Publication: Monitor Volume: 6 Issue: 218

The Russian and Ukrainian prime ministers’ negotiations on November 18 in Moscow have left the problem of Russian gas supplies to Ukraine for this winter and next year in suspense. The tenor of those negotiations and follow-up statements suggest that Moscow is interested in prolonging the suspense, with the aim of obtaining control over Ukraine’s gas transit system. For its part, Kyiv seeks to place this bilateral problem within an all-European context, which could protect the interests of Ukraine as a transit country for Russian gas to Western Europe.

Russia’s Prime Minister Mikhail Kasyanov offered his Ukrainian counterpart Viktor Yushchenko in Moscow a conditional renewal of supply contracts in 2001 and an eight-year grace period for Ukrainian arrears to Russia’s Gazprom. The condition is that the arrears be recognized as state debts, to be offset by handing Ukraine’s gas transit system to Gazprom in trust management. Kasyanov suggested that his government and Gazprom might accept Kyiv’s estimate of those arrears–lower than Moscow’s estimate–provided that Ukraine cedes the control of its gas transit system. The suggestion confirms that Moscow’s top priority is control, with debt settlement a means to that end.

Kyiv acknowledges US$1.36 billion in arrears–including interest and penalties–for Russian gas delivered from 1998 through 2000. It regards that amount, for the most part, as corporate debt, incurred by Ukraine’s gas importing companies, and negotiable between them and Gazprom. Moscow now claims just over US$2 billion in Ukrainian arrears and regards them as debts of the Ukrainian state. The legal problem remains unresolved. Moscow complicates it by insisting that such state debts entitle Russia and/or Gazprom to property shares in Ukraine’s energy sector or other Ukrainian industries.

The difference in debt accounting centers on the gas amounts consumed by Ukraine from January to May 2000, in the absence of supply contracts. The Russian side classifies those amounts as “siphoned off,” their value therefore accruing to the Ukrainian state debts for past deliveries. The Ukrainians acknowledge the use of those amounts, but want them included in the new supply contract, the signing of which Russian side itself withheld this year. Moscow has no evidence of Ukrainian siphoning since May, but predicts that the practice will resume in winter and demands guarantees against it in advance.

At least for the time being, Moscow has lifted the threat to block Turkmen gas supplies to Ukraine. Russian Deputy Prime Minister Viktor Khristenko, who is in charge of the energy sector, had recently warned Kyiv publicly that it must choose either Russia or Turkmenistan as its sole supplier of gas, the implication being that Ukraine cannot count on Russia to ensure the transit of Turkmen gas to Ukraine. At the negotiations in Moscow, however, the sides considered a possible breakdown of gas supplies to Ukraine in 2001 as follows: 30-32 billion cubic meters as Gazprom’s payment–in lieu of cash–for the transit of Russian gas via Ukraine to points west, 30 billion contracted by Ukraine for import from Turkmenistan via Russia, and 18 billion to be extracted by Ukraine on her own territory.

No Russian deliveries are included in that breakdown. Furthermore, Ukraine’s capacity to pay for the Turkmen supplies is far from certain, and Ashgabat conditions those deliveries on Ukrainian observance of a rigorous payment schedule. Kyiv will continue negotiating with Russia in the coming weeks for a supply contract which would tide Ukraine over the winter and through 2001. Moscow will negotiate with the aim of obtaining control over Ukraine’s gas transit system by using the three pressure levers: debts, supply contracts and the onset of freezing weather.

Ukraine’s government and political forces are groping for a solution which would meet and reconcile the interests of Ukraine, Russia and Western Europe. Kyiv is now considering two possible solutions, both involving some form of joint control of Ukraine’s gas transit system by Ukraine, Russia and West European interests. Yushchenko and most of the relevant departments of his government favor an arrangement of the concession type, in essence apportioning the operating rights and income for a definite period, while the system itself remains Ukrainian property. National Security and Defense Council Secretary Yevhen Marchuk, with elements in the Yushchenko government and with the support of some pro-presidential interest groups, favor privatization of the system, with Ukraine retaining a stake of minimum 30 percent and veto rights. The Verkhovna Rada’s nonleftist majority is similarly divided. There, pro-presidential groups have drafted legislation to privatize the gas transit system. Yushchenko’s supporters resist the proposal. The controversy parallels a political rivalry between the same two camps, with President Leonid Kuchma seemingly leaning toward the camp represented by Marchuk.

The European Union recently adjusted its position in a way which helps reduce Moscow’s leverage over Ukraine. The plan to lay a new export pipeline for Russian gas bypassing Ukraine has been redefined in a way which should preserve the crucial importance of the Ukrainian pipelines. As EU Commission President Romano Prodi indicated recently in Kyiv, the EU now considers that maximizing the use of the Ukrainian transit pipelines should take precedence over any new pipeline that would bypass Ukraine. That adjustment should relieve some of the psychological pressure on Kyiv in the upcoming rounds of negotiations (UNIAN, Eastern Economist Daily (Kyiv), RIA, November 15-20; see the Monitor, September 7, October 3, 5, 18, November 14; Fortnight in Review, October 6, 20, November 17).