KREMLIN HAS UPPER HAND IN GAS NEGOTIATIONS WITH UKRAINE

President Vladimir Putin’s December 8 televised argument for tripling the price of Russian gas to Ukraine, in cash only, as of 2006 (see EDM, December 9) in effect rejected President Viktor Yushchenko’s plea by telephone the previous day for moving slowly to market terms over several years. On the same day he took Yushchenko’s call, December 7, Putin called Turkmen President Saparmurat Niyazov. Presumably, Putin and Niyazov coordinated positions on the gas trade with Ukraine, to which Turkmenistan is the primary supplier. Turkmen gas can only reach Ukraine through Gazprom’s pipelines in Russia. Thus far, Turkmenistan has declined to confirm the implementation of its gas supply agreement with Ukraine for 2006, citing Kyiv’s debts for the Turkmen gas delivered in 2005.

Triggering that round of presidential telephone calls was the breakdown of negotiations on Russian gas supply to Ukraine and gas transit via Ukraine to European Union countries. On December 5-6 in Moscow, Naftohaz Ukrainy chairman Oleksiy Ivchenko and Gazprom’s management took irreconcilable positions on the supply and transit agreements for 2006. Without a Russia-Ukraine transit agreement taking effect on January 1, 2006, it is not clear how or on what terms Russian gas can reach the European Union.

In a remarkably vituperative press statement, Gazprom charged that the Ukrainian side was being “totally unconstructive, playing a very dangerous game, holding the Ukrainian people hostage [and] endangering the energy security of European consumers of Russian gas” (Interfax, December 6). With the January 1 deadline fast approaching, Moscow expects the EU to lean on Kyiv. Russian Prime Minister Mikhail Fradkov, in Brussels for a joint meeting of the European Commission and the Russian government, complained about Ukraine and warned the EU of “possible delays in Russian gas deliveries to Europe” because of Kyiv’s position. He asked the EU to use its “convincing arguments in advising Ukraine to ensure unimpeded transit of gas to Europe” (Interfax, December 7).

Ukraine may face national bankruptcy if the Russian price hikes and cash-only payments take effect overnight, as Moscow now demands. Ukraine’s gas bill to Russia would in that case rise from some $1.25 billion to an estimated $4.5 billion annually. Moreover, Ukraine’s metallurgical and chemical sectors — the main industrial consumers of gas — could be forced out of operation, warns Union of Industrialists and Entrepreneurs chairman Anatoly Kinakh, currently Secretary of Ukraine’s National Security and Defense Council. According to Kinakh, the chemical industry overall would operate at a loss if the price of gas exceeds $95 per 1,000 cubic meters, and the metallurgical sector overall would become loss-making if the gas costs more than $103 per 1,000 cubic meters. These two sectors jointly account for 30% of Ukraine’s annual GDP and 45% of the country’s export revenue, according to Kinakh’s estimates (Interfax-Ukraine, December 9). Moscow at this point demands $160 per 1,000 cubic meters of gas.

However, rather than bankrupting Ukraine, Gazprom may well be aiming for a deal to acquire part-ownership of Ukraine’s transit pipeline system, in return for conceding soft terms on gas supply to Ukraine. The Kremlin could score a major net strategic gain in this event.

(Ukrayinska pravda, December 6; Interfax-Ukraine, Ukrainian TV Channel One, December 8-10; Defense-Express [Kyiv], November 28; see EDM, June 21, 22, 27, July 5, 19, 27, September 9, 28, October 5, 24)