Publication: Eurasia Daily Monitor Volume: 3 Issue: 136

President Viktor Yushchenko’s associates in charge of Ukraine’s energy system are negotiating to cede control over the country’s gas transit pipelines to Gazprom. Although national control over the transit pipelines is generally deemed a major safeguard to Ukraine’s security and independence, and most political forces have long resisted Russian proposals for shared control, it seems that some of the president’s closest confidants are moving toward such a deal. They even seem in a hurry to consummate it during their short remaining time in what passes for a government, thus saddling the next government — irrespective of its complexion — with the consequences of such a deal.

On July 13, state oil and gas company Naftohaz Ukrainy chief executive Oleksandr Bolkisev announced that the government has begun negotiations with Gazprom toward establishing “joint management” of Ukraine’s gas transit system. Trying to sound somewhat reassuring, Bolkisev told the media that the pipelines would not be sold, surrendered, or dug out of the ground, but merely transferred into joint management. Should Ukraine refuse, Gazprom would reduce the gas transit through Ukraine by diversifying the transit routes to Europe, warned the Naftohaz chief, alluding to Gazprom’s pipeline projects in Belarus and on the Baltic seabed (Interfax-Ukraine, Channel Five TV [Kyiv], July 13).

That same day, Russian President Vladimir Putin praised Gazprom’s version of “diversification” — that is, diversifying the routes to Europe from a single source, Russia — on German television (ZDF, July 13). While playing off the transit countries against each other will add to Gazprom’s trump cards in the years ahead, the main factor behind Kyiv’s July 13 announcement is the indebtedness of Naftohaz to Gazprom via the latter’s offshoot RosUkrEnergo. This situation is in turn the fast and predictable result of the January 4 and February 2 agreements, made by Bolkisev’s protectors — Fuel and Energy Minister Ivan Plachkov and Naftohaz chairman Oleksiy Ivchenko — and backed by Prime Minister Yuriy Yekhanurov who pushed them through the government, and defended by Yushchenko for as long as his attention to this issue held.

Personnel movements at the top of Naftohaz in late June-early July — when Yulia Tymoshenko seemed set to become prime minister again — indicated an intent by that group of officials to cement the deals with Gazprom and RosUkrEnergo, before Tymoshenko could reverse them. On June 30, the cabinet of ministers at Yekhanurov’s instigation confirmed Bolkisev’s appointment as Naftohaz chief executive. On July 4, Ivchenko, who had resigned in late May as Naftohaz chief opting for his parliamentary seat, returned to Naftohaz (despite the incompatibility with the deputy’s mandate) appointed by Plachkov, this time as head of Naftohaz’ supervisory board. Yekhanurov hesitated to confirm this appointment, but Yushchenko prevailed on him to appoint Ivchenko, according to Ukrainian media accounts.

On July 6 in Moscow, Plachkov and Bolkisev made a potentially ruinous deal with Gazprom and RosUkrEnergo. The two suppliers pledged to maintain the existing, deceptively discounted gas price for Ukraine, $95 per 1,000 cubic meters, as a “transition price” through the end of 2006, renegotiable afterward. Moreover, Gazprom would pump 16 to 18 billion cubic meters of gas into Ukraine’s underground storage sites, most of this for sale in the upcoming heating season by Gazprom’s other offshoot, UkrGazEnergo. In return, UkrGazEnergo would expand into Ukraine’s most lucrative gas market sectors — the steel and chemical industries — deeply cutting into the income of an already insolvent Naftohaz.

And, for Gazprom’s trophy, “Gazprom and Naftohaz Ukrainy discussed the resumption of work of the Consortium for Managing and Developing Ukraine’s Gas Transit System and decided to hold a consortium meeting in the nearest future,” according to the official press release. The consortium is a proposal and nonbinding agreement from 2002-2003, promoted by Russian President Vladimir Putin with Ukraine’s then-president Leonid Kuchma and blessed by Germany’s then-Chancellor Gerhard Schroeder who is working closely with Gazprom. The “consortium” would have turned Ukraine’s transit pipeline system into a Russian-Ukrainian joint company, possibly with German minority participation. Not only Orange forces, but many others including Ukraine’s Socialist Party vehemently opposed the idea, and Kuchma himself quietly evaded it during his remaining time in office.

Russian-Ukrainian “joint management” of Ukraine’s transit system as just adumbrated by Bolkisev is a milder version of the “consortium” idea. Russian interests and personnel would clearly dominate in either format, as they do in the ostensibly “joint” RosUkrEnergo and UkrGazEnergo.

Fifteen months of Plachkov-Ivchenko management left Naftohaz insolvent and indebted. At the Moscow meeting, the Ukrainian side could not reply when it would repay $500 million in arrears to Gazprom’s front, RosUkrEnergo. At the moment, Naftohaz seeks another $150 million loan from the Gazprom-friendly AMRO Bank, on top of the $500 million in loans arranged by that same bank in June for repayment of Naftohaz debts. The Ukrainian company had incurred $680 million in debts, mainly to RosUkrEnergo (and a small portion to UkrGazEnergo) in January-April 2006 alone, and it is losing its income base for debt repayment, let alone investment. It also owes $300 million to Deutsche Bank, apparently collectible by Gazprom. Thus, pressure is building on Kyiv to repay the debt in the form of equity cessions or “joint management” with Gazprom of Ukraine’s pipelines.

Data just released by RosUkrEnergo show that it made $740 million in net profit in its first year of operations in Ukraine, 2005. Of that amount, it paid $712 million in dividends to its shareholders, including 50% to Gazprombank and 50% to the two individuals who Gazprom unverifiably says are the “Ukr” side in this shadowy company. Thus, RosUkrEnergo chose to make no investment in Ukraine, and Naftohaz is no longer in a position do so after the January and February agreements with Moscow.

(Interfax-Ukraine, Ukrainian News Agency, July 7, 10; Den, July 11; Zerkalo nedeli, July 8-14)