Publication: Eurasia Daily Monitor Volume: 2 Issue: 75

On April 15 in Ashgabat, Gazprom Chairman Alexei Miller satisfied Turkmenistan’s President Saparmurat Niyazov’s demand to switch to all-cash payments for Turkmen gas delivered to Russia. In return for this concession, Turkmenistan seems set to resume the deliveries, which it halted on January 1, 2005, in order to persuade Russia to change the pricing arrangements. Those arrangements had been onerous for Turkmenistan since their inception (2003) and became even more disadvantageous in the context of ongoing price trends on international markets.

The Russian-Turkmen contract, signed in 2003 and covering the years 2004-2006, had set the Russian purchase price at $44, to be paid 50% in cash and 50% by bartered goods, per 1,000 cubic meters of Turkmen gas at the country’s border. In late 2004-early 2005, Niyazov demanded a price hike to $58 per 1,000 cubic meters with full payment in cash, and it suspended the deliveries when Gazprom refused to renegotiate the contract.

Although Gazprom insisted that its legal position was unassailable until the contract’s expiry, and proposed renegotiating the price for 2007 and the subsequent years, Niyazov stood his ground. It was only midway through the year’s second quarter, on Miller’s second visit to Ashgabat this year, that Gazprom obtained the resumption of deliveries by yielding to one of the Turkmen demands (the structure of payments), albeit not the main one (the price itself). Meanwhile, Turkmen gas remains almost certainly the cheapest in the world at the point of delivery, due to Russia’s near-monopoly on the transit.

Ashgabat’s argument for full cash payments was two-fold. First, the reference prices for Russian steel and other metallurgical products — the mainstay of the barter component of Russian payments — have risen significantly, thus reducing the quantities delivered, as well as raising the cost of gas extraction and transport where those products are used in Turkmenistan. Second, Niyazov characterized the barter component as an unacceptable Soviet relic, incompatible with market relations.

Turkmenistan obtained this concession because Gazprom needs growing volumes of Turkmen gas for use within Russia, so as to release Russian-produced gas for export to lucrative European markets. With gas extraction in Russia basically stagnant, and investment capital in short supply for field development, it becomes increasingly problematic for Gazprom to meet its commitments to European countries. Thus, the 7 billion cubic meters of gas that Turkmenistan is due to deliver to Russia in 2005 — rising to 10 billion cubic meters in 2006 — have become significant to Russia’s balance of gas consumption and export.

According to Miller, at the end of the three-day negotiations in Ashgabat, Turkmen gas deliveries to Russia from this point on are to adhere to the schedule for 2005 as stipulated by the three-year contract. This phrasing does not clarify when the deliveries would resume, and whether Turkmenistan would make up for the volumes that were due to have been delivered from January through April to Russia.

In January Ukraine had accepted Ashgabat’s desire to raise the purchase price for Turkmen gas from $44 to $58 per 1,000 cubic meters of gas, but retained the structure of payments as 50% in cash and 50% in the form of goods and services. Under Ukraine’s contracts with Turkmenistan — unlike Russia’s contracts with that country — prices are subject to renegotiation annually. At present, Ukraine seeks to increase the barter component of its payments for Turkmen gas. This goal seems more difficult to attain, now that Russia has agreed to eliminate that component from its pricing arrangements with Turkmenistan.

(Interfax, Turkmen TV Channel One, April 15; see EDM, January 6, 12, February 11, March 24)