Publication: Monitor Volume: 6 Issue: 185

As winter looms, Ukraine faces energy shortages, mounting arrears for Russian gas, and demands to settle those arrears by ceding ownership shares in Ukraine’s energy sector to Russia. The Russian government and Gazprom seem to require that form of debt settlement as a condition to renewing the supply agreements with Ukraine. While pondering concessions to Moscow, the Ukrainian government is redoubling efforts to diversify the country’s supply sources.

On October 4 in Ashgabat, President Leonid Kuchma signed an agreement on supplies of Turkmen gas to Ukraine with his Turkmen counterpart Saparmurat Niazov. The agreement provides for the delivery of 5 billion cubic meters of gas during the remainder of the current year and 30 billion cubic meters in 2001. Turkmenistan will agree to the delivery of additional amounts in 2001 if Ukraine adheres to the payments schedule for the amounts contracted.

The price has been set at US$38 per thousand cubic meters of the gas to be delivered this year, and US$40 per thousand cubic meters to be delivered in 2001. That price applies at Turkmenistan’s border–that is, it does not include the cost of transit to Ukraine. Transit is only possible through Soviet-era pipelines across Uzbekistan, Kazakhstan and Russia, with Russia in control of the longest stretch of that route.

Kuchma and Niazov have agreed on payment for the gas through the usual mix of cash and barter settlements. Kyiv undertakes to pay 40 percent in hard currency and 60 percent in goods and services for the gas received this year, and 50 percent in hard currency and 50 percent in goods and services for next year’s supplies.

An accompanying agreement covers Ukrainian inputs of goods and services into investment projects in Turkmenistan. Those projects include a US$125 million bridge over the Amu-Daria river, a US$75 million plant for compressor installations and a US$30 million nitrate fertilizer factory.

In July of this year, Ukraine’s Deputy Prime Minister Yulia Tymoshenko had signed with Niazov a protocol of intent which gave Niazov the price he demanded–US$42 per thousand cubic meters. That document had envisaged supply volumes of 20 billion cubic meters during the remainder of this year and even higher on an annual basis from 2001 to 2010. Payment was to have been made 50 percent in cash and 50 percent through barter. The tentative agreement required approval by the president and government in Kyiv. Kuchma quashed the deal for the reason that the gas would have cost Ukraine US$90 per thousand cubic meters by the time the gas reached the Ukrainian border and the transit costs were factored in. The president therefore insisted on a lower price–US$38 per thousand cubic meters–at the Turkmen border. Ultimately, Kuchma and Niazov split the difference.

Under Tymoshenko’s deal with Niazov, the gas deliveries would have proceeded in parallel with Ukrainian reimbursement of debts to Turkmenistan for earlier deliveries of gas. Those arrears, well in excess of US$300 million, were to have been repaid until 2002. Turkmenistan had supplied gas to Ukraine from January to May 1999, but stopped the deliveries because of Ukraine’s default on the cash portion of the payments. Under the Kuchma-Niazov agreement, Turkmen deliveries will go forward independently of the reimbursement issue. That issue remains a matter of follow-up negotiations.

Last month, Niazov abandoned his insistence on long-term supply agreements with actual or prospective customers for Turkmen gas. The actual customers are only three at present: Russia, Ukraine and Iran–the latter for meager amounts. Due to rising prices for fuel on international markets, Niazov now favors short-term supply agreements, preferably on an annual basis, so as to take advantage of the current market trends. This change helped pave the way for the Kuchma-Niazov agreement (Turkmen State News Service, October 2; UNIAN, October 3-4; Eastern Economist Daily (Kyiv), October 4-5; see the Monitor, July 7, 24, August 1, September 7).