Publication: Monitor Volume: 6 Issue: 194

Meeting with Russia’s President Vladimir Putin on October 16 in Sochi, Ukrainian President Leonid Kuchma officially agreed to hand over to Moscow an as-yet-unspecified ownership share in Ukraine’s gas transit system. That system of pipelines, pumping stations and large-capacity storage sites handles annually up to 130 billion cubic meters in Russian gas exports to European countries. Those exports probably constitute Russia’s single largest source of hard currency earnings. The transit system is also key to Ukraine’s own gas imports and energy balance.

Official communiques from the Sochi meeting misleadingly term the deal-in-the-making a “privatization” of Ukraine’s gas transit system. The likely beneficiary, however, is Russia’s Gazprom monopoly. The same communiques present this development as a Ukrainian initiative which Russia “accepted.” In fact, Kyiv took this step under considerable pressure and after running out of options. Kuchma’s move had been expected and was coordinated in advance with the Ukrainian parliamentary leadership. Last month, senior figures in the parliamentary majority introduced draft legislation on the sale of ownership shares in Ukraine’s gas transit system.

The president, the cabinet and the parliamentary leaders hope to obtain a three-way deal which would involve major West European gas import companies, mainly from Germany and France, acquiring stakes in Ukraine’s gas transit system. Such a development would constitute a genuine, if partial, privatization as well as political counterbalance. Failing that, Ukraine’s economic and political vulnerability to Russia could increase from an already uncomfortable level.

At least five factors converged to push Ukraine onto this risky path. First, the mounting arrears for Russian gas already delivered. The arrears are compounded by penalties on Ukraine for siphoning off some of the westbound Russian gas from transit pipelines. As a cumulative result, Ukraine currently owes Russia almost US$2 billion–up from US$1.4 billion in January 2000–which it is unable to pay. The second factor is Ukraine’s dependence on Russia for gas imports from Turkmenistan. Kuchma recently signed an agreement with Turkmen President Saparmurat Niazov for the delivery of 35 billion cubic meters of favorably priced gas to Ukraine between now and the end of 2001. That agreement would, however, remain a dead letter in the absence of Russian consent to transit the Turkmen gas to Ukraine. And Moscow’s conditions include its participation in “privatizing” Ukraine’s pipelines.

The third factor is a plan by Germany, France and Italy, with the support of the European Union, to augment imports of Russian gas. Some of that gas would in fact be Turkmen gas bought and resold by Russia. The plan envisages imports of some 30 billion cubic meters annually through a new pipeline that Russia wants to bypass Ukraine. That would at one stroke reduce Ukraine’s transit revenue as well as her potential counterleverage to Russian pressures. Moscow, moreover, urges augmenting the bypass pipeline’s capacity in a follow-up stage. The bypass route would have to traverse Poland and Slovakia. The Polish government has initially refused to enter into any agreements detrimental to Ukraine. But Poland will probably have to reconsider that position in order to avoid jeopardizing her own bid for EU membership.

The fourth factor is an increasingly pressing need for modernizing the Soviet-era transit pipelines in Ukraine. Such a project is beyond Ukraine and/or Russia’s resources. Western technology and capital can be enlisted only to the extent to which the Ukrainian pipelines matter to Western Europe’s energy supplies. That in turn depends on the extent of Russia’s involvement as the source of supply. And Russia seeks co-ownership of Ukraine’s pipelines as part of the overall deal.

In the final analysis, Kyiv has found itself caught between crude Russian pressures and gentle West European ones to come to terms with Moscow. Ukraine’s Security Council Secretary Yevhen Marchuk hinted at the latter factor by stating an international seminar yesterday that friction with Russia, specifically in the matter of transporting Russian fuels to Europe, would jeopardize Ukraine’s own aspirations to draw close to the EU. More openly, Putin stated in Sochi that Ukraine’s status as a transit country for Europe-bound energy supplies depends on Kyiv’s coming to terms with Moscow, and “if we agree with Ukraine, we can then include Ukraine in the cooperation between Russia and Western Europe.” Putin spoke and acted as if he understood that Ukraine had been placed in the position of dealing with the West Europeans through Russia in this matter.

The fifth factor is short-term and perhaps, therefore, the most pressing. As winter approaches, Ukraine faces energy shortages while Moscow declines to renew supply contracts. Four negotiating rounds on debt settlement and contract renewal have remained fruitless. To reinforce the message, Moscow has delegated mere civil servants–instead of policymaking officials–to those talks. By early October, Ukrainian Parliament Chairman Ivan Plyushch–a staunch supporter of national independence–declared that Ukraine “can not go through the winter without Russia.” By mid-October, Kuchma decided to fly to Sochi with the “offer” that a debonair Putin “accepted” in front of television cameras.

The deal is not yet finished, however. Its fundamentals will have to be negotiated. Ukraine estimates the overall value of her gas transit system at US$20-25 billion. Moscow’s estimate of that value, the extent of the stake to change hands, and the possible Western stake in the system are as many unknowns at this point.

The Putin-Kuchma understandings in Sochi are not without their silver lining. First, all of Ukraine’s arrears to Russia as well as any debts to be incurred from now on will count as state debts, as distinct from corporate ones. That should theoretically open the way for Russian consent to debt restructuring along the same lines that Moscow seeks for itself from the Paris Club countries. The other silver lining is Russian consent to the transit of the Turkmen gas to Ukraine, at fees that would not drive up the price of the gas out of Ukraine’s reach by the time it reached the Ukrainian border. But these are “understandings in principle,” that is nonbinding, at this stage (UNIAN, Eastern Economist Daily (Kyiv), Dow-Jones Newswires, October 14-18; Russian Public Television, October 16-17; see the Monitor, April 19, May 23, July 7, 24, August 1, September 7, October 3, 5; Fortnight in Review, April 28, October 6).