UKRAINIAN-TURKMEN GAS DEAL SHATTERS, RUSSIAN VISE TIGHTENS.

On July 25-26 in Ashgabat, Deputy Prime Minister Yulia Tymoshenko negotiated with Turkmen President Saparmurat Niazov and initialed with her counterpart Yelly Gurbanmuradov a mammoth deal on Ukrainian gas purchases from Turkmenistan. With Russia threatening to call in Ukraine’s heavy debts and to reduce gas deliveries (see the Monitor, July 24), Ukraine urgently needs alternative gas supply sources and commercial contracts ahead of autumn. Compounding the gas problem, oil deliveries to Ukrainian refineries from Russia are meager as well as becoming more expensive through a Russian export surcharge which takes effect this month.

Under the Ashgabat deal, Turkmenistan would supply 20 billion cubic meters of gas during the remainder of the current year and up to 50 billion cubic meters annually during the period 2001-2010. That amount–added to Ukraine’s internal output–could fully cover Ukraine’s internal needs even if in the unlikely event of Russian deliveries ceasing. The price for Turkmen gas was set at US$42 per 1,000 cubic meters, to be paid by Ukraine in cash to the tune of 50 percent and through goods and services for the other 50 percent. Part of those goods and most of the services would be supplied to Turkmenistan’s oil and gas sector–an enticing prospect to Ukrainian steel pipe manufacturers and construction firms. The US$42 price is the same as that asked by Turkmenistan of Russia. The latter country, using her stranglehold on export pipelines, only pays US$36 per 1,000 cubic meters to Turkmenistan while selling Russian gas for double that price to Ukraine.

Ashgabat agreed, furthermore, to restructure Kyiv’s arrears for past deliveries of gas, and to resume the deliveries in parallel with the reimbursement schedule. Those arrears–well in excess of US$300 million–would be repaid by Kyiv through the usual mix of cash with goods and services until the end of 2002, a schedule “fully within Ukraine’s means to comply with,” according to Tymoshenko. Turkmenistan had supplied gas to Ukraine from January to May 1999, but stopped the deliveries in June 1999 because of Kyiv’s default on the cash portion of the payments.

There is a catch to Tymoshenko’s deal in Ashgabat. That cheap price of US$42 per 1,000 cubic meters applies at Turkmenistan’s border–that is, it does not include the cost of transit to Ukraine via Uzbekistan, Kazakhstan, and Russia. The Ukrainian government would have to negotiate with those countries for the transit. Partly for that reason, the document signed by Tymoshenko in Ashgabat was a protocol of intent, requiring approval by the president and government in Kyiv.

On July 27, however, President Leonid Kuchma appeared to quash the Tymoshenko’s tentative agreement with Ashgabat. Kuchma termed the deal “a deception” because the transit would–according to presidential advisers–push the cost to as much as US$90 per 1,000 cubic meters by the time the gas reaches Ukraine’s border. Prime Minister Viktor Yushchenko also commented skeptically, though less categorically than the president. Kuchma, moreover, termed “very alarming” the terms recently demanded by Moscow from Yushchenko regarding debt settlement with and gas supplies from Russia. And Tymoshenko declared in the industrial center Luhansk on July 30 that Moscow’s terms “are such that I can not bring myself to cite them.” Defending the deal with Turkmenistan, Tymoshenko argued that the real cost to Ukraine would amount to US$55 per 1,000 cubic meters of gas, once the gains of Ukrainian suppliers of goods and services are factored in. Kuchma in any case agreed with Niazov by telephone on July 31 to meet shortly and reconsider the issue.

According to industry sources, Moscow demands a 50 percent share for Gazprom and/or Gazprom’s subsidiary Itera in Ukraine’s gas transit and internal distribution system to offset Ukraine’s debts. Ukraine’s National Security and Defense Council Secretary, Yevhen Marchuk, seemed to respond to that demand in his July 26-27 press interview on Ukrainian-Russian relations. As part of a somber assessment, Marchuk stated that he would nevertheless “not regard it as tragic” if Ukraine turned a 30-33 percent stake in the gas and oil transport and processing system to Russia, on the condition that West European interests acquire an equal stake in that sector in the framework of Ukraine’s privatization program. Marchuk wants that program to be accelerated as a matter of urgency for Ukraine.

In the meantime, Moscow is turning up the pressure. Deputy Prime Minister Viktor Khristenko has cancelled a scheduled visit to Kyiv this week, during which he and Tymoshenko were to have co-chaired a meeting of an intergovernmental commission on debt settlement and gas supplies. Prime ministers Mikhail Kasyanov of Russia and Yushchenko had as recently as July 19 agreed to create that commission and schedule its inaugural meeting. But Moscow has apparently decided to delay the talks in order to soften up Kyiv’s position, pending a stronger Russian push. That push may come as early as August 17-18 when Presidents Vladimir Putin of Russia and Kuchma are scheduled to meet in the Crimea. The next, potentially even more favorable moment for a Russian push will be the early autumn, when Kyiv might grow desperate to conclude a gas supply agreement as the cold season sets in.

Moscow is also politically at work to undermine Ukraine’s sole remaining counterleverage–that deriving from Ukraine’s position as the main transit country for Russian gas exports to Western Europe. The Russian government wants to use an export route via Poland and Slovakia, bypassing Ukraine. The critical segment would join the Polish pipeline system with the Slovak one, en route to Germany and points further west. Poland, committed to a strategic partnership with Ukraine, has resisted the Russian proposals thus far. Prime Minister Jerzy Buzek provided assurances to Yushchenko at their recent meeting and appeared to uphold that position during talks with Khristenko in Russia last week. But Moscow now seeks to persuade European Union countries–of which it has publicly named Germany, France and Italy–to pressure Poland into accepting the Russian bypass plan.

Russia is launching this campaign under the motto, “energy security for Europe in the 21st century.” Should some West European countries go along, Poland–as an applicant for admission to the European Union–would find herself in difficulty, and Ukraine devoid of real bargaining chips vis-a-vis Moscow. If Ukraine does not quickly find an alternative gas supply source and Western partners for gas sector privatization, this coming autumn might see the defeat of Ukraine’s nine-year quest to achieve energy security, which Kyiv rightly sees as a guarantee of political independence from Russia. (Dow Jones Newswires, July 27; Eastern Economist Daily (Kyiv), UNIAN and UNIAN-Biznes, DINAU, Infobank, July 26-31; Monitor, March 20, April 19, May 23, 26, July 7, 24; see the Fortnight in Review, March 30, April 28.)

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