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RIA Novosti
April 1, 2008
No more cheap gas for Ukraine

MOSCOW. (Igor Tomberg for RIA Novosti) - U.S. President George W. Bush, who visited Kiev Monday before attending the NATO summit in Bucharest, said in an interview with the German newspaper Die Welt that Ukraine and Georgia should be given a "clear prospect" of joining NATO.

On March 23, Bush spoke about the energy situation in Ukraine in an exclusive interview with the Ukrainian TV channel Inter. He did not mention Russia, but clearly referred to it when saying that the transparency of contracts was crucial for energy security.

Bush said that first, energy contracts must be transparent, and all sides should be aware of the connection between the supplier and the intermediary and that another vital element is the diversification of supplies, since no one wants to be dependent on one state.

He did not mention the need to pay for gas supplies, which is the main problem of Ukraine's energy security.

This year, Ukraine imported Russian gas without a coordinated agreement until April 1. Gazprom has warned it three times and twice introduced restrictions on its gas supplies.

In early March, the presidents of Ukraine and Russia agreed on the general principles of settling the gas problems, which were formalized in a March 12 agreement. In mid-March, Gazprom and Ukraine's Naftogaz initialed it. But they have not started implementing it, because Prime Minister Yulia Tymoshenko said the text should be amended. The Ukrainian cabinet has not informed Gazprom about this, and Naftogaz has not resumed talks.

On March 25, President Viktor Yushchenko admitted that the situation with the deliveries of Central Asian gas had become threateningly vague, including such painful issue as gas payments.

Unfortunately, Ukraine's authorities cite different figures.

President Yushchenko said, "A debt of more than $2 billion [for gas delivered in 2008] is not only a financial burden, but also a blemish on the country's reputation."

Other sources put the figure at $2.8 billion.

Meanwhile Prime Minister Tymoshenko mentioned a $900 million debt, but did not say for what or to whom.

Yushchenko apparently wants to be seen as a constructive and responsible politician, while Tymoshenko is set to worsen relations with Gazprom.

Gazprom's restraint and the unwillingness of Ukrainian opposition leader Viktor Yanukovich to become involved point to a brewing gas conflict, which may have unpredictable consequences.

A delegation from Naftogaz that was supposed to come to Moscow on March 28 to discuss contradictions created by Ukraine's amendments to the March 12 agreement did not arrive.

Will Russia and Ukraine set up a joint venture to import Central Asian gas to Ukraine, as Putin and Yushchenko agreed to do? The company was to supply at least 50 billion cubic meters (bcm) of gas to Naftogaz at $179.5 per 1,000 cubic meters in 2008, and at least 55 bcm in subsequent years at a price to be coordinated by the sides.

The joint venture should replace RosUkrEnergo, but the Ukrainian wording of the agreement excludes the Switzerland-based trader, in which Gazprom owns 50%, Dmitry Firtash 45% and Ivan Fursin 5%, from the equation.

RosUkrEnergo, which was authorized to deliver gas to Ukraine only until April 1, will also be unable to deliver gas to Europe (it delivered 11.6 bcm in 2007) or to withdraw gas from Ukraine's underground storage facilities.

Tymoshenko said she wanted a "clean" and transparent scheme for gas supplies. But Gazprom, which supplies gas to Europe at $400 per 1,000 cubic meters, is determined to sell gas to Ukraine at a comparable price.

The scheme of gas supplies to Ukraine through intermediary companies was designed for political reasons aimed to smooth over the price differences. Gazprom sold gas to Ukraine at a lower price by mixing Russian gas with cheaper Central Asian gas.

Yushchenko said the intermediary companies should be preserved. He said, "Ukraine should maintain the border price at $179.5, and Gazprom should take part in gas distribution in Ukraine, which it is doing now through RosUkrEnergo and UkrGazEnergo."

One can understand his concerns, as Ukraine's domestic gas prices are among the lowest in Europe: $36.6 per 1,000 cubic meters for the public, $45.7 for budget-financed companies, $41.6 for communal services, and $71.4 for industrial enterprises. Gas prices for the public have not been changed since 1999 and are subsidized from the growing tariffs for industrial enterprises.

But these cross-subsidies are weakening Ukraine's industry and are fraught with problems in view of Ukraine's accession to the World Trade Organization. Unfortunately, Tymoshenko is provoking a conflict that may increase gas prices in Ukraine.

The Ukrainian cabinet's March 12 resolution on the sale of imported natural gas in Ukraine prohibited RosUkrEnergo from exporting gas from the country, which has made its operation unprofitable. The European clients of RosUkrEnergo say that Ukraine's new initiative will undermine their gas contracts and provoke a European scandal.

RosUkrEnergo has more than 100 counteragents in Hungary, as well as partners in Poland, the Czech Republic and Slovakia. It is the second largest supplier of gas to Poland after Gazprom.

Miroslaw Dobrut, vice president of the Polish oil and gas company PGNiG, came to Kiev late last week to express his company's concern.

Another matter of principle for Gazprom is the share of the Ukrainian domestic market. On March 19, the Tymoshenko government demanded that Gazprom's quota on direct sales of natural gas to Ukrainian industrial consumers should be limited to 2008, which is bound to complicate negotiations.

Gas relations with Russia are playing a growing role in Kiev's policy, provoking fierce debates about Ukraine's national interests between the president and the prime minister, who will vie for the presidency at the next elections.

Igor Kolomoisky, the owner of the Privat Group, which financed Tymoshenko's election campaign, has told the Ukrainian media that he is negotiating the acquisition of a 50% stake in RosUkrEnergo for $2-$3 billion and is interested in the company's gas contracts.

So the future of RosUkrEnergo may be not as gloomy as it seems. Experts say that Tymoshenko is repaying debts to her sponsors, and Privat has many gas-consuming companies. If one of her main allies buys half of the gas trader, Tymoshenko may soften her stance regarding RosUkrEnergo.

Many think that Tymoshenko's attack against RosUkrEnergo may be directed at Firtash, who owns a 45% stake in the company and has close ties with President Yushchenko. The attack may aim at depriving her main rival of his key financial resource.

Ukraine's gas problems may complicate Russian gas supplies to Europe. Even the South Stream pipeline, which is designed to pump Central Asian gas to Europe, can be used as a bargaining chip, because its construction across Ukraine must be coordinated with the country's authorities.

Gazprom will sell Ukraine gas at a "comfortable" price in 2008 only if all agreements coordinated by the two countries' presidents are honored. But if Kiev insists on its own wording of the agreement and demands a high transit payment, Gazprom will most likely deliver a counterstrike.

According to the CASE-Ukraine analytical center, Ukrainian industry must prepare to pay $320 per 1,000 cubic meters of Russian gas in 2009.

Gazprom CEO Alexei Miller has recently said that the price for European consumers will be $400 in 2009. Besides, the gas companies in Turkmenistan, Kazakhstan and Uzbekistan have recently announced a transition to European prices, and Gazprom has accepted their decision.

Which means there will be no more cheap gas for Ukraine.

Moscow will not subsidize gas for Ukraine, which wants to join NATO, because Russia is firmly opposed to Ukraine and Georgia's accession to the bloc. If the West wants Ukraine to join NATO (or the EU and WTO), it should take care of its energy and industry sectors, including possibly by subsidizing its gas imports.

Igor Tomberg, Ph.D., is a senior research fellow at the Center for Energy Studies, the Institute of World Economy and International Relations at the Russian Academy of Sciences.