Putin sits in catbird seat over Ukraine

by Tammy Lynch

In 2004, as Ukrainians celebrated the “success” of their “Orange Revolution,” few would have believed that five years later the country would be depending on the largess of Russian Prime Minister Vladimir Putin to help save its economy and maintain its gas supply. After all, wasn’t the “revolution” partly a revolt against the meddling of Russian politicians in Ukraine?

Yet, here Ukraine stands, thanking Mr. Putin for his support.

On 19 November, following talks with Ukraine Prime Minister Yulia Tymoshenko, Putin agreed not to levy huge fines on Ukraine for failing to fulfill the “take or pay” provision of its gas supply contract. The provision commits Ukraine to purchase and pay for a contracted level of gas and asses fines if the country does not do so.

But “take or pay” provisions lost favor throughout the world over the last two years, as gas prices and industrial production plummeted. Countries suddenly found themselves buying gas they didn’t need.

Following loud complaints from its European customers, Gazprom gradually has been removing the “take or pay” provisions from most of its European contracts or simply agreeing to ignore them.

This concession has now been made to Ukraine. Russia will not penalize its neighbor for buying approximately 25 percent of its contracted gas in 2009. But even more, Russia agreed to drastically lower the amount of gas Ukraine had previously contracted to purchase in 2010, from 52 billion cubic meters to 33.75 billion cubic meters. This will save Ukraine billions of dollars.

At the same time, Putin told reporters that Russia had agreed to raise by 60 percent the transit price paid by Russia to Ukraine for gas shipped through its pipes to Western Europe. And finally, the price of gas paid by Ukraine reportedly has been set at an average of $280 per 1000 cubic meters, which Gazprom suggests is the average price for Europe.

These concessions and agreements came remarkably quickly compared to previous years – two of which included shut offs of Ukraine’s gas.

Putin suggested that the agreements were relatively simple because of his counterpart. “She’s a tough negotiator,” he said of Tymoshenko following the agreements. “But we’ve always been able to agree, despite all difficulties, and we have managed to keep all of our commitments.”

Message sent and received – Mr. Putin can work with Ms. Tymoshenko.

But Ms. Tymoshenko must work with Mr. Putin. Her country has been badly hit by the global economic crisis and survived for a year only on IMF assistance. But since Ukraine President Viktor Yushchenko supported and signed a 20 percent raise in the country’s minimum wage (over Tymoshenko’s objections), the IMF froze a $3.8 loan tranche. Ukraine, however, still needs support and money or risks international debt default and the inability to pay wages and pensions.

Tymoshenko desperately needed a reduction in gas volumes. Ukraine also desperately needs financial support, and rumors abound that Russia agreed to provide $1 billion to the country’s struggling gas company, Naftohaz, in order to avoid a bond default.

The question that remains unanswered is what Russia expects for its largess in the long-run. And how, of course, Ukraine went from demanding full independence from its neighbor in 2004 to begging for concessions in 2009.