UKRAINE’S GAS PREDICAMENT WORSENING

One year ago today (see EDM, June 22, 2005), Moscow’s preparations for a late-autumn gas attack on Ukraine could already be detected. The early alert hardly registered in official Kyiv (except with then-prime minister Yulia Tymoshenko, who was soon forced out), let alone internationally; and Moscow’s attack came as a shocking surprise. The January and February 2006 gas deals have strengthened Moscow’s ability to negatively influence Ukraine’s overall economic performance and internal political arrangements. Nevertheless, most political forces (apart from the Yulia Tymoshenko Bloc, which rejects those deals) avoided this subject during Ukraine’s parliamentary election campaign and the strife ongoing since the March 26 elections.

At this year’s midpoint, Moscow is again preparing in its own way for Ukraine’s upcoming heating season. Capitalizing on the supplier’s monopoly through RosUkrEnergo and inroads into Ukraine’s internal gas transport system and market through UkrGazEnergo, Moscow seeks to advance gradually toward its goal of controlling Ukraine’s strategic transit pipelines.

Gazprom and the Kremlin are moving on several tracks toward that goal. First, they allowed Kyiv to import gas without payment from January through May, thus pulling the state company Naftohaz Ukrainy — the importer and pipeline owner — into indebtedness when the bills came in June. The debt accumulation process seems set to continue as Naftohaz — and, thus, the Ukrainian state — have to keep borrowing to pay the new gas bills in the months ahead.

Second, they have curtailed the Naftohaz income base (modest in any case) by capturing lucrative segments of the Ukrainian market through the joint venture UkrGazEnergo, controlled by RosUkrEnergo and thus ultimately by Gazprom. The selective market capture process also seems set to continue as a condition to uninterrupted gas deliveries from Russia, thus sapping the Naftohaz financial position even further and forcing it into deeper arrears to the gas supplier.

Third, the Kremlin and Gazprom are taking every measure to cut off Ukraine from direct access to its traditional supplier, Turkmenistan, thus forcing Kyiv to buy that same Turkmen gas from the “exclusive supplier” RosUkrEnergo on Gazprom-dictated terms.

And fourth, Moscow is already predicting that Ukraine will again divert gas volumes bound for Europe from the Ukrainian transit system next winter, thus cutting into Europe’s supply. Kremlin and Gazprom officials have propagated this message recently during President Vladimir Putin’s meeting with news agency chiefs from G-8 countries, the World Gas Congress in Amsterdam, the annual conference of international investors in Moscow, and Italian Prime Minister Romano Prodi’s Kremlin visit.

Thus, Moscow seeks to portray Ukraine as an unreliable manager of the transit system and a source of risk to Europe’s energy supply. This line seems designed to induce European acceptance of a transfer of control over Ukraine’s transit system into Gazprom’s or some intermediate hands, if Ukraine responds to Gazprom’s pressures by siphoning gas again to the detriment of European consumers next winter.

At this stage, Ukraine is facing a supply gap of 10.7 billion cubic meters for consumption and reserve stocks in the second half of 2006. Ukraine also lags behind schedule in terms of building up those reserve stocks to 16 billion cubic meters in underground storage sites ahead of winter. Gazprom and RosUkrEnergo (with their overlapping managements) propose to sell the missing quantities to Naftohaz Ukrainy and to UkrGazEnergo at prices set by the January agreement: $95 per 1,000 cubic meters of the Turkmen-Russian gas mix within the volumes agreed in January, or $230 per 1,000 cubic meters of Russian gas above and beyond those agreed volumes. Indeed, Gazprom is pressing Kyiv publicly to fill those gaps, arguing that deficits in Ukraine’s supply or reserves in winter could lead to siphoning again and jeopardize the fulfillment of Gazprom’s export commitments.

Ukraine’s caretaker government is seeking ways to fill those gaps. The difficulties are, first, Russia’s obstruction of Ukraine’s direct access to Turkmen gas, which at $60 to $65 per 1,000 cubic meters is far cheaper than RosUkrEnergo’s gas at $95. (The wide differential would persist if Turkmenistan and Gazprom/RosUkrEnergo raise their respective prices, which they have said they might do from July 1 onward.) Second, Gazprom has stopped storing its gas in Ukrainian sites as of this year, citing previous cases when it could not draw on those volumes for export because Kyiv could not account for them or admitted to have unilaterally borrowed from them. With that safety cushion gone, Kyiv needs at this point to increase its gas purchases for the reserve stocks — a difficult decision for cash-starved Naftohaz and the government.

Naftohaz Ukrainy is trying hard to preserve its reduced portion of Ukraine’s industrial gas market. That portion shrank as a result of the February agreement with UkrGazEnergo, itself a direct consequence of the January agreement with RosUkrEnergo. Prime Minister Yuriy Yekhanurov, who signed the UkrGazEnergo agreement, carefully arranged to limit UkrGazEnergo’s sales volume in 2006 to 5 billion cubic meters. However, Kyiv faces pressure to gradually yield further market share to UkrGazEnergo in Ukraine’s industrial gas market, as short-term expedients to postpone the reckoning for Naftohaz debts and to keep gas deliveries flowing: from Gazprom through RosUkrEnergo to Ukraine and from RosUkrEnergo through UkrGazEnergo inside Ukraine. Official Kyiv has allowed the country to become caught in this mechanism.

The vacuum of governance in Kyiv since January 2006 — indeed since early 2005 at Naftohaz and the Fuel and Energy Ministry — is playing into Moscow’s hands as problems pile up in Ukraine, unattended and increasingly intractable. Caretaker ministers who have already been dismissed or resigned both collectively and individually have no authority to negotiate with foreign counterparts. Nor do the Naftohaz caretaker officials, designated by the caretaker minister, pending the formation of a new government.

Among Ukraine’s major parties, only the Yulia Tymoshenko Bloc rejects the January and February gas deals as illegitimate and calls for negotiating with Russia on the basis of Ukraine’s national interests. Other political forces could support re-negotiation of those agreements, once a government is formed at last. For its part, President Viktor Yushchenko’s circle seems reconciled with and in some cases committed to those gas deals and has quietly worked to implement them, which might render them irreversible even if Tymoshenko becomes prime minister again. This is undoubtedly one of the reasons behind the presidency’s tactic to drag out the negotiations over the formation of a new government for as long as possible.

(Interfax-Ukraine, June 6 – 21; Zerkalo nedeli, June 10-16, 17-23)