The Russian-Central European Gas Conflict Continues

While the Ukrainian-Russian gas conflict appears to have been resolved, its fallout is still reverberating throughout Central Europe. In Poland, RosUkrEnergo (RUE), the Swiss based middleman that was dropped from the Ukrainian-Russian-Central Asian gas trade on January 20, has failed to meet its contractual obligations to supply the Polish oil and gas distribution company Polskie Gornictwo Naftowe i Gazownictwo (PGNiG) with 7 million cubic meters of gas per day. The Polish business daily Puls Biznesu reported on January 29 that PGNiG was considering suing RUE for breach of contract.

According to Kommersant on January 28, RUE failed to meet deliveries because on January 20 Naftohaz Ukrainy bought RUE’s $1.7 billion debt from Gazprom and then took possession of 11 billion cubic meters (bcm) of RUE’s gas in Ukrainian underground storage facilities, effectively preventing the export of this gas to RUE’s clients.

Poland imports 76 percent of its annual consumption of 14 bcm of gas, and 90 percent of this comes from Russia and Central Asia. In 2006 PGNiG signed a three-year contract with RUE to buy 2.3 bcm of Central Asian gas per year. The remaining 6.2 bcm was contracted for with Gazprom Export, a 100 percent subsidiary of Gazprom headed by Gazprom Deputy CEO Alexander Medvedev.

Medvedev, however, is also a member of the RUE coordinating committee, along with two other Gazprom Deputy CEO’s who jointly represent Gazprom’s 50 percent ownership of the company.

The mystery of this arrangement is why Gazprom created the scheme allowing Gazprom Export to compete with RUE in sales to Poland and other markets? Why did it allow two private Ukrainian entrepreneurs, Dmytro Firtash and Ivan Fursin, to make hundreds of millions of dollars for a number of years, thus depriving Gazprom of substantial profits and the Russian budget of cash?

Polish Prime Minister Donald Tusk was quoted by UNIAN on January 28 as saying that he intended to raise this matter with Russian Prime Minister Vladimir Putin at the World Economic Forum in Davos, Switzerland.

Tusk apparently is concerned by Gazprom’s demand that Poland lower its transit fee for Russian gas going to Europe via the Yamal-Europe pipeline as compensation to Gazprom for delivering the 7 million cubic meters a day that RUE could no longer provide.

The conflict over RUE and gas supplies to Poland from Russia did not begin in 2009, however. On August 9, 2006, the Polish daily Rzeczpospolita reported that PGNiG was on the verge of dropping its contract with RUE over a dispute involving new Gazprom demands–some would call it blackmail. Gazprom was apparently insisting that if Poland wanted to continue receiving cheap gas (most likely of Central Asian origin), it would have to give Gazprom access to the management of the Polish section of the Yamal-Europe pipeline as well as the right to operate in the Polish domestic market.

The Russian portion of the pipeline is owned and operated by Gazprom. The Belarusian section is owned by Gazprom and operated by Beltransgaz, the Belarus state-owned pipeline company which is 25 percent owned by Gazprom. The Polish section is owned and operated by EuRoPol Gaz S.A., a joint venture of Polish PGNiG and Russia’s Gazprom (each with 48 percent of the shares) and Polish Gas-Trading S.A. (4 percent).

RUE was apparently being used by the Kremlin to pressure the Poles into accepting Russian gas hegemony, and this tactic has now been resurrected by Putin and Dmitry Medvedev.

Although RosUkrEnergo was excluded from the Gazprom-Naftohaz scheme, it still has a number of active contracts with other European countries, including Romania and Hungary. In Hungary RUE has been deeply involved in selling gas to Emfesz, a company established by Firtash in 2003 when he was secretly heading Eural Trans Gas, the predecessor of RUE. Emfesz operates on the Hungarian domestic market and is currently the second largest gas importer in Hungary, supplying 3 bcm annually (www.emfesz.hu).

If Emfesz can no longer obtain gas from RUE, Hungary will stand to lose billions of dollars and the current government of Ferenc Gyurcsany, which has dogmatically supported Russia’s gas strategy, will have to explain why it supported Firtash’s fly-by-night scheme. Were bribes distributed to members of the Gyurcsany government by Russian and pro-Russian companies to allow Emfesz to remain in business or was permission freely given? Interestingly enough, in 2005 the EU Commission stated that the "independent character of Emfesz was questionable" (EU Regulation No. 138/2004). This was apparently ignored by the Hungarian government in its rush to please the Kremlin.

RUE is also under contract to supply 1.5 bcm of gas to Romania (Kommersant, January 28). Will it be able to meet this commitment or will Gazprom be faced with a slew of new law suits for nonperformance?

The consequences of RUE’s shady role are becoming more evident daily. Vladimir Putin put together a crooked scheme; and together with Dmitry Medvedev, Alexei Miller, Leonid Kuchma, Dmytro Firtash, Semen Mogilevich, and scores of others, he has defrauded the Russian and Ukrainian people and denied them the services they deserve from their elected officials.