ANALYSIS: Russia to use energy pressure in 2006 Ukrainian election (08/28/05)

ANALYSIS

Russia to use energy pressure in 2006 Ukrainian election

by Taras Kuzio
Eurasia Daily Monitor

Russia plans to triple gas prices eight months before Ukraine's parliamentary election and only months away from winter (International Herald Tribune, August 1). The move is linked to Russia's continued unwillingness to accept the election of Viktor Yushchenko as Ukraine's president. In June President Vladimir Putin's party of power, Unified Russia, signed a cooperation agreement with the Party of the Regions headed by defeated Ukrainian presidential candidate Viktor Yanukovych.

Russia's use of energy pressure to influence the outcome of elections in the Commonwealth of Independent States is a tried and tested tactic. Earlier in 2005, Russia attempted to influence Moldova's parliamentary election by cutting off energy supplies - a tactic that failed in facilitating the election of Russophile centrists.

The planned price increase targeting Ukraine would raise gas prices charged by Russia to world market levels. Currently Russia charges Ukraine $80 for 1,000 cubic meters of gas - nearly three times as high as what Moscow charges Belarus.

These planned gas price increases could have a negative impact on Ukraine's economic growth, which has already declined from 12 percent last year to 4 percent in the first half of this year. Higher gas prices will increase inflation and hurt metallurgical plants, which are the highest consumers of gas.

The metallurgical sector provides up to 60 percent of Ukraine's economic growth. If, as expected, gas prices rise dramatically above $80 per 1,000 cubic meters, "Ukraine will suffer major economic disruptions," reported IntelliNews on July 4.

Energy conservation is the way forward but this is not a short-term option. Ukraine ranks third worst in the world in energy-intensive production (IntelliNews, July 4).

Ukraine pays for most of the gas it receives through transit fees charged to Russia. Ninety percent of Russian gas is exported to Europe through Ukraine. Russia's stranglehold over the supply of gas to Ukraine is to some degree counter-balanced by Ukraine's control over export outlets for Russia. Ukraine has threatened to compensate for this increase by raising transit charges.

High levels corruption in both Russia and Ukraine remain major problem in the supply of gas. Slush funds to the tune of hundreds of millions of dollars used unofficially by the Yanukovych election campaign were drawn from energy corruption in Russian-Ukrainian energy consortiums.

Russia has ignored this problem by focusing on Ukraine's alleged "unreliability" as a gas transit country. The Yushchenko administration is keen to renegotiate the terms of the Russian-Ukrainian-German agreement in 2003-2004 which would have led to a de facto Russian control over Ukraine's transit system (Eurasia Daily Monitor, July 9). Russia has long sought to control Ukraine's and Belarus' gas transit pipelines and storage facilities.

Corruption has been especially prevalent in two Russian-Ukrainian consortiums (Eural TransGas and RosUkrEnergo) created to facilitate the delivery of Turkmen gas to Ukraine and Europe. Ukraine annually obtains 36 billion cubic meters of gas from Turkmenistan and 24 billion cubic meters from Russia.

The Financial Times (July 27) reported that the Ukrainian authorities were concerned that Eural TransGas and RosUkrEnergo were not only linked to Mr. Putin and Leonid Kuchma, but also to organized crime. Security Service of Ukraine (SBU) Chairman Oleksander Turchynov openly expressed his fear that international mafia boss Semyon Mogilevich had a business stake in RosUkrEnergo or used it to launder money.

Mr. Mogilevych is wanted by the FBI and Interpol for money laundering. Like many former Kuchma officials, he is living freely in Moscow with the Russian authorities refusing to extradite him.

Mr. Turchynov did not find Mr. Mogilevych's name on any RosUkrEnergo documents. Nevertheless, "there are many signs that a group of people who are under his control could be participating [in this business]," according to Ukrayinska Pravda of August 3.

The SBU is undertaking a wider investigation into money laundering, smuggling and tax evasion from the Turkmen gas trade. This is part of an on-going struggle against corruption in the energy sector by the government of Yulia Tymoshenko. Prime Minister Tymoshenko dealt with this issue successfully as first vice prime minister in the Yushchenko government in 2000-2001.

Former Naftohaz Ukrainy CEO Ihor Bakai is in hiding in Russia, where he fled in December 2004. He was given Russian internal and external service passports earlier this year when he took up Russian citizenship. Ukraine, unlike Russia, does not recognize dual citizenship.

Mr. Bakai was released from Naftohaz Ukrainy in 2001 after corruption scandals but was brought back in 2003-2004 by Mr. Kuchma to head the Directorate on State Affairs. Mr. Bakai is charged with abuse of office leading to the loss of $1 billion.

A change in the CEO of the state-run Naftohaz Ukrainy has nearly tripled budget revenues to the state. The new CEO, Oleksii Ivchenko, is a Yushchenko loyalist.

Fearing criminal charges, outgoing Naftohaz Ukrainy CEO Yurii Boiko "purchased" the marginal Republican Party of Ukraine (RPU) as a protective political roof. The RPU has no ratings and is not currently being courted as an ally by any well-known political party for the 2006 election.

Outgoing Foreign Affairs Minister Konstyantin Gryshchenko agreed to become the RPU's foreign affairs spokesman. On a recent visit to Washington he unsuccessfully attempted to convince policy-makers that the RPU is a Ukrainian equivalent of the U.S. Republican Party (Washington Times, June 11).

RosUkrEnergo was created in summer 2004 to replace Eural TransGas. Its aim is to act as an intermediary between Gazprom and Naftohaz Ukrainy to transit Turkmen gas through Russia into Ukraine. Eural TransGas managers moved over to RosUkrEnergo.

Gazprom, through its Swiss-registered ARosgas Holding A.G., owns 50 percent of RosUkrEnergo. The remaining half is owned by Centragas Holding, an Austrian registered company 100 percent owned by Raiffeisen Investment A.G.

Centragas CEO Wolfgang Putschek has denied that RosUkrEnergo has any links to Mr. Mogilevich (Financial Times, July 27). In a letter to President Yushchenko, Mr. Putschek denied categorically that Mr. Mogilevich or any other organized crime boss had ties to RosUkrEnergo. Molgilevuch has himself denied he has any links to RosUkrEnergo or was using it to launder funds (Ukrayinska Pravda, August 1).

Accusations of high-level corruption by the Putin and Kuchma administrations and links to organized crime have led to calls by Prime Minister Tymoshenko to end the use of intermediaries to bring Turkmen gas to Ukraine. "I am consistently working so that there will be no intermediary between Ukraine and Turkmenistan," Ms. Tymoshenko revealed (Ukrayinska Pravda, July 2).

Ms. Tymoshenko has also refused to countenance working with RosUkrEnergo since she believes it was established, with numerous legal infringements. Trade in Turkmen gas should be undertaken directly by Naftohaz Ukrainy with Russia and Turkmenistan, but without the use of an intermediary (Ukrayinska Pravda, July 13).

This though, may be easier said than done.

Dr. Taras Kuzio is visiting professor at the Elliot School of International Affairs, George Washington University. The articles above, which originally appeared in The Jamestown Foundation's Eurasia Daily Monitor, are reprinted here with permission from the foundation (www.jamestown.org).

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