Publication: Eurasia Daily Monitor Volume: 5 Issue: 197

With President Viktor Yushchenko’s disbanding of the Ukrainian parliament on October 8 and legal squabbles over new elections, the continuing Ukrainian-Russian negotiations over 2009 gas supplies for Ukraine appear to have taken a back seat to the political drama being acted out in Kyiv.

How these talks will proceed if a new government is formed is anyone’s guess, but time is running out; and not only Ukrainians, but also Russians and, above all, Europeans, are eager to see a resolution to these talks, which have become an annual nerve-wracking event shrouded in mystery and opacity.

The negotiations began on a positive note on October 2, after Ukrainian Prime Minister Yulia Tymoshenko’s meeting with Russian Prime Minister Vladimir Putin in Moscow.

Initial reports after the meeting indicated that while the price for gas had not been agreed upon, an outline of a broader agreement apparently was. This included a three-year pricing scheme that might include subsidies on Central Asian gas purchased by Russia and then resold to Ukraine. At the end of this three-year “grace period” Ukraine would begin to pay world prices. Any such subsidy, however, would not exceed 25 percent according to a Gazprom spokesman (Ukrayinska Pravda, October 8).

Direct commercial dealings between Gazprom and Naftohaz Ukraine without the use of middlemen companies—a divisive topic in previous negotiations—was agreed upon as well.

The sides also agreed to allow Gazprom and Naftohaz to explore the possibilities for joint gas exports from Ukraine to Europe (The Moscow Times, October 3) In the past Ukraine had been forbidden from re-exporting Central Asian gas to Europe.

Earlier, the Ukrainian media announced that a company called KazUkrEnergo had been registered in Zurich, Switzerland. The company intends to sell Kazakh gas together with Naftohaz and the Kazakh state-owned KazMunayGaz to European clients (Ekonomichna Hazeta, September 29).

This year’s negotiations involve a number of disparate factors:

The key issue is the price Central Asian gas producers will charge Gazprom for their product, which is then resold to Ukraine. Earlier in 2008 Turkmenistan announced that it intended to charge “world prices” for its gas in 2009. Kazakhstan and Uzbekistan announced that they intended to follow suit. The price, however, has still not been announced. The internet website Ukrayinska Pravda quoted Naftohaz chairman Oleh Dubyna on October 2 as saying that he expected the gas price for Ukraine in 2009 to be in the vicinity of $250 to $300 per 1,000 cubic meters. Ukraine imports almost 50 billion cubic meters of gas annually. The current average price for Russian gas sold to European buyers is over $500 per 1,000 cubic meters.

How much Central Asian gas does Russia need to sell to European customers, and at what price, in order to avoid shortfalls in Russia? In 2007 and 2008 Russia apparently needed 10 billion cubic meters (bcm) to make up for falling gas production. These 10 bcm were sold to European consumers by a questionable middleman, RosUkrEnergo (RUE), which has often been accused by Ukrainian Prime Minister Yulia Tymoshenko as having links to Russian organized crime.

Unexpectedly, on October 7 Anatoliy Podmyshalsky, the director of Gazprom Zbut Ukrayina, a company created in 2008 to market gas in Ukraine, told the newspaper Kommersant Ukrayina that Gazprom was considering proposing to the Ukrainian side that it buy Russian gas and that Central Asian gas be sold to Europe. “Only in this way can Ukraine buy gas at below market prices,” the paper wrote.

In return for selling discounted Russian gas, Gazprom would purchase Ukrainian domestic gas distribution companies.

It is difficult to say with certainty what the price of Russian gas will be in 2009 given that gas prices are linked to world oil prices which have decreased significantly in the later part of 2008. The usual period for gas prices to catch up with oil prices is about one year.

During the Tymoshenko-Putin meeting, Putin suggested that gas supplies could be influenced by political instability in Kyiv and the alleged Ukrainian arms sales to Georgia during the August war.

This was said only in reference to the Tymoshenko-Yushchenko falling out. When Putin stated that if a new government were to come to power in Ukraine, however, they could declare the gas agreement null and void. This was clearly a reference to Ukraine’s arming Georgia and not a marginal comment and could be seen as a form of political-economic pressure on Ukraine to toe the Russian line on South Ossetia and Abkhazia.

The results of the 2009 gas price negotiations will have implications not only for the profitability of Ukrainian enterprises but for European energy security and, down the line, for such critical issues as 2009 food crops in Africa and Asia, which buy Ukrainian fertilizer, the production of which uses huge amounts of gas.

If snap parliamentary elections do take place and result in a government top-heavy with members from Tymoshenko’s BYuT Bloc and Party of the Regions, the gas negotiations will in all likelihood not be greatly affected.