Publication: Eurasia Daily Monitor Volume: 2 Issue: 121

Ukraine’s ability to pay for natural gas is already severely stressed on both the Russian and the Turkmen fronts. Ukraine’s own, growing budget deficit has contributed to that stress.

On June 20, Turkmenistan publicized the scolding administered that same day by President Saparmurat Niyazov to Ukrainian President Viktor Yushchenko personally by telephone and to a delegation of Ukraine’s state oil and gas company Naftohaz Ukrainy in Ashgabat. As cited by a government press release, and shown live on state television, Niyazov used such words as “cheating,” “fooling,” “swindle,” and “fraud.” Turkmenistan will supply the agreed volumes of gas provided that Ukraine fulfills its own commitments, he declared. “We can no longer work like this,” he warned (Turkmen Television, June 20; Interfax-Ukraine, June 21).

According to Niyazov, Ukraine’s arrears to Turkmenistan now total $600 million, including almost $500 million due for Turkmen gas delivered during the first five months of 2005. Those sums represent the mutually agreed value of Ukrainian-made industrial goods that were to be delivered to Turkmenistan in partial payment for the gas received from that country. Ukraine, however, withheld deliveries while unilaterally recalculating sharply upward the unit prices of those goods (mainly metallurgical products), with account taken of rising production costs in Ukraine. If accepted by Turkmenistan, the recalculation would mean a sharp drop in the quantities of Ukrainian goods that pay for Turkmen gas.

Both Yushchenko by telephone and Naftohaz Ukrainy chairman Oleksiy Ivchenko in Ashgabat promised to rapidly correct the situation. Yushchenko had already twice promised redress “within days” to Niyazov in March in Ashgabat and in May by telephone. On May 8 at the CIS summit in Moscow, Yushchenko had flattered Turkmenbashi by awarding a Ukrainian medal to Niyazov’s father post-mortem. In Ashgabat on June 20, however, Niyazov warned, “If you don’t have the goods, then don’t conclude any barter agreements with us; let’s do trade in hard currency then” (Turkmen Television, UNIAN, June 20).

Under the bilateral agreement for 2002-2006, Turkmenistan delivers 36 billion cubic meters of gas to Ukraine annually, the price being negotiated for each calendar year. The price is $58 per 1,000 cubic meters in 2005. Ukraine pays 50% of the annual bill in cash and 50% through barter (mainly metallurgical goods and equipment and construction services). Niyazov wants to abandon the barter method and switch to 100% cash payments. Yushchenko and other Ukrainian officials, however, have as recently as May asked Niyazov to accept an increase in the barter portion of Ukraine’s payments.

Russia’s Gazprom is also asking Ukraine to switch to market prices and cash payments for certain aspects of the gas trade. Gazprom delivers 24 billion cubic meters of gas annually to Ukraine as compensation — in lieu of cash — for the transit of Russian gas en route to Europe through Ukrainian pipelines. The Russian “compensation gas” for Ukraine is valued at $50 per 1,000 cubic meters. Ukraine’s transit service is valued at $1.09 per 1,000 cubic meters of Russian gas per 100 kilometers of Ukrainian pipeline. Both of those rates are far below European market levels. Ukraine transited 134 billion cubic meters of Russian gas to European countries in 2004 (up by 6% over 2003).

Gazprom now proposes to pay European-level transit rates in cash to Ukraine for Russian gas en route to points west in Europe. At the same time, however, Gazprom proposes to sell gas to Ukraine for the country’s own use at the European market rate of $160 per 1,000 cubic meters. (This might turn out to be Turkmen gas resold by Russia to Ukraine at a high markup.) The net effect would add to the already heavy stress on Ukraine’s budget, if Ukraine will — as it now must — continue using those 24 billion cubic meters of Russian gas annually for Ukraine’s internal consumption.

At a June 21 news conference in Kyiv, Ivchenko and First Deputy Prime Minister Anatoly Kinakh urged that the existing barter and pricing arrangements for gas with both Russia and Turkmenistan be maintained intact. Any change made with either country, they argued, would embolden the other country to demand changes as well. They noted that the Ukrainian state cannot afford higher prices for gas and that Ukraine’s processing industry — particularly the steel and chemical sectors — would lose in the competition for export markets, if production costs were forced upward by higher prices for Russian gas. According to Kinakh, the basic agreement with Russia on the gas trade was ratified by the Verkhovna Rada and runs until 2012, thus any changes would have to be made through the Rada. At the same time, he urged Ukrainian industry to prepare for higher gas prices by introducing energy-saving technologies and modernizing production capacities with foreign investments. (Interfax-Ukraine, Inter TV, June 21). Kinakh had long been calling for such measures as prime minister and deputy prime minister in successive governments.

Meanwhile, Naftohaz Ukrainy has confirmed Gazprom’s claims that Russian gas in the amount of 7.8 billion cubic meters is being held in underground storage sites in Ukraine. Destined for European consumer countries, that gas is held in reserve for use in Europe in winter. At this point, however, the Russian side wants that gas to be taken out of storages and counted toward Gazprom’s in-kind payment to Ukraine for transit in 2005. For its part, Kyiv wants to stretch out its use of that gas from 2005 through 2008. This solution would amount to a loan worth $1.2 to 1.3 billion and would also occupy a part of the underground storage capacity that is destined for European consumer countries (Interfax-Ukraine, June 18, 20).