Publication: Eurasia Daily Monitor Volume: 2 Issue: 124

On June 24 in Ashgabat, Turkmenistan President Saparmurat Niyazov and Naftohaz Ukrainy chairman Oleksiy Ivchenko signed a contract radically changing the modalities of the gas trade between the two countries. It involves a staggering volume of Turkmen gas, at deeply discounted prices, to be paid by Ukraine in hard currency. Moreover, it implicitly terminates the practice of Russia’s Gazprom to appoint a middleman company as operator of the transit of Turkmen gas via Russia.

Effective from July 1, 2005, the new Kyiv-Ashgabat arrangements supersede the existing, five-year contract (2002-2006) for its remaining period through December 31, 2006. They also cancel the half-cash, half-barter pricing agreement for 2005 that was signed on January 2 in Ashgabat by Naftohaz Ukrainy’s Kuchma-era chief Yuriy Boyko.

Under the new contract, Turkmenistan will deliver 59.5 billion cubic meters of gas to Ukraine for an 18-month period. Ukraine will buy 15.5 billion cubic meters until December 2005, and another 33 billion cubic meters in 2006, for a subtotal of 48.5 billion cubic meters, referred to as “commercial gas.” Kyiv will pay $2.134 billion in cash for these deliveries. Additionally, Turkmenistan will supply Ukraine with 5 billion cubic meters of gas during the remainder of 2005 and another 6 billion cubic meters in 2006, subtotaling 11 billion cubic meters, referred to as “investment gas.” This will count toward Turkmenistan’s payment for the services of Ukrainian companies on several major construction and infrastructure projects in Turkmenistan.

Ukraine will pay $44 in cash per 1,000 cubic meters for the “commercial” gas at the Turkmen border. This price is far below international market prices for gas, and almost certainly means a very narrow profit margin (if any) for Turkmenistan. Kyiv had paid the same price in 2004, but only 50% in cash, the other 50% in barter by supplying Ukrainian industrial goods to Turkmenistan. Because Kyiv was unwilling or unable to switch to full-cash payments, Niyazov sharply raised the price on January 1, 2005, to $58 per 1,000 cubic meters. The new contract signifies a compromise: low price for Ukraine, full cash for Turkmenistan.

Niyazov and Ivchenko have further agreed that Ukraine will pay its arrears in goods to Turkmenistan for past deliveries of gas, in full and without revaluing upward the price of those goods. Ashgabat claims some $600 million worth of Ukrainian goods in arrears, including nearly $500 million for the first five months of 2005 alone. The rapid accumulation of arrears and Kyiv’s proposal to increase the accounting price of those goods — by a 2.5 “coefficient” in some key categories — prompted Niyazov last week to pillory Ukraine as unreliable and threaten a partial suspension of gas deliveries. At that point, Kyiv dispatched a 15-strong expert group to Ashgabat for negotiations, capped on June 22-24 by a Niyazov-Ivchenko round.

During that round, Niyazov dismissed the head of the State Oil and Gas Company (TurkmenNebitgaz), Ylyas Caryiev, in an orchestrated scene on live television. Niyazov accused Caryiev of signing the gas-for-goods agreements with Ukraine hurting Turkmenistan’s interests, particularly by accepting to revalue upward the prices of Ukrainian goods. Niyazov appointed an Army Colonel with a reputation for integrity, Geldi Muhammedov, as the new head of TurkmenNebitgaz.

As recently as last week, top Ukrainian officials were uniformly opposed to the idea of altering the half-cash, half-barter formula to pay for Turkmen gas. For his part, Ukrainian President Viktor Yushchenko had asked Niyazov publicly to agree to more barter and less cash.

Ivchenko carried to Ashgabat a written message from Yushchenko inviting Niyazov on an official visit to Ukraine in early September. Yushchenko proposes to negotiate a 25-year agreement on Turkmen gas supplies to Ukraine, and also an agreement on laying a pipeline to Ukraine to bypass Gazprom’s pipeline system. The alternative pipeline can extricate Turkmenistan from Gazprom’s monopoly on the transit of Turkmen gas to consumer countries.

Ukrainian government officials, irrespective of factional alignments, rule out the use of a middleman company to transport Turkmen gas via Russia. Gazprom had appointed such companies until 2004 by agreement with Ukrainian then-president Leonid Kuchma’s administration. Ukraine’s State Security Service chief Oleksandr Turchynov is now heading an investigation into alleged corruption affairs involving the barter payments for Turkmen gas that were handled by those companies.

Moscow seems irritated by the exclusion of those middleman arrangements. It did not allow the plane carrying Ivchenko’s delegation to cross Russian air space on the return flight to Kyiv. The Ukrainian plane had to fly through Azerbaijan and Georgia.

(Interfax-Ukraine, UNIAN, 1 + 1 TV, Turkmen Television, Turkmen government press release, June 23-25; Zerkalo Nedeli, June 18-24; EDM, June 21, 23)