Publication: Eurasia Daily Monitor Volume: 3 Issue: 170

Russian President Vladimir Putin has bestowed rare praise on Ukrainian President Viktor Yushchenko for agreeing to the gas deals with Gazprom and RosUkrEnergo. Addressing an audience of prominent Western experts at Novo-Ogarevo for the latest Valdai Discussion Club meeting, Putin said of Yushchenko, “He was right to make this decision, he proved to be a serious and responsible politician and did not get bogged down in details” (Kremlin.ru, Interfax, September 9, 13). The praise reciprocates Yushchenko’s praise of Putin’s “help” and “wisdom” eight months ago in connection with the gas agreements.

It seemed evident from the outset that the January 4 and February 2 agreements were designed to set the stage for gradual Russian takeover in one form or another of Ukraine’s gas transport system by using three tools: first, manipulation of Turkmen gas supplies to Ukraine; second, takeovers of Ukrainian assets in lieu of payments for Russian-delivered gas; and, third, forcing a revenue-starved Ukrainian energy sector to invite Russian investments in the overdue modernization of Ukraine’s energy infrastructure, resulting in transfers of control. These trends were set in motion during this year’s first quarter, but were obscured by the presidential team’s and Party of Regions’ spoils-dividing scrambles during the second and third quarters. Those trends are now dangerously accelerating, and the approaching winter adds to the Kremlin’s leverage against Ukraine.

On September 5 Gazprom agreed to Turkmenistan’s demand for a steep price hike on Turkmen gas delivered to Russia: from $65 to $100 per 1,000 cubic meters as of October 1. Russian-bought Turkmen gas forms the lion’s share in the gas mix delivered by Gazprom and RosUkrEnergo to Ukraine at $95 per 1,000 cubic meters. Thus, the Kremlin can now authorize a correspondingly steep price hike on the gas to be delivered to Ukraine. Alternatively, the Kremlin can “allow” Ukraine to accumulate debt and/or to hand over Ukrainian assets for Russian-delivered Turkmen gas.

During the second week of September, Gazprom chairman Alexei Miller and Ukraine’s Fuel and Energy Minister Yuriy Boyko agreed in principle to maintain the existing $95 price until the end of 2006 and to renegotiate the price upward for 2007. Gazprom seems prepared to hike the price only “moderately” in return for some form of direct or indirect control over Ukrainian pipelines, gas distribution companies, and possibly other energy enterprises in Ukraine.

When Yushchenko and his energy team presented the gas agreements to the Ukrainian public earlier this year, they not only looked away from the traps in the discounted price of $95, but also insisted that the price had been set for five years, when in reality it is subject to annual renegotiation. From February to August, they seemed to ignore the warning signs from Moscow and Ashgabat that any price increase for Turkmen gas would necessarily raise the price on Russia-mediated gas supplies to Ukraine. What the January agreement does set for five years — and far below European or even regional levels — is the transit charges for Gazprom’s use of Ukraine’s transit system for gas exports to Europe. Thus, Kyiv is unable to offset the price hike on gas supplies by raising the charges on gas transit.

Putin and his prime minister, Mikhail Fradkov, made clear to Ukrainian Prime Minister Viktor Yanukovych last month at their meeting in Sochi that Ukraine must prepare for a price hike to come in 2007. On September 13, departing on his first visit to Brussels, Yanukovych announced that the government intends to create a $600 million “stabilization fund” in the 2007 state budget in order to cover at least part of the anticipated price hike. He did not specify possible sources for such a fund in a situation when the projected state budget already has a built-in deficit and the state oil and gas company, Naftohaz Ukrainy, is loss-making and debt-ridden after 15 months of management by members of the presidential team.

RosUkrEnergo has already announced plans to buy stakes in the gas distribution systems of seven of Ukraine’s oblasts (out of 26) as part of its intentions to create a wide distribution network (Action Ukraine Report [AUR], September 14). Management of these stakes is to be delegated to the joint venture UkrGazEnergo, fronting for RosUkrEnergo, which is itself a front for Gazprom.