Publication: Eurasia Daily Monitor Volume: 3 Issue: 190

Ukrainian President Viktor Yushchenko

On October 10, President Viktor Yushchenko’s office issued two policy announcements regarding control over Ukraine’s gas transit pipeline system: regarding national ownership in the morning and regarding a Russian-German-Ukrainian consortium in the evening.

Meeting in the morning with Prime Minister Viktor Yanukovych to discuss government policies and a Party of Regions-Our Ukraine “broad coalition,” Yushchenko “underscored the inadmissibility of any compromises regarding transit fees for [Russian] gas and the ownership of the country’s gas transportation system,” according to the presidential press service (Interfax-Ukraine, October 10).

Speaking by telephone with German Chancellor Angela Merkel in the afternoon, Yushchenko “came out in favor of resuming negotiations toward the creation of a Ukrainian-German-Russian consortium for gas transportation,” again according to the presidential press service (Interfax-Ukraine, October 10). As they spoke, Merkel was hosting Russian President Vladimir Putin on an official visit in Germany.

According to the newly appointed deputy head of the presidential secretariat, Oleksandr Chalyi, the Merkel-Yushchenko telephone conversation was a substitute for a personal meeting that was not held during Yushchenko’s October 3-4 visit to Germany. At that point, Merkel had been so engrossed in the German government’s debate on health service reform that she could not see the Ukrainian president, Chalyi maintained in his inaugural news conference (Interfax-Ukraine, October 11).

Irrespective of any scheduling problems, the sequence of these top-level contacts suggests that Russian-German coordination occurred first, and then the Ukrainian president was approached. The German government apparently passed up the opportunity to discuss the gas consortium issue with Yushchenko in Germany barely a week before Putin’s visit there. Gas deliveries and transit topped the agenda of Putin’s visit to a Germany complacent about overdependence on Russian supplies (see EDM, October 12).

The gas transit system is Ukraine’s single largest economic and strategic asset and Russian control over it is a major objective of Russian policy in Europe. The idea of turning Ukraine’s gas transit system into a Russian-Ukrainian consortium dates back to a 2002 preliminary document of intent, supplemented by a similar document signed in 2003 with Germany. Then-president Leonid Kuchma signed those documents in the knowledge that national control over the pipeline system was a matter of consensus in Ukraine across party lines and that the Verkhovna Rada was unlikely to approve a cession of such control.

At that time, Moscow insisted on dealing with Ukraine first on a bilateral basis, creating a Russian-Ukrainian consortium (on terms that Moscow would largely have defined), and then inviting a third party to join as a minority shareholder. Germany, whose then-chancellor Gerhard Schroeder backed the consortium plan, was the leading candidate for minority shareholder through one of Germany’s energy companies.

To induce Kyiv to yield control over the system, Moscow held out promises to cancel Kyiv’s debts for past deliveries of gas, to maintain low and stable prices on future deliveries, and to invest massively in the Ukrainian system’s modernization and expansion. The latter promise was misleading all along, as Gazprom is chronically short of investment funds for projects in Russia itself. The issues of past debts, future prices, and, above all, ownership were not conclusively resolved during Ukraine’s 2004-2006 presidential and parliamentary elections, with Russia awaiting the political outcomes in Ukraine before deciding on further moves.

Meanwhile, Ukraine’s situation has deteriorated in a number of respects. First, according to Yanukovych, the national energy holding Naftohaz Ukrainy “appears to be on the verge of bankruptcy, as a result of extraordinary obligations and a year-and-a-half of criminal management” (AP, September 28) — a reference to the presidential protégés in charge from early 2005 through mid-2006. There is no clear accounting of the company’s debts to Russia. Apart from its arrears to Gazprom, the new debts incurred by Naftohaz to Gazprom’s newly created offshoot RosUkrEnergo just in the first half of 2006 amount to some $600 million, according to Fuel and Energy Minister Yuriy Boyko (Interfax-Ukraine, October 11).

In addition, Naftohaz took out Western loans in 2005-2006. Some funds were used to refinance debts to Gazprom and/or RosUkrEnergo (from the AMRO Bank), and others were used for investment in the gas transport system (from Deutsche Bank, used by Naftohaz for other than the declared purpose, and said to have been written by Deutsche Bank over to Gazprom for collection from Ukraine).

Moreover, it remains unclear how Ukraine is paying Moscow for the gas just received for Ukraine’s winter supplies. Injected into Ukraine’s underground storage sites in September and early October, according to Boyko, that volume amounts to at least 8 billion cubic meters, belong to RosUkrEnergo’s offshoot UkrGazEnergo; plus possibly a portion of the stored 10 billion cubic meters may also belong to RosUkrEnergo itself (Interfax-Ukraine, October 11).

Naftohaz lost half of its sales revenue earlier this year by ceding the industrial market for gas within Ukraine to UkrGazEnergo. It has also forfeited major transit revenue by agreeing to maintain the fee on Russian gas en route to Europe via Ukraine unchanged at only $1.6 per one thousand cubic meters per one hundred kilometers of pipeline, despite the price hike on Russian-delivered gas to Ukraine. The Yanukovych government is adhering to this arrangement inherited from the Yushchenko team.

Finally, the price on Russia-delivered gas to Ukraine is rising substantially due to Turkmenistan’s price hike on the gas it sold to Russia for resale to Ukraine. The Turkmen hike, from $65 to $100 per one thousand cubic meters, in effect from October 1 onward, is not yet reflected in the price charged by RosUkrEnergo to Ukraine in the fourth quarter of 2006. RosUkrEnergo will collect that increment from Ukraine retroactively in 2007, when the price of its gas supplied to Ukraine is expected to rise from $95 to some $130 per one thousand cubic meters, mainly of Turkmen provenance.

In this situation, Moscow seems set to move to claim control over Ukraine’s gas transit system, in association with Germany as a minority partner. Politically, it will try to sell its move in Ukraine as a comprehensive settlement of past debts and evidence of restraint on future prices. It will try to sell it politically in the West as a major investment project to modernize Ukraine’s system in the interest of Western consumers. And it will portray it both in Ukraine and in the West as an “international” consortium with Germany in tow, obscuring Berlin’s actual role in an energy partnership that Russia is shaping on its own terms.