Kyiv Insists on Revision of Gas Contract with Russia

Ukrainian Party of Regions leader Viktor Yanukovych

Ukraine has launched talks to revise the January 2009 gas contract with Russia according to which the base price was hiked from $179 to $450 per 1,000 cubic meters of gas. Kyiv hopes the contract will be revised by the end of the summer. Ukraine’s ruling Party of Regions cannot afford high domestic gas prices ahead of the October 2012 parliamentary elections as its popularity is crumbling, hence the rapid revision of the contract. President Viktor Yanukovych is ready to pay for Russian gas in rubles but he is not willing to secure cheaper gas by joining the Moscow-dominated Customs Union. Kyiv is also apparently trying to play on differences between Russian President Dmitry Medvedev and Prime Minister Vladimir Putin ahead of next year’s Russian presidential elections.   
Ukrainian leaders told Putin on his recent visit to Kyiv that the gas contract had to be revised. At the same time, Putin’s invitation for Ukraine to join the customs union of Russia, Belarus and Kazakhstan was ignored (EDM, April 22). Yanukovych confirmed in an interview with the Wall Street Journal on April 26, that he preferred a free trade deal, which Ukraine is negotiating with the European Union, to the Customs Union. Moreover, he dismissed Putin’s comments that Ukraine would earn an additional $6.5 billion to $9 billion per annum if it joined the Customs Union as empty talk. At the same time, Yanukovych said it should be possible to pay for Russian gas in rubles if Russia “applied a lowering coefficient to the price of gas.” He made it clear this was a concession offered to Russia (Interfax-Ukraine, April 21). Yanukovych spoke one day after Putin’s announcement to the Russian Duma that Ukraine wanted to pay for gas in rubles, rather than US dollars as has been the case thus far.  
Ukrainian Prime Minister Mykola Azarov persuaded Putin to send his deputy Igor Sechin to Kyiv in order to check why the contracts “did not suit Ukraine,” as Putin put it. Sechin arrived in Kyiv on April 19, but nothing has been reported about the results of his meeting with Ukrainian officials. Apparently there was no tangible result, as Putin had rejected any revision of the contract ahead of Sechin’s trip, saying that the contract simply had to be adhered to (Nezavisimaya Gazeta, April 20). By contrast, some progress was reportedly achieved with Medvedev’s team. According to the sources of the Ukrainian weekly newspaper Zerkalo Nedeli, during his visit to Kyiv on April 26, Medvedev agreed to discuss the contract formula that would base the price for Ukraine on international oil prices (Zerkalo Nedeli, April 27). Such a formula, at a time when oil prices are rising, is expected to cause the price for Ukraine to jump from the current $293 per 1,000 cubic meters of gas to as much as $340 by the end of 2011—even with the discount which Ukraine secured last year in exchange for allowing the Russian Black Sea Fleet to stay in Sevastopol until 2042.
Following the agreement with Medvedev, talks to settle the gas price dispute were started on April 28, when Ukrainian Energy Minister Yury Boyko arrived in Moscow to meet with Gazprom’s CEO Aleksey Miller. The formal start of the talks, according to Zerkalo Nedeli’s sources, means that if no compromise is reached by the end of May, Ukraine will be entitled to dispute the 2009 contract in a Swedish court according to the contract’s provisions. In particular, the contract may be invalidated if it is proved that it was concluded under pressure or as a result of fraud (Zerkalo Nedeli, April 28). Ukrainian prosecutors started preparing the basis for litigation with Gazprom by charging former Prime Minister Yulia Tymoshenko with exceeding her authority when she instructed the Naftohaz Ukrainy national oil and gas company to conclude the contract and by opening a criminal case against the then CEO of Naftohaz Oleg Dubyna (EDM, April 22).
Boyko said a new gas contract would be concluded by the end of summer 2011. He pledged to do his utmost to achieve this and confirmed that a lawsuit might be an option, although he insisted that an agreement should be reached without courts. Boyko added that if either Kazakhstan or Uzbekistan offered cheaper gas Ukraine would buy it from them (Inter TV, April 29). It is not clear how this can be achieved given that it is currently impossible for Ukraine to buy gas from Central Asia without Russian mediation. The Ukrainian billionaire Dmytro Firtash, a long-term partner of Gazprom, may be involved at some point. Firtash’s Ostchem Group started buying gas from Central Asia for its Ukrainian chemical factories this past April.
On Ukraina TV on May 1, Azarov insisted that Russia would have to agree to revise gas prices. Again, he did not specify how this may be achieved, saying only that expensive gas for Ukraine did not correspond with the spirit of strategic partnership between the two nations and that Boyko’s talks with Miller on April 28 were “constructive.” Like Boyko, Azarov said that a lawsuit against Russia would only be the last resort.