UKRAINE’S REPUTATION AT STAKE IN GAS TRADE WITH RUSSIA

Interviewed on a Ukrainian television channel on July 1, Gazprom Vice-President Alexander Medvedev stated that the Russian side wants to go ahead with the Russian-Ukrainian-German understandings of 2003-2004 regarding ownership and management of Ukraine’s gas transit system (TV Channel 5, July 1). Known informally as the “Putin-Kuchma-Schroeder model,” those understandings were meant to ensure a Russian takeover of the gas transit system on Ukraine’s territory, as well as joint Russian-German investments in upgrading that system. German business and Chancellor Gerhard Schroeder became a party to those understandings in return for Russian guarantees of stable supplies via Ukraine to Germany — Gazprom’s largest and increasingly captive customer country in Europe.

The Russian side had originated that proposal in order to increase its economic and political leverage on both Ukraine and Germany. For a key political argument, Moscow portrayed Ukraine as an “unreliable” transit country. It cited past cases of Ukraine siphoning off gas destined for Europe from the transit pipelines or threatening to interfere with Russian gas supplies to Europe when Russia insisted on collecting Ukraine’s commercial debts to Gazprom. Moscow continued using those arguments against Ukraine in Europe even after Ukrainian Prime Minister Viktor Yushchenko’s government, with Yulia Tymoshenko as deputy prime minister overseeing the energy sector, had ended those practices by 2001-2002.

Three years later, with Yushchenko president and Tymoshenko prime minister, some Ukrainian officials ironically are offering Moscow once again the pretexts for portraying Ukraine as an unreliable transit country and for proposing transit schemes to Europe detrimental to Ukraine.

The current controversy centers on the 7.8 billion cubic meters of Russian gas, destined for European countries, that Ukraine now admits (after previous denials) to holding in underground storage sites on its territory since last winter. Gazprom has proposed three possible ways of settling the issue: 1) release that gas to Gazprom for delivery to European countries as originally intended; 2) buy that gas from Gazprom at the European market price; or 3) deduct those 7.8 billion cubic meters from the overall amount of gas that Gazprom is due to deliver to Ukraine in 2005 under contract as in-kind payment for Ukrainian transit services. On June 29, Gazprom officially announced that it had decided unilaterally to go for the third option. Nevertheless, all three options (and possibly some other ones) are apparently under further discussion.

The first option would seem to be the most straightforward, but Kyiv does not seem to consider it seriously. The second option, at $160 per 1,000 cubic meters, is clearly beyond Kyiv’s means. The third option may be relatively painless financially for Kyiv, but it would reduce Russia’s in-kind payment to Ukraine some 15 billion cubic meters, instead of the approximately 23 billion cubic meters that had been contracted for 2005.

At the moment, Ukrainian officials acknowledge a gap of 5 billion to 6 billion cubic meters of gas in Ukraine’s supplies for 2005. The government is casting about for supply sources to cover that deficit ahead of the heating season. A shortage of gas this coming winter, with cold and dark apartments, could severely hurt the government’s prospects in the March 2006 parliamentary elections.

Under these circumstances, Kyiv seems to be stonewalling on Gazprom’s demands to recover those 7.8 billion cubic meters of gas. Kyiv now proposes to use that gas itself and stretch out the payment for it into 2006. This solution would, in practice, 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. On June 29 in Moscow, Naftohaz Ukrainy chairman Oleksiy Ivchenko ended a round of negotiations with Gazprom by warning that Ukraine might subtract those 7.8 billion cubic meters from the overall volume of gas exported by Gazprom through Ukraine to Europe. A Naftohaz press release two days later made the same point (NTV, Interfax-Ukraine, June 29, July 1). The warning was generally interpreted as implying that Kyiv would, in that case, divert that amount of gas from the transit system for Ukraine’s own use.

This could severely strain Ukraine’s relations with European Union countries, undermine its bid for closer relations with the EU, and provide ammunition to Russia-First circles in Western Europe. For his part, National Security and Defense Council Secretary Petro Poroshenko went to great lengths in a press interview to deny outright the existence of any problem, even resurrecting the Kuchma-era argument that Kyiv can use the “transit argument” against Russia (Ukrayinska pravda, June 29). In fact, playing such a card hurts Ukraine in Europe first of all.

Moscow is exploiting Kyiv’s predicament by urging a return to the Putin-Kuchma-Schroeder model as well as calling for construction of transit pipelines that bypass “unreliable” Ukraine. Apparently, Gazprom and Russian President Vladimir Putin have timed their demands to the Russian-German-French summit in Kaliningrad on July 2 and the upcoming G8 summit in Scotland. At the tripartite summit, Putin and Schroeder reaffirmed their commitment to the project for a Baltic seabed pipeline from Russia to Germany, bypassing all the countries in between (Interfax, July 2, 3; see EDM, June 22).