has now determined that the government-proposed legislation contravenes the EU’s legal framework. The Commission’s finding is clearly a collective one, as the matter falls within the jurisdiction of several directorates in Brussels. Significantly, it is the office of the Commissioner for EU Enlargement that has announced the negative opinion and requested the Croatian government to take it into account. This suggests that the objectionable legislation risked delaying the completion of Croatia’s accession to the EU. The Commission however expressed appreciation for the government’s willingness to consult with the EU on the matter (HINA, Vjesnik, October 24-28).

Details of the Commission’s finding are not public, but the underlying considerations seem clear. The restrictive stipulations challenged the EU’s competition law, the free movement of capital within the EU, and other aspects of the acquis communautaire, as well as Croatia’s pre-accession commitment to the privatization of INA. Indeed, the restrictive draft law would have applied specifically to INA in order to hit at MOL, thus clearly showing discriminatory intent against an investor from within the EU.

On this as on other energy policy issues, the Croatian government seems to lack a consistent strategy, acting instead on contradictory impulses. Local special interests that used to milk the state-owned INA, have coalesced with Russian interests in harassing MOL, apparently hoping to squeeze it out of Croatia. Both of these sets of interests are represented in government. With parliamentary elections due in December, populist rhetoric distorts the public debate on energy policy.

On the other hand, the government does not want to jeopardize the time-table of Croatia’s accession to the EU by breaching EU law. The accession treaty is due for signing in December, and for ratification by the parliaments of 27 EU member countries (including Hungary) during 2012. This helped induce Prime Minister Jadranka Kosor to submit the government’s draft bill to Brussels for review, instead of passing it through the Croatian parliament unilaterally. According to local commentators, the EU’s negative judgment was not only predictable, but also a welcome excuse for the government to drop that restrictive, discriminatory legislation. This is no longer feasible in any case, as the parliament has just entered the pre-election recess (Jutarnji List, Poslovni Dnevnik, October 24-28).

The European Commission’s finding removes the basis for suspension of trading in INA shares in Zagreb. HANFA, the financial market regulator that had imposed the suspension, has now devised a new avenue of attack. It has filed criminal charges against top MOL executives in Hungary and on INA’s board for alleged insider trading, and referred the charges to the Prosecutor’s Office for further action. In parallel, Croatia’s Office against Corruption and Organized Crime and the Prosecutor’s Office are pursuing a bribery case against Croatia’s former prime minister, Ivo Sanader, and MOL’s president and CEO, Zsolt Hernadi. That case rests mainly on allegations by an individual Croatian businessman in a plea-bargaining case. Croatian law-enforcement authorities have not presented evidence to INA, MOL, or the counterpart Hungarian authorities. However, a campaign has been orchestrated in the Croatian press around those allegations (www.business.hr, Vjesnik, MTI, October 26-28).

Those allegations are designed explicitly to challenge the 2009 shareholders’ agreement, which strengthened MOL’s operating rights in INA with 47 percent of ownership shares. Local interest groups seem intent on wresting the operating rights back from MOL and using law-enforcement agencies non-transparently toward that end.

Since acquiring those operating rights, MOL has introduced European best-practices in INA’s management (practices that had turned MOL itself into a Central European leader); cleaned up socialist-legacy corrupt practices from INA; turned it from a chronically loss-making company into a profitable one; completed the first phase of INA’s refinery upgrade program; continued investing into it during the recession; and spearheaded efforts to interconnect Croatia with Central Europe and the EU’s evolving, unified energy market.

That progress can be rolled back by undoing its legal basis. Ongoing attempts to do so raise questions about the transparency of Croatian law-enforcement processes and their independence from special business interests. Croatia’s EU accession mechanism ought to consider these issues, ahead of the accession itself.