ANALYSIS: Kyiv counts on 10-year gas-transit deal (04/28/02)

ANALYSIS

Kyiv counts on 10-year gas-transit deal

by Michael Lelyveld
RFE/RL Poland, Belarus and Ukraine Report

Fears have arisen again in Ukraine over Russia's plans to find other transit routes for natural gas exports to Europe. But all signs suggest that Moscow cannot afford to pursue major pipeline projects for the time being.

Last week, Russia's decade-old effort to secure outlets for its vital gas exports seemed to be moving on several fronts at once with talks in Moscow, Warsaw and Weimar, Germany.

The problem of access for gas exports has been a preoccupation for Russian leaders ever since the Soviet break-up left the main Progress pipeline system in the hands of Ukraine.

Since taking office two years ago, Russian President Vladimir Putin has been relentless in pursuing strategies to gain control of the transit pipelines through Ukraine or to bypass the country with new lines through Poland and Slovakia.

Aside from oil, natural gas is Russia's biggest hard-currency earner. Russia supplies one-fourth of Europe's gas, and 90 percent of the flow goes through Ukraine. The route has been a source of both cheap gas for Ukraine and endless disputes with Moscow. Charges of pilfering from the pipeline and Ukraine's $1.4 billion gas debt were supposed to be settled last October, when a deal was reached to restructure the debt over 12 years.

But Ukraine's anxiety has continued over Russia's long delay in accepting bonds to back the debt scheme and its continued campaign to find bypass routes.

On April 9, an energy expert warned Ukrainian officials in Kyiv that the country could lose more than $1 billion in transit fees if Russia succeeds in building an alternate pipeline through Poland, the Associated Press reported. Volodymyr Saprykin of Ukraine's Razumkov Center for Economic and Political Studies said, "It means the loss of Ukraine's monopoly for gas transit," adding that "it may not happen today, but it's possible in five to seven years."

But the possibility may be less threatening after a meeting in Moscow between Prime Ministers Anatolii Kinakh of Ukraine and Mikhail Kasianov of Russia. Mr. Kinakh said after the meeting on April 10 that the two countries will sign a 10-year gas-transit deal by June. Mr. Kasianov confirmed the plan, saying that the sides are also considering ways of making the pipelines secure.

According to Russia's official news agency RIA-Novosti, Prime Minister Kasianov said, "By June, specialists from the two countries will have provided a set of measures to become the foundation of the bilateral document." Mr. Kasianov also said the debt problem is "practically solved," a phrase that has prompted worries in the past because Russia has yet to explain the reason for delays in approving the bonds. He said only one legal "snag" remains, without elaborating.

But, according to RIA-Novosti, Ukraine has agreed to honor the debts if the national gas company Naftohaz Ukrainy fails to pay them off. That point has been critical for Moscow in the past.

While the terms of the transit deal are unknown, the 10-year commitment suggests that Russia may be resigned to Ukrainian transit, even if it develops other routes in the long term. The Progress system still has vast unused capacity, which would be costly to recreate somewhere else.

The biggest hindrance may be that Russia's Gazprom lacks the funds to fulfill its bypass plans. Last month Gazprom joined with Germany's Ruhrgas and Gaz de France in a $2.7 billion deal to buy 49 percent of Slovensky Plynarensky Priemysel, the Slovakian gas system. The move again stirred fears in Ukraine of a pipeline detour. But Gazprom's partners supplied all of the cash, because the company's finances are strapped.

Last month the industry newsletter Petroleum Argus quoted an unnamed official of the Polish Oil and Gas Company as saying that "Gazprom has dropped its plan for a pipeline bypassing Ukraine" due to a lack of funds. A link to Slovakia would cost an estimated $1 billion. Russia has also delayed plans for building a second branch of its Yamal Peninsula gas line through Poland, because the first "already has unused capacity," according to the newsletter.

In Poland, the gas issue is both financial and political. On April 11, Gazprom Chairman Aleksei Miller held talks with officials in Warsaw about Polish demands to ease the terms of a 1993 "take-or-pay" contract because Poland's gas consumption has lagged. Gazprom has been pressing Poland to spend $200 million to finish the first Yamal line.

But the government has also been sensitive about the effect of a bypass on Ukraine. In addition, the daily Gazeta Wyborcza reported on April 11 that prosecutors in Gdansk have launched a probe into Poland's losses from construction of the Yamal project.

During President Putin's talks on April 10 with German Chancellor Gerhard Schroeder in Weimar, the issue of gas exports also surfaced. At a meeting with businesspeople, Mr. Putin voiced concern over new European Union competition rules that limit the share of energy that a member-country can import from a non-member to 30 percent. President Putin said, "If we are talking about a common economic space, we should take measures and change the rules, and put Russia in the picture too," RIA-Novosti reported. Russia has been highly critical of the EU regulations, arguing that they threaten Gazprom's long-term contracts.

The issue may be one more reason that Moscow may be becoming more cautious about new investments to build pipelines around Ukraine.

Michael Lelyveld is an RFE/RL correspondent.

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