Soviet-era pipelines bring Russian gas to and through Ukraine, which burns it for fuel and takes transit fees on what is shipped onward to central and western Europe. Ukraine for a decade has diddled the Russians and fiddled the gas, running up billions of dollars in arrears on the stuff they consume and siphoning off billions of cubic meters intended for other customers.
But Ukraine is learning that if you don’t pay the piper, you don’t call the tune. Russia is moving vigorously to open alternate routes, and Ukraine is crying foul.
One route is already in use. A $2 billion pipeline, built by a consortium of Russian, German, Italian and French companies, opened last year and carries Russian gas through Belarus to Poland and Germany. Now Poland has apparently dropped objections to a second route through Belarus across Poland to Slovakia. The pipelines through Ukraine, old and badly in need of repair, could become increasingly obsolete.
Ukraine’s President Leonid Kuchma, visiting Russia’s Tyumen region where the gas originates, complained repeatedly about the Russia’s move to new routes, which he called “political.” He sought assurances that Russian supplier Gazprom would not cut its shipments through Ukraine, but he did not get them. Transit volumes through Ukraine, and transit fees, could drop by 20 or 25 percent when the second new line opens.
Ukraine owes Gazprom nearly $2 billion for gas delivered to Ukraine and never paid for. In addition, Ukraine during much of the 1990s stole an estimated 3 billion cubic meters of transit gas each year. Very difficult and bitter negotiations produced Ukrainian recognition of the arrears, but not their payment. Presidents Kuchma and Putin agreed over a year ago that Ukraine could pay its debt by transferring its equity in the pipeline system to Gazprom, but the deal never closed. Ukraine apparently stopped siphoning gas in May 2000. But like prudent investors, the Russians want to spread their risks.
As much as Russia wants alternate routes to take its gas to Europe, Ukraine wants alternate sources of supply. The country has a supply agreement with Turkmenistan, but Turkmenistan has no access to Ukraine except through Soviet-era pipelines that Gazprom controls. Ukraine backs non-Russian routes like the Trans-Caspian Gas Pipeline project for Central Asian and Caspian gas and oil, but political risks in the region give financiers the fantods, and most projects are just pipe dreams. Ukraine will have to deal with the Russians as best it can, for many years to come.