A New Ukrainian Russian Gas Confrontation

Just when the outlook for normalization in the Ukrainian-Russian gas relationship appeared on the horizon, Russian President Dmitry Medvedev and Gazprom head Alexei Miller have upset the gas cart.

On November 20 Kommersant Daily reported that Medvedev and Miller threatened to charge Ukraine $400 per 1,000 cubic meters for gas beginning in January 2009 if Naftohaz Ukrainy, the Ukrainian state-owned energy company, did not repay an alleged $2.4 billion debt to Gazprom.

Two days later, Gazprom spokesman Sergey Kuprianov, appearing on the Russian television program “Vesti,” warned that Gazprom might be forced to cut off gas supplies to Ukraine beginning on January 1, 2009; “As you perfectly well understand, we cannot supply gas without a contract,” he said.

The day after Medvedev’s announcement, Ukrainian President Viktor Yushchenko demanded that Prime Minister Yulia Tymoshenko’s government pay this debt within five days. Yushchenko linked the price of gas to the price that Russia pays for its lease for keeping the Black Sea Fleet in Sevastopol. Yushchenko also called for a review of transit fees Gazprom pays to transport Russian gas to Europe via Ukraine and the fees for underground gas storage facilities in Ukraine.

Yushchenko did not miss this opportunity once again to mix domestic politics with the continuing gas-price conflict by accusing his opponent, Prime Minister Yulia Tymoshenko, of responsibility for the debt (although he was the only Ukrainian official to make such an accusation). “You are to take personal blame for this,” Yushchenko angrily stated, adding that the Cabinet of Ministers’ lack of professionalism in gas procurement was leading to the “colonization of the state” (Kommersant, November 22).

Tymoshenko, who was visiting Sweden, responded to Yushchenko’s charges by stating that the alleged sum was not a Ukrainian state debt to Gazprom but was, in fact, owed by the shady Swiss middleman company, RosUkrEnergo (Kommersant, November 22).

In what some interpret as an attack on Yushchenko, Alexei Miller, and Dmitry Medvedev, Tymoshenko added: “I believe that it is necessary to end corruption in the gas sector and not burden the government with other questions. I think that our government will end corruption in the gas sector and will begin to sign direct, transparent contracts” (Kommersant, November 22).

Soon after Tymoshenko’s rebuttal, Naftohaz Ukrainy issued its own statement: “The Company underlines the fact that it has no debt to OAO Gazprom and calls on politicians and experts to stop speculating about this question. Naftohaz’s debt to RosUkrEnergo for gas used in 2008 is $1.267 billion” (Kommersant, November 22).

The Ukrainian weekly Zerkalo Tyzhnia, however, reported on November 22 that sources in Naftohaz said that the company’s debt to RUE was in the order of $2.25 billion, which included late payment penalties of $250 million.

In late 2007 Naftohaz signed a contract for 2008 purchases with RosUkrEnergo and not Gazpromexport, a subsidiary of Gazprom responsible for marketing gas. According to the scheme, Gazpromexport buys gas from Central Asia and resells it to RUE, which sells it to Naftohaz on the Russian-Ukrainian border. RUE, in turn, is obligated to repay Gazpromexport for the gas delivered to Ukraine. The confusion in this opaque scheme stems from the fact that RUE is 50 percent owned by Gazprom. Alexander Medvedev, the deputy head of Gazprom and head of Gazpromexport, is also a member of the RUE coordination committee, so Medvedev in fact winds up selling and buying to and from himself.

Since coming to power, Yulia Tymoshenko has been determined to cut RUE out of the Central Asian gas supply chain and sign normal long-term, take or pay contracts directly with Gazprom. At her meeting with Vladimir Putin in October, an agreement was signed that held out the prospect for such a normalization of economic relations. The key passage of the agreement reads: “The Parties acknowledge that the efficiency of the transition to direct relations in gas shipment depends on the settlement of the debt to Gazprom OJSC for natural gas supplied to Ukrainian consumers” (Ukrayinska Pravda, October 4).

It appears that Gazprom and the Kremlin, along with the Ukrainian “gas lobby,” which is reputed to be close to both Viktor Yanukovych, the leader of the pro-Russian Party of Regions, and to Viktor Yushchenko, want to prevent RUE’s removal and avoid long-term contracts, hence the Russian claim that the Ukrainian debt is to Gazprom and not RUE so until it is settled, RUE will remain the middleman.

Tymoshenko is also aware that Yushchenko’s threat to increase prices for underground gas storage in Ukraine would have a disastrous impact, not only on Gazprom and RUE, but above all on Naftohaz Ukrainy. The current price for storing gas in Ukraine is $6.68 for 1,000 cubic meters. In Germany the cost is $82.50. Two-thirds of the gas stored in these underground caverns, however, belongs to Naftohaz. If the Ukrainian government were to raise its storage tariff to half the German level, the financial impact on the state-owned company would be crushing.

As January 2009 rapidly approaches, Gazprom’s European customers will be closely monitoring developments on the Ukrainian-Russian gas front. The January 2006 cutoff of gas to Ukraine, in which RUE played a critical role, had a greater impact on European customers than on Ukraine. The possibility of having a highly suspect scheme, allegedly linked to organized crime, maintain such a powerful hold on gas supplies to Europe should be of concern to European leaders.