New Team in Kyiv Sets Stage for Gas Consortium With Russia

Ukraine’s new government, built around the Party of Regions, has re-empowered some key Ukrainian protagonists of gas “schemes” with Russia from past years (Naftohaz Ukrainy Management Change Indicates Turn to Russia, EDM, March 24).

Yulia Tymoshenko‘s government succeeded in ridding Ukraine of those schemes at the beginning of 2009. The Tymoshenko government started shifting the focus of Ukraine’s energy policy from Russia to the European Union. However, the advent of President Viktor Yanukovych, with a Donetsk industry-dominated government, has restored some of Gazprom’s pre-2009 (and indeed pre-2004) allies to power and influence in Kyiv.

Fuel and Energy Minister Yuriy Boyko and the gas trader and industrialist Dmytro Firtash are leading figures in this group from the industry side, closely associated with Presidential Administration head Serhiy Liovochkin and the Chairman of the Ukrainian Security Service (SBU) Valery Khoroshkovsky (Dzerkalo Tyzhnia, March 13).

This group seems set to play a key role in shaping Ukrainian relations with Russia in the energy sector under the new authorities. Sharing the Ukrainian gas transit system with Gazprom through an international consortium, in return for discounted prices on Russian gas, is a centerpiece in this policy. Yanukovych and Prime Minister Nikolai Azarov’s government have announced this objective and appointed the new team to execute this policy at the Fuel and Energy Ministry and Naftohaz Ukrainy.

Liovochkin had previously served in the presidential administration under Leonid Kuchma in 2002-2004. At that time, Liovochkin helped arrange the RosUkrEnergo scheme with Boyko and Firtash (Kyiv Post, February 25, 2010). A top-rated bureaucrat, young and fluent in English, Liovochkin is expected to be tasked with preparing Yanukovych’s visits to the West, notably the president’s hoped-for trip in April to Washington.

SBU chairman Khoroshkovsky is regarded as an ally of Boyko, Firtash, and Liovochkin in a tightly-knit group (Ukraiynska Pravda, March 13, 19). Reputed to be among the wealthiest businessmen in Ukraine, Khoroshkovsky is Firtash’s partner in the Independent TV corporation and the top-rated Inter TV channel (“Ukraine’s first button”). Yanukovych elevated Khoroshkovsky to SBU chairman after Yushchenko had appointed him deputy secretary of the National Security and Defense Council, then deputy chairman of the SBU. Khoroshkovsky and Firtash provided a connecting link in the informal alignment of Yushchenko and Yanukovych against the Yulia Tymoshenko government (Ukraiynska Pravda, March 12; Dzerkalo Tyzhnia, March 13).

Leading the opposition after her narrow loss in the presidential election, Tymoshenko has cautioned “all foreign partners” that transferring the Ukrainian gas transit system to a consortium in any form would contravene Ukrainian law, Kyiv’s interests, and European integration goals. Noting that such a consortium would mainly benefit oligarchic interests associated with Yanukovych’s team, Tymoshenko warns that “this government is not eternal,” and a subsequent government would cancel any such consortium (Interfax-Ukraine, March 22).

Ukrainian legislation indeed precludes any form of alienation of the gas transit system. The law goes into great detail to list all possible forms of alienation, including consortium, and bans them. Tymoshenko authored this law in 2007 as opposition leader during the second Yanukovych government. The Party of Regions went along with this legislation in the Verkhovna Rada at that time (EDM, February 7, 2007).

What has changed since that time is, first, the removal of corrupt “supply schemes” by the Tymoshenko government and its shift to commercial pricing in January 2009, by negotiation with Russian Prime Minister Vladimir Putin (who had earlier colluded with RosUkrEnergo). The Tymoshenko government had recognized that gas sector reform is a key to Ukrainian European integration goals. Second, the economic crisis means that Gazprom can no longer enrich favored traders in Russia and Ukraine through special pricing. And third, the cheap Turkmen gas that once enabled those schemes is no longer available.

What has remained constant, however, is the requirement of discounted Russian gas, to sustain inefficient Ukrainian steel and chemical industries for post-crisis recovery. With neither Gazprom nor Turkmenistan available to bear the costs, these are to be downloaded on Ukraine itself, by sharing out its gas transit system with Gazprom.

Yanukovych and the government portray such a consortium as tripartite, Ukraine-Russia-Europe. In reality, there is no designated European party to such a consortium. Suppositions in the past have centered on certain German and Italian companies that are allied with Gazprom. Nor can the Boyko-Firtash team and the Party of Regions be expected to promote Ukrainian and European integration interests ahead of group interests through such a consortium. The only certainty is that Gazprom would dominate the proposed consortium, notwithstanding any European presence in it for window dressing.