Publication: Eurasia Daily Monitor Volume: 2 Issue: 229

On December 8, live on Russian state television (which is widely received in Ukraine), Russian President Vladimir Putin harangued Ukraine at length to triple the price for Russian natural gas, and to pay in cash. Putin skillfully calibrated his tone to avoid antagonizing Ukraine’s populace at the start of the parliamentary election campaign. With all the principal contenders bidding for some form of endorsement from Putin, such endorsements can be a highly saleable — indeed, auctionable — Russian political commodity in Ukraine in the coming months. Hence Putin’s attempt in his speech to reassure Ukraine’s citizens that sharply increased prices and cash payments for Russian gas would not affect them, but “only” Ukraine’s industry.

With Prime Minister Mikhail Fradkov and Energy and Industry Minister Viktor Khristenko flanking him, Putin instructed the government that the “liberalization” and switch to “market terms” in the Russian-Ukrainian gas trade must not impair interstate relations. Putin argued that gas extracted in Ukraine (some 18 billion cubic meters annually) could fully meet the needs of Ukraine’s residential consumers. It is the industrial consumers, Putin indicated, who depend on Russian gas and the Turkmen gas that reaches Ukraine through Russia.

For a clinching argument, Putin cited Ukraine’s GDP growth and “multibillion dollar Western credits for energy projects” as evidence of Ukraine’s ability to pay high cash prices for Russian gas. He seemed to ignore those credits’ actual destination, which is the development of Ukraine’s own energy infrastructure.

Russia supplies Ukraine with some 25 billion cubic meters of gas annually (an average for recent years) in return for Ukrainian transit services to Gazprom, which pumps its gas to European Union territory through Ukraine’s pipeline system. Gazprom intends to deliver some 112 billion cubic meters to EU countries via Ukraine in 2006, amounting to nearly 80% of its deliveries to EU markets.

The Russian gas for Ukraine, however, is valued at $50 per 1,000 cubic meters, and Ukraine’s transit service is valued at $1.09 per 1,000 cubic meters of Russian gas per 100 kilometers of Ukrainian pipelines. This is a pure barter transaction (the widely used term, “gas price,” is a misnomer in this context) and both valuations are far below the existing rates in Europe. There, Gazprom is charging prices some $180 per 1,000 cubic meters of gas on average, and plans further increases in 2006.

The Russian-Ukrainian gas trade is based on a framework agreement signed 2001 and valid for the period 2003-2013. Under this agreement, Ukraine may payment either in the form of transit services or in cash for Russian gas. The volumes of that gas supplied to Ukraine and transited through Ukraine each year, as well as the forms of payment and the price or valuation of the gas supplied and transit services, are all to be negotiated in annual protocols and contracts on supply and transit. All these aspects, including the possibility of switching from one form of payment to another (e.g., from barter to cash) are subject to mutual consent in the annual negotiations.

At this time, the Russian side demands $160 per 1,000 cubic meters of gas supplied to Ukraine from January 1, 2006, onward, with payment to be made in cash. For its part, Kyiv insists on a gradual rise in prices over several years and for counting the value of its transit services for Russian gas as part of the price. For this heating season, Ukraine proposes to buy the usual 25 billion cubic meters, in a first tranche of 17 billion cubic meters at $50 per 1,000 cubic meters and a further tranche of 8 billion cubic meters at $80 to $82 per 1,000 cubic meters. Beyond that, Kyiv would accept to $90-96 at the start of the next heating season (autumn 2006).

Ukraine consumes some 80 billion cubic meters of gas annually, including some 25 billion received in barter from Russia, 18 billion extracted in Ukraine, and 36 billion cubic meters received from Turkmenistan via Russia. The delivery of Turkmen gas is subject to Turkmen-Ukrainian sale-and-purchase agreements and Turkmen-Russian transit agreements. Thus far, Turkmenistan has declined to sign the agreements on gas supply to Ukraine for 2006.

(RTR Russia TV, RIA, Interfax-Ukraine, December 6-8)