RUSSIA’S GAS, UKRAINE’S PIPELINE, EUROPE’S ENERGY

By Sergei Kolchin

[Author’s Note: This article examines the agreement recently signed by three presidents–Russia, Ukraine and Germany–on setting up a gas consortium from the point of view of the political and economic consequences for Russian and Ukraine and some other European countries, notably Poland.]

Ukraine, Russia and Germany have agreed to act as equal partners in forming a consortium to manage the Ukrainian gas distribution system. The respective presidents–Leonid Kuchma, Vladimir Putin and Gerhard Schroeder–signed the deal in June.

European capital will renovate the dilapidated Ukrainian pipeline network of 35,000 kilometers of arterial pipeline, 122 compressor stations and thirteen underground reservoirs. Germany’s involvement has already attracted US$2.5 billion for reconstructing and developing the pipeline, so the benefits for Kyiv are beyond question. On the other hand, Moscow’s control over the flow of fuel through Ukraine’s territory will enable it to put a stop to Ukraine’s unsanctioned diversions of gas. Ending this practice will both remove one of the main obstacles in Moscow-Kyiv relations and reinforce Russia’s authority in European eyes as a reliable provider of fuel.

The part gas plays in Europe’s energy balance is growing rapidly: It is forecast that by 2030 gas will provide one-third of the total volume of Europe’s energy requirements. The current long-term agreement will guarantee the Europeans a stable supply of Russian gas.

Putin, Kuchma and Schroeder also agreed to consider bringing German gas companies into the consortium, as the German chancellor proposed.

In the view of all sides, the consortium “will promote increasingly effective exploitation of Ukraine’s major gas pipelines, uninterrupted gas transit to Europe through Ukrainian territory, and reliable service to consumers.”

“Exploiting the gas distribution system with Russian, Ukrainian and German capital gives new scope for effective consortium operations,” Putin said after signing the tripartite agreement. Moreover, the idea of the consortium is also attractive to Russia’s partners in Central Asia.

Putin also expressed confidence that cooperation between Russia, Ukraine and Germany in the gas sector ‘will make the gas supply system increasingly reliable and boost European partners’ confidence in Russia.’ He stressed that Germany is the major customer for Russian gas and that the signing of the agreement “marks a qualitative change in our German partners’ participation in energy cooperation.”

For his part, the German chancellor described the project, which Putin and Kuchma developed, as a ‘brilliant idea.’ Schroeder noted how very important the consortium is for the European economy, that “it will raise Germany’s energy system to a new level” and that it “will represent a qualitative shift in European energy policy.”

As observed by Russian Vice Premier Viktor Khristenko after the signing ceremony, the agreement is not the last word on the process of involving other European gas companies. “Membership may be broadened to include our long-standing and proven partners.”

GAS AND FOREIGN POLICY

The new agreement marks a change in the gas vector of Russia’s foreign policy. Until now, this had centered chiefly on threats to build a pipeline to bypass Ukraine, which Russia had accused both of stealing Russian gas and of adopting an unconstructive attitude to its debts and to transit as a whole. Moscow has in the past expended a vast amount of effort, first on securing large-scale investments from Western partners, and then on pressuring Poland, through whose territory the alternative route would pass.

But then Gazprom, the major interested participant in this project, appeared suddenly to lose interest. At the end of winter 2001, the project dropped off the company’s priorities. The Russian gas monopoly’s current financial position appears not to favor implementing costly new projects. There are not enough gas production resources to support large-scale ambitions for transporting gas to Western Europe. In the end, Moscow, despite the difficulty of its energy relations with Kyiv, has opted for its “old friend.” After all, modernizing and maintaining the current pipeline is at least twice as cheap as building a new one. The new gas relations between Russia and Ukraine “are not a sign of any new politicization,” Russian Vice Premier Khristenko stressed, and the joint use of the pipeline through Ukraine to carry 90 percent of Russia’s exported gas to Europe, is just “plain pragmatism.”

In Kyiv, the consortium will undoubtedly see a stormier reception. Kuchma’s opponents from within the national democratic camp have long accused him of trying to cede to Moscow their main geopolitical asset–that is, the monopoly on gas transit to the EU that makes Ukraine a key partner for Europe as well as Russia. The idea of the consortium will raise suspicions that Moscow is again trying to seize control of the Ukrainian pipeline, though Germany’s active participation in the consortium gives the lie to their picture of Russian expansionism. Meanwhile, there is another potential grievance: that Russia and Germany went over Ukraine’s head in signing the agreement with the collaboration of the appeaser Kuchma. In any case, the deputies of the Supreme Rada were totally surprised by the rapid development of events, and a number of them have already voiced concerns that Ukraine will turn out, as usual, to be no more than a junior partner in the consortium.

The Petersburg agreements are evidence of the new post-Soviet order, the contours of which began to take shape after September 11, 2001. Playing on the conflicts between Russia and the West, a practice that until recently formed the basis of the policies of many former Soviet republics, especially Ukraine, is no longer realistic.

This story does have a loser, however. The proposed construction of a gas pipeline across Belarus to bypass Ukraine is no longer on the cards, at least not in the near future. It is not hard to imagine what Belarusan President Alyaksandr Lukashenka’s attitude is to this, now that he has lost one of the main bargaining chips in his negotiations with Moscow. The two sides are far from reaching any mutual understanding on the matter. Speaking on the outcome of recent discussions with his Belarusan counterpart, Putin did not disguise his displeasure at the attitude displayed to the juridical creation of a Union, and in particular at Belarusan efforts to obtain a veto on all key issues, together with other ‘juridical stuff and nonsense’ contained within the conditions for integration set out by Minsk. To a considerable extent, this has been determined by Russia’s new approach to the gas transportation problem.

The breakthrough in Russo-Ukrainian gas relations has also been accompanied by certain concessions from each side. Ukraine, in particular, has proposed to Russia that it will settle its natural gas bills on a barter basis, accepting gas in lieu of transit fees.

Poland’s prime minister, Leszek Miller, recently announced that his country will no longer need Norwegian gas because Russian supplies cover all its requirements. What is more, Poland has found a way of writing off part of its debt to Gazprom. In June, a meeting of shareholders in the Polish gas monopoly, EuroPolGaz, approved a share issue worth US$200 million. The Poles will pay for Gazprom’s share, thus reducing their debt (totaling US$1.3 billion) to the corporation by almost US$100 million. It was proposed to use part of this debt to finance the construction of the new Yamal-Western Europe pipeline, but in the light of recent events this is becoming a less likely prospect.

Thus Russia is reinforcing her position as the main supplier of gas to Europe, largely by virtue of reviewing her priorities in this sector.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.