Publication: Eurasia Daily Monitor Volume: 3 Issue: 37

Turkmenistan has taken two steps in quick succession that pose severe problems for Ukraine’s gas supplies. Ashgabat will raise the gas price in line with international market trends, and is demanding prompt payment of Ukraine’s arrears for past deliveries of Turkmen gas. Missteps by Ukrainian officials in charge of gas policy are aggravating these problems.

On February 11, Ashgabat announced its intention to raise the price of its gas sold to Russia from $65 per one thousand cubic meters at present to $100 by September or October 2006. This spells the end of the “free lunch” that Moscow has promised Kyiv in the form of $95 per one thousand cubic meters of mainly Turkmen gas supplied by Gazprom’s offshoot RosUkrEnergo. That price is based on mixing a large volume of Turkmen gas at $65 with a relatively small volume of Russian gas priced at $230, and delivering that mix to Ukraine at $95 per one thousand cubic meters. These arrangements, written into the Russian-Ukrainian gas deals of January 4 and February 2, become unsustainable if Turkmenistan hikes the price of its gas sold to Gazprom and RosUkrEnergo. Ukraine will then have to pay far more than the deceptively low price, in return for which the Ukrainian negotiators handed Russia unprecedented forms of leverage over Ukraine’s economy.

Ukrainian experts and even RosUkrEnergo representatives had publicly anticipated the Turkmen price hike with quasi-certainty. However, the handful of officials entrusted by President Viktor Yushchenko with the secretive handling of gas policy — led by Prime Minister Yuriy Yekhanurov, Fuel and Energy Minister Ivan Plachkov, and Naftohaz Ukrainy chairman Oleksiy Ivchenko — professed to be unconcerned. Thus, on February 11 and 16, Yekhanurov declared that he saw “no connection” between the Turkmen price hike and the price of the gas mix to be bought by Ukraine. The same group of officials had claimed that the $95 price was fixed for the period 2006-2010 in the agreements signed with RosUkrEnergo, even as the documents made clear that this price only applies for the first half of 2006.

By signing those agreements, Ukrainian negotiators forfeited the chance to buy Turkmen gas directly, without dubious intermediaries, in 2006 and thereafter. However, that chance also depended on the settlement of Ukraine’s debts to Turkmenistan for past deliveries of gas. Kyiv currently owes Ashgabat $159 million, including $143 million worth of goods for Turkmen gas supplied in the first half of 2005. At that stage, Ukraine was paying 50% of the Turkmen gas bill in cash and 50% in goods and services. Yushchenko and other Ukrainian officials sought to maintain that formula and even to extend the barter portion of the settlements, but Turkmen President Saparmurat Niyazov successfully insisted on abolishing all barter transactions with Ukraine as of July 1, 2005.

Last December, Ukraine and Turkmenistan signed an agreement on the supply of 40 billion cubic meters of Turkmen gas to Ukraine in 2006, priced at $50 per one thousand cubic meters in the first half of the year and $60 in the second half. As a precondition to these deliveries, Ukraine had to settle the arrears in first quarter of 2006. As this was not done, and as Turkmenistan chose to sell its gas to Russia at the better price of $65 per one thousand cubic meters, Kyiv resorted to RosUkrEnergo as the intermediary for Turkmen gas supplies.

On February 17-18, Plachkov and Ivchenko held talks with Niyazov and other Turkmen officials in Ashgabat on possible deliveries of Turkmen gas in 2006 and 2007. Niyazov reaffirmed the position that the debts must be settled before any discussions on further supplies. Turkmen Oil and Gas Minister Gurbanmurat Atayev issued a press release terming the Ukrainian delegation “unconstructive” and complaining of its “attempts to confuse the issues.” Such a stand “complicates the negotiations on the gas trade between Turkmenistan and Ukraine for 2007 and beyond,” the release warned.

On February 19, a concerned Yushchenko telephoned Niyazov, ostensibly to congratulate him on his birthday, which is marked as Turkmenistan’s Flag Day. Niyazov asked for prompt payment of the arrears; Yushchenko promised quick action and invited Niyazov for an official visit to Ukraine.

On February 20 in Kyiv, however, Ivchenko told mass media that the debt “does not exist” and accused Turkmenistan and its president of “displaying Eastern perfidy,” “humiliating Ukraine and damaging its image.” Ivchenko urged that Ukraine “renounce Turkmen gas altogether” and stop holding talks with Turkmenistan, and threatened to sue Turkmenistan in the Stockholm Arbitration Court for breach of contract. He assured the public that Ukraine would in any case receive gas for $95 per one thousand cubic meters (RosUkrEnergo’s price), but did not explain the reasons for such confidence. (One Plus One Television [Kyiv], February 20). The statement seems to reflect Ivchenko’s deep involvement in the negotiations with RosUkrEnergo that resulted in the January 2 and February 4 agreements.

The Ministry of Foreign Affairs implicitly contradicted Ivchenko the next day. Spokesman Vasyl Filipchuk told the media that some of the goods owed to Ashgabat are in the process of being delivered, another part is to be delivered in first half of 2006, and a third portion consisting of $77 million worth of goods remains in suspension because of differences over the valuation of those goods. The statement appeared motivated by concern to repair the relationship. On the same day, however, Filipchuk’s boss, Borys Tarasyuk, resorted to polemics: He claimed that Turkmenistan does not have sufficient gas to cover supply agreements with both Russia and Ukraine, and accused Ashgabat of using the debt issue as an excuse for reneging on the December 2005 agreement with Ukraine on supplies in 2006.

The cycle now seen — with Ashgabat seeking debt payment, Plachkov and Ivchenko stonewalling, and Yushchenko promising to act while inviting Niyazov to visit — became a familiar pattern during 2005 and seems to persist. Incoherence, conflicting messages, lack of transparency, and undue influence of group and personal interests continue to characterize Kyiv’s response to the gas and other crisis phenomena, despite the hopes that been placed in the Orange government. Pro-reform ministers have been reduced to secondary roles on gas policy, at a growing cost to Ukraine’s interests.

(Interfax-Ukraine, UNIAN, Turkmen Television First Channel, Turkmen government website, February 17-21)