Russia Seeks Control of Ukraine’s Gas Transit System Through a Consortium

Russia and some circles in Germany are reactivating the idea of a consortium to control Ukraine’s gas transit system. Moscow hopes to profit from the crisis atmosphere it has itself created since January 1 by stopping gas supplies to Europe via Ukraine. Blaming Ukraine in oft-inflammatory language for the stoppage, Russia is seeking to persuade Germany and the rest of Europe that Ukraine is unqualified to handle the transit of Russian gas supplies.

Moscow’s thesis, if accepted, would lead to two possible corollaries. One would be international backing for circumventing Ukraine with Gazprom’s pipeline projects, such as Nord Stream and South Stream, which Gazprom lacks the means to build. The other would be international acceptance of transferring control over Ukraine’s transit system from an “unreliable” Ukrainian government to a “reliable” Gazprom, under the mantle of an international consortium.

Either solution would increase Russia’s strategic leverage over Europe. Together with Russia’s German partners, the Kremlin has proposed the consortium solution for Ukraine several times in recent years and is now reiterating it, again with Germany as its primary target audience.

Russian Prime Minister Vladimir Putin has aired the consortium proposal regarding Ukraine’s pipelines three times in recent days: on November 7 in St. Petersburg when receiving former German Chancellor Gerhard Schroeder; in his November 8 press conference in Moscow, after receiving Prime Minister Mirek Topolanek of the Czech Republic, current holder of the EU Presidency; and again on January 11 in an interview on German television (www.premier.gov.ru, January 8; Interfax, January 7, 8, 11; German ARD TV, January 11; Nezavisimaya Gazeta, January 13).

Putin said that Gazprom would consider taking part in “privatizing” Ukraine’s gas transit system, either on its own or preferably as part of an operating consortium. Putin invoked the trilateral memorandum of understanding that he signed in June 2002 in St. Petersburg (at the time as Russian president) with then-President Leonid Kuchma of Ukraine and then-Chancellor Schroeder, to hand Ukraine’s gas transit system over to a Russian-Ukrainian-German consortium. Wondering aloud why Ukraine never went ahead with this scheme, Putin took a swipe at “those who passed the law banning the development [sic] of that gas transit system.” He meant Yulia Tymoshenko, who initiated that law as opposition leader in 2007 and is now the prime minister. That law, however, does not ban “development”; it does preclude a transfer of ownership of Ukraine’s gas transit system.

That “international” consortium was to have included Gazprom, Naftohaz Ukrainy (legally the owner of the transit system), and the German E.On Ruhrgas. Investment in the Ukrainian transit system’s modernization was its declared goal—as well as a cover for Gazprom to take over the system de facto. The tripartite formula was hardly “international.” It could have given Russia discretionary control over Ukraine’s system through Gazprom’s collaborators in the Party of Regions (in power from 2002 to 2004, running the energy sector) and the likely passive acquiescence by the German minority partner. The dominant role reserved for Gazprom in that arrangement led some Ukrainians to quip that it was a “consortium for one party.”

The subsequent behavior of those same players does not suggest that they would, or could, have acted independently of Russia in such a consortium. On the contrary: key figures in the Party of Regions went on to bring Gazprom’s shadowy proxy, RosUkrEnergo, into Ukraine; Schroeder went on to join Gazprom openly; and Ruhrgas (itself a minority shareholder in Gazprom) staked its future on “access” to gas in Russia as its overriding priority.

As Ruhrgas Chairman (and Gazprom board member) Burkhard Bergmann stated at the time, Russia’s decision to invite Germany into this transit consortium was “certainly attributable to the relationship between President Putin and Chancellor Schroeder, their exceptional personal relationship.” Bergmann also said that the “volume of investment [in the Ukrainian system’s modernization] would partly depend on whether Ukraine offers ownership shares in the existing pipelines” (Die Welt, June 13, 2002). For its part, Moscow has remained ambiguous on this point to this day.

While the consortium would be open to additional partners (as Putin has suggested in recent days), Gazprom’s dominant role in this scheme has never been in doubt. Discussions on activating the consortium went on for several years. Kuchma did not deliver (apparently not even intending to deliver) on the deal, and the Orange takeover in Ukraine seemed to block the consortium scheme altogether. Since that event, Ukraine’s official policy has ruled out a handover of control of existing transit pipelines and storage sites; but it does allow joint control over any new ones that might be built.

In retrospect, the Putin-Schroeder agreement on Ukraine in 2002 marked the first move in a long-term strategy, the next phase of which came with the Nord Stream gas pipeline project on the Baltic seabed, signed by the same leaders in 2005 and spearheaded by them to this day. Both initiatives reflect a strategic design for close integration of the Russian and German economies in the energy sector and beyond. While the first of these initiatives would control the transit route through Ukraine’s territory, Nord Stream is meant to circumvent any transit country, connecting Russia directly with Germany. The common denominator behind both initiatives if they come to fruition as intended, however, is that of cementing a Russo-German special relationship, economically and politically.