DOES UKRAINE REALLY HAVE COUNTER LEVERS FOR GAS SUPPLIES?

As tensions increase on all sides of the Ukrainian gas delivery dispute, each player must review its strategic assets. Kyiv may have at least three forms of counter-leverage at its disposal to prevent bankruptcy or the need to surrender partial control of its transit pipeline system. However, the possible forms of counter-leverage entail serious risks as well.

1. Linking Gas Price with Transit Fees.

Kyiv has successfully insisted on negotiating in a single package the price of Russian gas to be supplied to Ukraine and the Ukrainian transit charges on Russian gas bound for Europe. Moscow wanted to complete the contract on transit to Europe first, and only then negotiate the sale-and-purchase contract with Ukraine. Such a sequence would have deprived Kyiv of the possibility to use transit fees on its territory as a means to limit Gazprom’s ability to raise the price on gas for Ukraine. Thus, Naftohaz Ukrainy warns that it would more than triple the transit fees on Europe-bound Russian gas, from the current $1.09 to $3.5 per 1,000 cubic meters per 100 kilometers, if Gazprom carries out its stated intention to more than triple the price of its gas sold to Ukraine, from $50 to $160 per 1,000 cubic meters.

For its part, Gazprom has offered to raise the transit fees paid to Ukraine to $1.75 per 1,000 cubic meters per 100 kilometers. But, responding to Kyiv’s threat to triple those charges, Gazprom warns that it would similarly increase the transit fees for Turkmen gas bound for Ukraine through Russia’s territory, in which case Ukraine would have to pay the differential. In essence, Ukraine is trying to use its quasi-monopoly as a transit country (its pipelines handle nearly 80% of Gazprom’s deliveries to Europe) to offset Russia’s quasi-monopoly as a supplier country. However, Moscow may gain the upper hand by bringing Turkmenistan into the argument on Russia’s side.

2. Gas Siphoning.

Some Ukrainian officials are occasionally hinting that they might again resort to siphoning Russian gas from the transit pipelines, if Gazprom imposes unfair prices on Ukraine. That practice can inflict losses on Gazprom in the short term. However, such siphoning would cut into the volumes of Russian gas contracted with European countries and could seriously complicate Kyiv’s relations with the European Union. Moscow is complaining preemptively in Brussels and elsewhere in Western Europe against Ukraine’s alleged siphoning intentions. Gazeport (Gazprom’s export arm) General-Director Alexander Medvedev warned, “The international community will not permit Ukraine to revert to siphoning gas illicitly.”

Ukraine notoriously used that practice during the mid- and late 1990s, initially at Gazprom’s expense; but ultimately the siphoning was factored into Kyiv’s financial debts to Moscow. Viktor Yushchenko and Yulia Tymoshenko put an end to siphoning in 2001 while serving as prime minister and deputy prime minister overseeing the energy sector, respectively. However, siphoning apparently resumed in 2004, leading to the accumulation of 7 billion cubic meters of Russian gas in Ukrainian storage sites by 2005, which Moscow suddenly “discovered” in mid-year. Russian President Vladimir Putin personally aired this issue to embarrass the Orange government. Kyiv was counting on using that volume in this heating season. Ukraine can hardly risk its reputation with the EU by siphoning gas destined for EU countries.

3. Offsets through the Russian Military?

On December 9, Anatoly Matviyenko, deputy chief of President Viktor Yushchenko’s Secretariat, told journalists in Kyiv that Ukraine might increase rental charges on the Russian Black Sea Fleet’s Crimean bases, so as to offset the price hike on Russian gas. Matviyenko, a founding member of the Orange team, nevertheless mixed that warning with a past-oriented sentimental appeal: “Ukraine and Russia have old ties, we should not resort to a practical-mechanical approach that ignores those ties” (Interfax-Ukraine, December 9).

Unmoved, Russia’s Defense Minister Sergei Ivanov and the Ambassador to Ukraine, Viktor Chernomyrdin, rebuffed Matviyenko’s statement within hours, with Ivanov terming it a “knee-jerk reaction” (RIA-Novosti, December 9). Under the 20-year agreements signed in 1997, Russia pays an estimated $100 million annually to Ukraine for land and anchorages used by its fleet in the Crimea. In recent years, those rental payments have been deducted from Ukraine’s energy bill to Russia, but they only make a small dent into that annual bill. That dent could deepen if Ukraine were to increase the rent charged to the Russian military for using the Mukachevo and Sevastopol radars, as some suggest.

For his part, Naftohaz Ukrainy chairman Oleksiy Ivchenko has proposed a new type of barter arrangement: Naftohaz would supply Ukrainian-made weapons systems worth more than $1 billion annually to Gazprom for gas, and Gazprom would resell the weaponry to Russia’s Defense Ministry. Gazprom quickly rejected Ivchenko’s proposal, citing Gazprom’s need of cash for its investment program in Russia. Sergei Ivanov also turned down the idea on the grounds that the Russian military buys only weapons components from Ukraine, preferring to produce the weapons systems in Russia. Both Gazprom’s spokesman and Ivanov commented sarcastically on Kyiv’s apparent preference for barter instead of cash-based market arrangements. Prime Minister Yuriy Yekhanurov and Defense Minister Anatoly Hrytsenko disavowed Ivchenko’s offer; and on December 10, Yushchenko dismissed his political ally Ivchenko from his executive post after the breakdown of the negotiations in Moscow.

Yushchenko continues his efforts to bring Putin on a visit to Ukraine, most recently for the December 1-2 summit of the Community of Democratic Choice. Putin has declined all invitations thus far.

(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)