Publication: Eurasia Daily Monitor Volume: 3 Issue: 199

Meeting in Kyiv on October 24, Prime Ministers Viktor Yanukovych of Ukraine and Mikhail Fradkov of Russia authorized the signing of agreements whereby 55 billion cubic meters of “Central Asian” gas would be delivered to Ukraine in 2007 at a price of $130 per 1,000 cubic meters. The contracts were apparently signed that same day in Moscow, according to Ukrainian Fuel and Energy Minister Yuriy Boyko’s comments at the Ukrainian cabinet of ministers’ October 25 session. Boyko also announced publicly that “a copy of the signed contract is already available in Ukraine,” without elaborating (Interfax-Ukraine, Channel Five TV [Kyiv], October 24, 25).

The new price is almost 50% higher than the $95 per 1,000 cubic meters of gas delivered by Gazprom’s offshoot, RosUkrEnergo, to Ukraine during 2006. Nevertheless, the Ukrainian government is not demanding a higher transit rate for Gazprom and RosUkrEnergo gas en route to European Union territory via Ukraine. According to Yanukovych and Boyko, Ukraine cannot use that bargaining card, because the gas transit rate was already set for five years by the January 2006 Moscow agreements signed by Gazprom, RosUkrEnergo, and the state company Naftohaz Ukrainy.

Those agreements set the transit rate for 2006-2010 at $1.6 per 1,000 cubic meters per 100 kilometers of Ukrainian pipelines, whereas the sale-and-purchase price of gas is subject to renegotiation in annual agreements. Thus, the January 2006 agreements deprived Ukraine of its once strong “transit argument” for restraining Russian gas price hikes.

The $130 price does not come as a surprise. The Russian side had first cited this price in August during Yanukovych’s visit with Russian President Vladimir Putin and Fradkov in Sochi (see EDM, August 17) and a number of times since then publicly. Yanukovych and other government officials are now portraying the $130 price in the October 25 agreement as a political victory.

Ukrainian President Viktor Yushchenko seems to be disassociating himself from the terms of the October 25 agreement. The presidential secretariat’s deputy chief, Oleksandr Chalyy, publicly describes Yushchenko’s position as follows: First, Fradkov “did not name any gas price” during his meeting with Yushchenko that same day. The price in 2006, hiked by the January agreements to $95 per 1,000 cubic meters, is “very unfavorable to Ukraine” as a point of departure for any further hikes. Second, the transit rate to be charged by Ukraine to Russia “remains a key issue” in the formation of the price for gas supplied to Ukraine. Third, the Ukrainian presidency does not understand why the Russian gas price to Ukraine is growing despite the fact that the world price for oil — which is factored into market prices for gas — is falling. And, fourth, the presidency insists that pricing arrangements for gas supplies and gas transit be first established by Russia-Ukraine annual intergovernmental protocols, then incorporated into annual commercial contracts (Interfax-Ukraine, ICTV television [Kyiv], October 25).

Those arguments seem weak because Kyiv has forfeited key arguments — including some of those invoked by Chalyy — through the January 2006 Moscow agreements, which Yushchenko’s energy team signed and the president defended politically afterward.

Yushchenko intends to take an official position on the October 25 agreement later on, after consultation with the cabinet of ministers. Meanwhile at Kyiv airport on his way to the EU-Ukraine summit in Finland, the president held a meeting with Deputy Prime Minister for Fuel and Energy Andriy Klyuyev, Boyko, and the management of Naftohaz Ukrainy, all of whom are exponents of Donetsk industrial interests, in charge of Ukraine’s energy policy. Yushchenko raised with them the issue of gas price formation, calculation of the transit rate, and the signing of an intergovernmental protocol on gas issues. However, these seem pro forma arguments. In fact, at this meeting, the president laid the stress on the formation of a “transparent” Russia-Ukraine-EU gas consortium to take charge of Ukraine’s gas transit system (Interfax-Ukraine, October 25).

A transfer of control over Ukraine’s gas transit system from national control into some form of Russian-shared control is Moscow’s ultimate objective. It proposes the formation of a joint transit consortium in Ukraine in return for price restraint and debt relief. Thus far, Germany is the only prospective candidate to join a Russia-Ukraine gas transit consortium, which Russia would clearly dominate. Chancellor Angela Merkel reactivated the consortium idea by telephone to Yushchenko during Putin’s most recent visit to Germany (see EDM, October 16). Apparently, Moscow timed the announcement of the latest price hike on Ukraine to the EU-Ukraine summit. The EU has not taken a position and does not seem to be considering a common policy on this issue of uppermost interest to the EU and most of its member countries.