Ukrainian President-Elect Yanukovych Resurrects Gas Consortium Scheme

Throughout the electoral campaign, Ukrainian President-elect Viktor Yanukovych promised to seek a special deal with Russia on natural gas: Russia to supply Ukraine with gas at discounted prices and, in return, be allowed to take over an ownership share in Ukraine’s gas transit system, which is now fully state-owned (Interfax-Ukraine, January 15, 19, 22, February 5, 7; Inter TV [Kyiv], February 7).

Yanukovych proposes to share the ownership through the vehicle of a gas consortium that would include: the state-owned UkrTransGaz (Ukrainian transit system’s operator), Russia’s Gazprom as supplier, and third-party consumer participation. He suggests that each participant (Ukrainian state, Gazprom, and the consumer side) would hold one third of the shares in the gas transit system through Ukraine. The German E.ON Ruhrgas and Gaz de France are being mentioned as possible shareholders on the consumer side. Gazprom would clearly be the dominant force in such a consortium; and the European presence, window-dressing in this configuration.

The “third-force” presidential candidate Serhiy Tyhypko, who has emerged as the front-runner for the post of prime minister, proposes that Ukraine retains a 50 percent ownership of the transit system, allowing Gazprom and the consumer side to acquire 25 percent each (Nezavisimaya Gazeta, February 10).

Following Yanukovych’s victory, RosUkrEnergo co-owner and Centragas beneficiary Dmytro Firtash is also laying claim to an ownership stake –hypothetically 9 percent– in Ukraine’s gas transit system, in the event of its being shared out. Firtash is one of the main financial backers of Yanukovych’s Party of Regions. His Centragas together with RosUkrEnergo (in which Centragas holds 50 percent interest) claim that Yulia Tymoshenko’s government expropriated from them 11 billion cubic meters (bcm) of stored gas. Yanukovych’s election has apparently emboldened Firtash to seek compensation in the form of ownership shares in the country’s transit system (Kommersant, Interfax-Ukraine, February 9).

Apart from such unforeseen complications, the consortium proposal dates back to a 2002 memorandum signed by Vladimir Putin, Leonid Kuchma, and Gerhard Schroeder (the Russian and Ukrainian presidents and German chancellor, respectively, at that time). The non-binding agreement envisaged creating a consortium of UkrTransGaz, Gazprom, and Ruhrgas to take over Ukraine’s transit system. By all accounts from that period, Kuchma signed without intending to deliver.

The Orange regime change seemed to have buried the consortium idea. In 2006, however, Putin boldly went public with a proposal for shared control of Ukraine’s gas transit system. Putin’s overconfidence apparently stemmed from the then President Viktor Yushchenko’s rapprochement with the Kremlin and Gazprom, resulting in RosUkrEnergo’s entry into Ukraine and Yushchenko’s relationship with Firtash at that time. Putin’s move triggered a political storm in Ukraine. The opposition leader at the time, Yulia Tymoshenko, authored legislation banning any alienation of Ukraine’s gas transit system (all possible forms of alienation being listed as banned). The Ukrainian parliament adopted that legislation overwhelmingly, with the Party of Regions also voting in favor.

At present, Yanukovych offers three main arguments for resurrecting the consortium proposal. First, he claims that Ukraine cannot afford European market-level gas prices, as stipulated in the January 2009 agreement signed by Tymoshenko’s and Putin’s governments. Yanukovych calls explicitly for negotiating a different agreement with Moscow, involving in practice an exchange of ownership shares for low-priced gas.

Second, Yanukovych expresses outright alarm over Gazprom’s South Stream pipeline project, which bypasses Ukraine via the Black Sea. Yanukovych professes to believe that South Stream can replace Ukraine’s transit system as the main conduit for Russian gas to Europe. To stave off that prospect, his solution is to make Gazprom a co-owner of the Ukrainian system, also incentivizing the Russian company to finance the Ukrainian system’s modernization through the proposed consortium.

Yanukovych’s third stated goal is to “guarantee” a transit volume of at least 100 bcm of Russian gas through Ukraine annually; and to increase that volume eventually to the full capacity of the Ukrainian transit system at 140 to 145 bcm per year. The annual transit volumes had averaged some 115 bcm in recent years, with a high of 119 bcm in 2008, a drop to 95 bcm in the recession year 2009, and 116 bcm planned (though by no means guaranteed) by Gazprom for 2010 (Interfax-Ukraine, February 5).

For his part, Tyhypko does not call for discounted prices on Russian gas, apparently accepting European-level prices. While Yanukovych calls for re-negotiating the agreement with Russia (in practice, for a new agreement), Tyhypko would only “review” that agreement to determine whether it conforms to European standards on setting gas prices and transit fees; and re-negotiate if it does not.

Prime Minister Yulia Tymoshenko strongly defended Ukrainian ownership of the transit system during the presidential election campaign. Tymoshenko is confident that the March 2009 agreement, signed by her government with the European Commission, can form the basis for European technical assistance and investment in modernizing Ukraine’s gas transit system, without requiring a shared control with Gazprom. The Party of Regions and industrial interests behind it would have to amend the 2006, Tymoshenko-authored legislation, in order to change the Ukrainian transit system’s ownership.