Ukrainian Law Bars Transferring Ownership of the Gas Transit System

Gaining some form of control over Ukraine’s state-owned gas transit system has been a constant objective of Russian policy since the 1990s. That 30-year-old system’s worn-out condition, its mismanagement, and the insolvency of its operator Naftohaz Ukrainy are providing Gazprom with a wide opening to gain control under the guise of investing in the system’s modernization. Moscow has sought to achieve its goal through a Gazprom-dominated international consortium but has not succeeded in creating such a consortium thus far (see article above), nor has it persuaded Ukraine to share the country’s single most important economic asset with Russia.

Meanwhile, the Kremlin and Gazprom are nevertheless milking Naftohaz and underpaying for the use of Ukraine’s transit system through the shadowy intermediary companies RosUkrEnergo and UkrGaz-Energo, which are driving Naftohaz and the transit system into bankruptcy, precluding its modernization, and facilitating its ultimate de facto takeover by Gazprom under some flag of convenience. Ukraine’s political system has tolerated these arrangements, indeed allowing those two companies to network with elements in the Party of Regions and around the president.

Nevertheless, the Ukrainian political system has reacted sharply whenever Moscow has attempted overtly to gain control of the gas transit system. One such attempt in 2007 prompted Ukraine to pass strong blocking legislation, which now stands in the way of Russian Prime Minister Vladimir Putin’s latest proposal to create a Russo-German or international consortium to operate the gas transit system on Ukrainian territory (www.premier.gov.ru, January 8; Interfax, January 7, 8, 11; German ARD TV, January 11; Nezavisimaya Gazeta, January 13).

As President of Russia in 2007, Putin called for “unifying” Ukraine’s gas transit system with Russia’s through some common entity, which he did not publicly specify. In return he offered Ukrainian “access” to oil and gas extraction projects on Russian territory, also unspecified. The proposal was meant as a basis for negotiations ahead of a Russian-Ukrainian presidential meeting. Putin claimed that Ukrainian President Viktor Yushchenko and the government, headed by Viktor Yanukovych at that time, favored such a trade-off and had even initiated the proposal.

Putin’s proposal on February 1, 2007, backfired instantly and powerfully in Ukraine. Opposition leader Yulia Tymoshenko initiated and the Verkhovna Rada (parliament) adopted a law on February 6 that prohibits any form of a legal change of ownership of Naftohaz Ukrainy’s assets. It rules out any deals that would involve the sale, transfer, merger, concession, lease, collateralization, entry into joint venture, joint or trust management, mortgaging, or any change in the status of ownership or control of Ukraine’s gas transit system and other Naftohaz assets. The law also stipulates that Naftohaz may not be declared bankrupt, an ultimate safeguard against Russian debt collection through the takeover of assets. The law would only allow transfer of Naftohaz assets hypothetically to an entity that would be 100 percent Ukrainian state-owned.

The 2007 law expanded on previous legislation and closed all avenues for parting with these Ukrainian assets. Kyiv’s proponents of such transactions were forced on the defensive by Putin’s crude indiscretion and Tymoshenko’s initiative. The political atmosphere made it impossible even for Gazprom-friendly deputies to stop the passage of the law. It garnered 430 votes, with none opposed, in the 450-seat Verkhovna Rada (www.kremlin.ru, February 1, 2007; Interfax-Ukraine, UNIAN, February 3-6, 2007; see EDM, February 7, 2007).

That law gave Ukraine breathing space to involve the European Union (not just Gazprom with a German fig leaf) in the needed modernization of Ukraine’s gas transit system, in the EU’s own interest. The EU and Ukraine equally failed, however, to use that breathing space. The context in January 2009 is markedly different. Russia has created a supply crisis preparatory to reactivating the consortium scheme and has not even asked for Ukraine’s opinion. Instead, Moscow assails Ukraine as “thieving” and “criminal” and accuses Washington of orchestrating Ukraine’s behavior. Meanwhile the United States is hobbled by its interregnum. All parties are forced to consider Moscow’s proposal under time pressure in mid-winter and amid a deepening economic recession.

Germany is the primary target audience of Putin’s proposal. Klaus Mangold, chairman of the powerful East Commission of German Business (Ostausschuss der Deutschen Wirtschaft, representing companies with interests in Russia) has endorsed Putin’s proposal in principle. Economics Minister Michael Glos (Christian Social Union), a long-time believer in Russia’s “reliability” as an energy supplier, regards the proposal as “worth considering” (Frankfurter Allgemeine Zeitung, January 14).

These initial reactions stop short of addressing the decisive point: Would the proposed consortium be dominated by Gazprom or be genuinely European? As some German commentators note, the issue is a vital one for the EU and can only be addressed successfully with the EU’s direct participation (Financial Times Deutschland, January 14).

The European Commission plans to hold a donors’ meeting in Brussels in March on financing the modernization of Ukraine’s gas transit system and internationalizing operational control. The consortium issue will probably come up for consideration there. In that context, the EU is expected to ask Ukraine to change the 2007 law, which provides safeguards against Gazprom. That step would be worth taking to enable genuine European oversight, investment, modernization, and part-ownership of Ukraine’s gas transit system, as opposed to placing Gazprom in the driver’s seat.