Publication: Monitor Volume: 6 Issue: 143

Prime Ministers Viktor Yushchenko of Ukraine and Mikhail Kasyanov of Russia, with massive government delegations, held talks on July 19 in Moscow on restructuring Ukraine’s heavy debts for Russian gas. Those debts notwithstanding, Kyiv’s delegation sought agreement on expanding the volume and easing the commercial terms of Russian energy deliveries to Ukraine. Should that attempt be even partially successful–and if not tied to political concessions–it would reward Kyiv’s creative use of debtor’s leverage vis-a-vis Moscow.

After much wrangling between the two governments–and infighting within the Ukrainian government–the sides conclusively agreed that Ukraine’s arrears for gas amounted to US$1.5 billion as of December 31, 1999. The sides agreed in principle to work toward restructuring Ukraine’s arrears on terms no different from those that Kyiv expects to receive from the Paris Club of creditor countries. But disagreement persists on the current year’s debts, which Moscow puts at US$700 million–an implausibly high figure which seems intended to offset the loss which Moscow feels it incurred in agreeing to the US$1.5 billion figure for the Ukrainian arrears. Moreover, an exasperated Russia complained that Ukraine continues to unlawfully siphon Russian gas from the transit pipelines–a practice which not only inflicts losses on Gazprom but also interferes with Russian gas deliveries to European countries.

In the run-up to the Moscow meeting, Gazprom and government officials had reaffirmed their intention to lay gas export pipelines to circumvent Ukraine. Two possible routes are being considered. One, via Belarus and Poland, does not hold much hope for Moscow because the Poles are reluctant to undermine Ukraine’s counterleverage. In preparing for the Moscow meeting, Yushchenko had met on July 16 in Zamosc, Poland with Prime Minister Jerzy Buzek, who reaffirmed the position that Warsaw would not hurt the interests of “strategic partner Ukraine” in the matter of gas transit. Moscow’s alternative option is an export pipeline running from the Russian head of the Gulf of Finland, along the Baltic seabed in the direction of Germany. But Gazprom and the Russian government are in no position to finance a project of such magnitude.

The Ukrainians countered with a set of bold proposals of their own.

(1) Establishing a “common energy balance” of Russia and Ukraine. This concept has long been under discussion between various CIS countries and Russia. It entails calculating the aggregate requirements of Russia and–in this case–Ukraine for natural gas, oil, electrical power and nuclear fuel for a given time; planning and executing deliveries of those Russian energy carriers at prices close to the Russian internal prices; and guaranteeing timely repayment for those deliveries, presumably on a primarily barter basis.

(2) Devising a new commercial and financial mechanism to link timely Ukrainian payments with stable Russian deliveries of gas and other energy carriers. An intergovernmental commission, co-chaired by Deputy Prime Ministers Viktor Khristenko and Yulia Tymoshenko, will launch negotiations on that matter next week in Kyiv, aiming for results before the onset of winter. Just how Ukraine will be able to offset the Russian deliveries seems, however, far from clear.

(3) Canceling the Russian tax surcharge on Russian oil and gas exports, which is due to go into effect in August and would raise the price of those commodities.

(4) Raising the transit tariffs for Russian gas and oil piped via Ukraine to points west and south. Ukraine would use that extra revenue toward servicing the arrears or paying for current deliveries of Russian fuels.

(5) Involving Russian industry and banks in the project to complete two power blocs at Ukraine’s Rivne and Khmelnitskaya nuclear power plants. Ukraine is turning to Russia because European Union countries, led by Germany’s antinuclear government, declined to support the project–which is meant to compensate for the closure of the Chornobyl nuclear power plant. Russia, for its part, badly needs export contracts for its underutilized plants which specialize in equipment for the nuclear energy industry.

(6) Ceasing the siphoning from transit pipelines in Ukraine as soon as the common energy balance has been established, and on the premise that Russia renounces plans for new export pipelines to bypass Ukraine. Yushchenko even insisted on an increase in Russian gas transit via Ukraine, which currently totals some 115 billion cubic meters annually, and called for overhauling existing pipelines and raising their throughput capacity. Such a move would evidently enhance Kyiv’s bargaining position. But Yushchenko was well placed to argue that while the bypass projects are beyond Russia’s ability to finance, modernizing Ukrainian pipelines is (given a joint effort) affordable.

Kasyanov’s public retort that Moscow has “grandiose plans of a geopolitical nature to lay new export pipelines to Europe” rang hollow, considering Russia’s present economic situation. But the gist of Kasyanov’s remarks suggests, first, that Moscow will seriously consider Kyiv’s proposals, and, second, that Moscow will try to attach onerous conditions. The Russian prime minister stated that the problem of Russian energy deliveries to Ukraine “must be resolved as one part of a package, involving some decisions beyond the two governments’ authority.” This almost certainly implies transferring Ukrainian pipelines and industrial assets to Russian control–a move which would require presidential approval and parliamentary consent in Kyiv. Those goals have on the whole eluded the Russian government and private interests for several years. Recently, however, Ukraine has transferred the Mykolayiv alumina plant, the Lysychansk (LINOS) oil refinery and several other plants to Russian control in the framework of Ukraine’s privatization program.

The Russian government pledged to repay debts to Ukraine for services to Russia’s Black Sea Fleet and to return the deposits of private Ukrainian citizens, held by the ex-Soviet (now Russian) Foreign Trade Bank (Vneshekonombank) in Moscow since the collapse of the Soviet Union. These, too, are chronic irritants not likely to disappear any time soon from the bilateral relationship. Presidents Leonid Kuchma’s and Vladimir Putin’s meeting, scheduled for August 18 in the Crimea, will test the current state of that relationship and its prospects (UNIAN, DINAU, RIA, Itar-Tass, July 16-19; Vremya novosti, July 18; Eastern Economist Daily (Kyiv), July 18-20)