Publication: Fortnight in Review Volume: 6 Issue: 22

With growing insistence, the Russian government and Gazprom demand control over Ukraine’s gas transit system carrying Russian gas to Europe. That system represents Ukraine’s largest economic asset by far and just about the only Ukrainian counterleverage to Russian political pressures. Moscow now wants a 51-percent stake and operational management of Ukraine’s gas transit system, preferably in the form of a long-term concession because it can hardly afford a purchase. Russian control of that system would severely compromise Ukraine’s political independence and give Moscow powerful leverage to reverse Kyiv’s Western-oriented foreign and security policies.

Moscow hopes to enlist Western consent and even assistance to this operation. It asserts that its motivation for the desired takeover is the need to ensure reliable and stable deliveries of Russian gas to Western Europe, secure against any siphoning by Ukraine. This problem does exist, but Moscow overstates it to boost its case for a takeover. To coerce Ukraine into ceding control, Moscow is currently applying concentric pressures on three fronts.

First, Moscow threatens to call in Ukrainian arrears–which it puts at US$2 billion–for past deliveries of Russian gas and to reduce the current, meager deliveries. Gazprom’s affiliate Itera has since October been playing a cat-and-mouse game with Ukrainian thermal power plants. Gazprom and the Russian government, moreover, are dragging out the negotiations on supply contracts for 2001 even as winter sets in.

Second, Russia is suddenly insisting on an all-or-nothing role as a gas supplier to Ukraine. Two months ago, Presidents Leonid Kuchma and Saparmurat Niazov signed an agreement on the delivery of 35 billion cubic meters of Turkmen gas to Ukraine via Russia from the fourth quarter of 2000 through the end of 2001. Turkmenistan began pumping the gas in late October or early November. But before any substantial amounts could reach Ukraine, Russian Deputy Prime Minister Viktor Khristenko stunningly announced on November 13 that “Ukraine’s gas needs must be covered by either Russian or Turkmen gas. We only accept an ‘either-or’ formula. We reject a ‘Russian-plus-Turkmen’ formula.”

That false alternative represents a thinly veiled demand for a Russian monopoly. Ukraine and her Western partners can hardly count on Russia to allow free and nonextortionate access of Turkmen gas to Ukraine, should the latter choose Turkmenistan over Russia as the supplier. Moscow’s new, all-or-nothing demand is being presented to Kyiv in a package with the demand for Russian control of Ukraine’s gas transit system. That control, combined with a monopoly of supplies, would leave Ukraine in a stranglehold.

Third, Gazprom and four major West European gas importers–Gaz de France, Ruhrgas and Wintershall of Germany, and Italy’s ENI–last month signed protocols of intent to lay a westbound pipeline to circumvent Ukraine via Poland and Slovakia. The Western companies, with the respective governments behind them, appeared to ignore Ukrainian and Polish interests and excluded those transit countries from the negotiations with Russia. That procedure enabled the Russian government and Gazprom to use those protocols of intent for psychological pressure on Ukraine. Moscow presents the bypass project as intended to reduce the volume of Russian gas transit through Ukraine. The cut would deprive Ukraine of gas earned from Gazprom as transit fees in lieu of cash.

More damagingly still, a bypass pipeline would reduce the Ukrainian transit system’s commercial value, and make it more difficult for Kyiv to attract Western investments for the overdue modernization of that obsolescent system. Kyiv’s problem could grow even worse if the pipeline soon to be completed via Belarus takes some of the gas currently being exported through Ukraine.

Officials in Kyiv now fear that the bypass projects could turn Ukraine’s transit system into “a heap of scrap iron,” unless Moscow can be persuaded to continue using the Ukrainian pipelines in a stable and predictable way in return for a share of control. These officials would only cede a minority share to Russia and would tender a commensurate share to Western companies.

Poland has taken the position that it would not support projects damaging to Ukraine’s interests. Earlier this month, Polish leaders and the visiting Ukrainian Prime Minister Viktor Yushchenko formulated a common position. It holds that the bypass via Poland would be used for supplementing Russian gas deliveries to Europe, as opposed to rerouting the deliveries that now go through Ukraine.

The European Union has taken some time to arrive at a similar position. EU Commission President Romano Prodi brought that reassurance on November 9-10 to Kyiv. Judging from their public statements, Prodi and Kuchma agreed on three basic principles. First, the Ukrainian transit system will be used to its full capacity before any bypass pipelines are laid. While current use amounts to some 120 billion cubic meters annually, the system’s full capacity amounts to some 180 billion cubic meters. Second, Ukraine should be a full party to any negotiations involving Russia and the West Europeans with regard to transit volumes, tariff terms, and the operation and modernization of Ukraine’s transit system. And, third, the justifications of any bypass pipeline should be critically examined in light of the fact–as Prodi phrased it–that any bypass route would be longer than the direct westbound route through Ukraine.