The Putin-Medvedev Brawl over Gazprom: Will Europe Suffer?

by Roman Kupchinsky

With the Fall/Winter heating season in Europe rapidly approaching, there are indications that a vicious fight has begun between the apparatus of Russian President Dmitri Medvedev and Prime Minister Vladimir Putin’s entrenched loyalists over control of Gazprom, the giant Russian state-owned gas company.

The victor will have a major say in determining Russia’s energy policy towards Europe in the coming years as well as gaining control over the financial resources of Gazprom, a vital asset in future political campaigns.

The first public indications that a fight had begun in Moscow came on September 1 when Putin met with Ukrainian Prime Minister Yulia Tymoshenko in Poland and agreed to release Ukraine from the key provision of the “take or pay” gas contract signed in January 2009 – that Ukraine would have to pay for the gas it had promised to buy but did not take from Gazprom.

Tymoshenko stated that in 2010, Naftohaz Ukraine, the state oil and gas monopoly, would only purchase 25 billion cubic meters of gas (bcm) from Russia instead of the 52 bcm contracted for under the long term contract. In 2009 Ukraine was obligated to buy 40 bcm but only needed 33 bcm for its domestic consumption.

Tymoshenko was reported by the Moscow Times as saying that “In my view, one can say we removed all gas problems, or at least are firmly on the way to having no problems about the issue,” she said. “I am always delighted to have our meetings and I know that they always result in real actions.”

As part of the agreement, Putin agreed to have Gazprom drop a law suit against Naftohaz by RosUkrEnergo, a Swiss gas trader 50 percent owned by Gazprom, for $600 million in late payment penalty charges.

Soon after the Putin-Tymoshenko agreement was announced, Ukraine raised the transit fee for Russian gas to Europe in 2010 from $1.7 per one thousand cubic meters/100 kilometers to $2.7 and asked that Gazprom pay this bill in advance.

On September 7 Medvedev met with Gazprom CEO Alexei Miller and instructed him not to make this payment. “We need to act in accordance with the agreement which was signed on January 19 (2009). We do not need to dream up anything new. We also face difficult times,” Medvedev stated.

Medvedev’s comment that Gazprom must act in accordance with the existing contract was a direct attack on Putin who a week earlier had pledged to by-pass its fundamental clauses.

As soon as the Putin-Miller meeting ended, Gazprom spokesmen were reported by Kommersant as saying that Ukraine had the right to ask for changes in the existing contract, but that this does not obligate Gazprom to act on them and Gazprom has the right to penalize Ukraine for breaking the contract. This response might indicate that Gazprom management is looking to break its umbilical cord to Putin and switch its loyalty to Medvedev.

Another event which could shed light on the Putin-Medvedev fight began on September 7 when a Moscow court began a new trial in the case of Vladimir Nekrasov, the owner of the now bankrupt chain of cosmetic stores Arbat Prestige and Semyon Mogilevich, an alleged Russian organized crime leader suspected of links to RosUkrEnergo. According to sources in Moscow, Medvedev’s supporters are anxious to show that Mogilevich and organized crime were linked to Gazprom in their efforts to discredit Alexei Miller and Vladimir Putin and take control of Gazprom.

To make matters worse, on August 31, the representative of the IMF in Ukraine, Max Alier, threatened to break off all cooperation with Ukraine if the government led by Prime Minister Yulia Tymoshenko reneged on meeting its commitment to raise domestic gas prices. The first price increase (20 percent) for household users was scheduled to go into effect on September 1, 2009; however, this apparently did not take place and the vast government subsidies for gas remain in place as European frustration with Ukraine grows.

Putin’s new willingness to suddenly meet Ukrainian gas needs is in direct contrast to Medvedev’s new anti-Ukrainian hard line and seems to be part of Putin’s counter-attack in order to preserve the Gazprom Empire for himself and his clan of siloviki.

This does not bode well for anyone. The Medvedev-Putin fight, which boils down to which camp will control billions of dollars of Gazprom’s assets,is an internal Russian inter-clan battle with enormous consequences for European energy security.

The European Union could wind up the big loser in this battle. If the Ukrainian-Russian conflict over the future of the January 2009 contract is not resolved soon, Ukraine might be hard pressed to meet its transit commitments of Russian gas to the EU in early 2010.