Yanukovych Rejects Putin’s Gazprom-Naftohaz Ukrainy Merger Proposal

Russian President, Dmitry Medvedev, met with his Ukrainian counterpart, Viktor Yanukovych, for the seventh time this year, in Kyiv on May 17-18, but contrary to general expectations no new gas agreements were reached. Ukraine rejected Russian Prime Minister, Vladimir Putin’s, April 30 offer to merge the national oil and gas company, Naftohaz Ukrainy, with Gazprom. Kyiv’s position is that such a merger is impossible in principle as it would mean Naftohaz’s takeover by Gazprom, given the fact that the latter is much larger. Instead, Kyiv may agree to a joint venture between Naftohaz and Gazprom. Medvedev signaled his readiness to discuss this option.

Kyiv’s reaction to Putin’s proposal has been cautious from the outset. In early May, Kyiv indicated that it would proceed from national interests as far as Putin’s offer was concerned (EDM, May 12). As the opposition and the expert community stepped up criticism of the merger offer, the government also became more outspoken. Ukrainian Fuel and Energy Minister, Yury Boyko, was the first top official to rule out a “simple” merger of Naftohaz and Gazprom as it would be “unprecedented in scale,” he stated during a TV interview (ICTV, May 12). Boyko went to Moscow on May 13 to discuss Putin’s offer with Gazprom’s CEO, Alexei Miller, but no agreement was reached.

Yanukovych, speaking to Ekho Moskvy on May 13, said that a merger would be possible on the parity principle only. “If I had been there,” he said half-jokingly, meaning in Azarov’s place during his meeting with Putin on April 30, “I would have extended my hand to Putin saying ‘I agree on a 50/50 share.’” Yanukovych noted that the modernization of gas pipelines was more important for him than a merger. He reiterated that Russia should drop its South Stream pipeline project bypassing Ukraine and help to upgrade its pipelines instead, which would be a cheaper option. In another interview, on May 13, Yanukovych said in clear terms that there would be no merger. Russia would not agree to a 50/50 Gazprom-Naftohaz merger given Naftohaz’s small size compared to Gazprom, he explained. “However a merger on any other condition is impossible,” said Yanukovych (BBC Ukrainian Service, May 13).

Serhy Pashynsky, former advisor to Yulia Tymoshenko on energy matters, suggested that Kyiv would prefer the creation of a joint venture with Gazprom where 50-60 percent would belong to Ukraine and include hydrocarbon deposits in Russia (Kommersant-Ukraine, May 14). Former Deputy Foreign Minister, Valery Chaly, confirmed that such an option was discussed (Channel 5, May 17). Ukraine could contribute its gas storage facilities and pipelines to such a joint venture. Current Ukrainian laws prohibit this, but the pro-Yanukovych majority in parliament can easily amend them. Recently, a bill which if passed into law, will allow foreign participation in the gas transport network was registered in parliament (Ukrainski Novyny, May 14).

Medvedev, speaking in an interview to Ukrainian TV channels on the eve of his visit, agreed that a joint venture could be an option. Medvedev admitted that as Naftohaz is much smaller, a proper merger with Gazprom, whose value he estimated at $150-200 billion, would hardly be realistic. He suggested merging some assets of the two companies instead, but did not elaborate (Inter, 1+1 TV, May 16). Putin’s merger proposal was not discussed at the May 17 meeting of the Russo-Ukrainian interstate commission, which is co-chaired by Medvedev and Yanukovych, according to Andry Honcharuk, an aide to Yanukovych (Channel 5, May 17).

Miller, who accompanied Medvedev in Kyiv, indicated that he understood that a merger (or rather Naftohaz’s takeover by Gazprom) would not happen soon. He suggested a “stage-by-stage” merger (Ukrainska Pravda, May 17). This probably means that a joint venture will be set up after all, though Russia and Ukraine must assign different meanings to the process. While Moscow will view this as only the first stage in Naftohaz’s takeover, Kyiv will prefer that integration between the two countries’ gas sectors stops at that stage for the time being. The metals and chemical tycoons who are behind Yanukovych are uninterested in passing control of Naftohaz to Russia and consequently dominance on gas prices, on which their industries heavily depend.

Yanukovych, speaking at a joint press conference with Medvedev, signaled that Kyiv was unable to keep pace with Moscow regarding economic integration plans. “We have concluded that it’s impossible to work like this when seven meetings [between Yanukovych and Medvedev] took place over such a short period, so the heads of our working groups have to prepare different decisions in a hurry”, said Yanukovych (Inter TV, May 17).

The honeymoon period between Yanukovych and Moscow may soon be over. While Moscow wants to expand its economic interests in Ukraine as rapidly as possible, not sure of how long a friendly government will rule in Kyiv, Yanukovych’s approach must be increasingly viewed in Moscow as too cautious. No important economic agreements were reached between Russia and Ukraine this time. Among the five documents signed in Kyiv only one, on land border demarcation, is really significant as it was the result of many years of difficult talks. However, Moscow’s earlier offers on deep integration in the sectors of nuclear power generation, aerospace, and shipbuilding were left unanswered.