Intricate deal ends gas crisis between Russia and Ukraine (01/08/06)

Intricate deal ends gas crisis between Russia and Ukraine

by Zenon Zawada
Kyiv Press Bureau

KYIV - The Ukrainian government finally resolved its natural gas conflict with the Russian Federation, but not without throwing Europe into a brief New Year's crisis with countries such as France and Italy suffering cuts to their supplies.

The intricate deal struck between Europe's bickering eastern neighbors enabled both sides to declare they got the price they wanted.

Gazprom, the Russian state-owned monopoly, will sell natural gas to a trading company, RosUkrEnergo, for $230 per 1,000 cubic meters, the price it insisted Ukraine pay.

RosUkrEnergo will then combine the Russian natural gas with cheaper gas mostly from Turkmenistan and then charge Ukraine $95 per 1,000 cubic meters, the price Ukrainian officials had sought. Ukraine had been paying $50 per 1,000 cubic meters.

"The Ukrainian economy is well enough prepared to operate in new market conditions," said President Viktor Yushchenko, adding that he was satisfied. "Ukraine is a reliable and stable partner both for the European Union and the Russian Federation."

Convincing Europe of Russia's stability, on the other hand, will be a harder task at this point as European leaders clearly read President Vladimir Putin's political motive of destabilizing the Ukrainian government ahead of March elections, preferring to lay blame for the crisis with him.

Moscow is "using political brute force on countries that are moving outside its sphere of influence, and this risks creating instability," said Walt Patterson, an energy expert at the Royal Institute for International Affairs in London, as quoted by the International Herald Tribune.

As promised, Gazprom cut natural gas supplies on January 1 because Ukraine refused a fourfold increase in price. As a direct result, Italy lost 25 percent of its natural gas supply, France lost 30 percent of its supply that day and Poland lost one-third.

Europe was still coping with reduced supplies on January 2. The continent obtains a quarter of its natural gas supply from Russia, of which 90 percent crosses Ukraine by pipeline.

Russian leaders aimed to pin the blame on Ukraine as Gazprom Exports Director Alexander Medvedev accused Ukrainian authorities of siphoning off 100 million cubic meters of natural gas worth $25 million from the pipeline in the first 24 hours of the cut off.

"With the indisputable thievery of our gas from the export pipes, we've decided to take all possible measures to secure our gas so that Western consumers continue to receive gas in accordance with contracts," Mr. Medvedev said.

Ukrainian Fuel and Energy Minister Ivan Plachkov firmly denied Mr. Medvedev's accusations of theft.

However, the Financial Times quoted a natural gas advisor to the Ukrainian government, Alex Danilyuk, acknowledging that "we have no choice but to take some of the Russian gas" because Turkmenistan had also cut its supplies to Ukraine.

Gazprom was widely suspected of cutting off the Turkmen gas as well in order to put additional pressure on Ukraine.

Mr. Putin's ploy to scapegoat Ukraine ultimately backfired as European leaders began questioning Russia's reliability as an energy partner, prompting Gazprom officials to return to the negotiating table and restore much of the natural gas it had cut off.

Even after the two sides reached consensus in the early morning of January 4, European leaders and the media kept the finger of blame pointed directly at Mr. Putin.

"Everyone but Putin and his Gazprom underlings agree that this was a total disaster from the Kremlin," said Ivan Lozowy, president of the Kyiv-based Institute of Statehood and Democracy, which is exclusively financed by Ukrainian business donations. "Yushchenko and his government handled it okay."

The Yushchenko government was able to survive the crisis without selling part of the gas transit system's ownership to Russia, as its northern neighbor Belarus had done.

As part of its agreement with Naftohaz, Ukraine's state-owned natural gas counterpart, Gazprom agreed to a 47 percent increase in the fee it pays for transporting gas though Ukrainian-owned pipelines and to stop the system of bartering transit fees for natural gas.

The higher revenues will provide Ukraine with about $500 million to put toward the $1.5 billion it faces in higher natural gas costs.

The deal will have a positive effect on Russian-Ukrainian relations, Mr. Putin asserted. "It's not only important that Russia's approach to calculating the gas price was recognized as justified, but that our relations are assuming a new quality and becoming a truly transparent market partnership," Interfax quoted Mr. Putin as saying.

RosUkrEnergo, the company acting as the middleman in the deal, is jointly owned by Gazprom bank and "a number of private Ukrainian investors" whose portfolios are managed by Raiffeisen Investment, according to CEO Wolfgang Putschek.

When the Yushchenko administration came to power in January 2005, one of the first acts of former Prime Minister Yulia Tymoshenko was to call for a criminal investigation into RosUkrEnergo, characterized as a "criminal enterprise," according to a Radio Free Europe/Radio Liberty (RFE/RL) report.

Shortly afterwards, Security Service of Ukraine (SBU) Chief Oleksander Turchynov said he was launching a criminal case against RosUkrEnergo. The investigation abruptly ended in mid-August, RFE/RL reported.

Soon after Mr. Turchynov's dismissal, the SBU officer in charge of the investigation, Andrii Kozhemyakin, was transferred from the case to other duties, the Ukrainian website obozrevatel.com.ua reported in September.

It's no coincidence that Mr. Putin inflicted the crisis upon the Yushchenko government on New Year's Day, the holiday the majority of Ukrainians consider most significant during the year when they are typically at home with their families and watching television.

Amidst television news reports of Mr. Yushchenko and his officials wrestling with the crisis, advertisements promoting the Party of Regions and a calm, presidential-looking Viktor Yanukovych offering Ukrainians stability dominated the commercial breaks of most networks.

"You would be almost irrational to think the Russians didn't do this on purpose," Mr. Lozowy said. "Their biggest supporters (in Ukraine) immediately took up the refrain of criticizing their own government for precipitating this gas crisis, which confirms the whole purpose was to impact and influence the pre-election tendencies of voters."

The election campaigns are already in full swing for the March 26 parliamentary elections, which will not only determine control of the Verkhovna Rada but the prime minister as well.

All polls point to the pro-Russian Party of Regions commanding a solid lead over fractured pro-Western blocs, namely Mr. Yushchenko's Our Ukraine, the Yulia Tymoshenko Bloc and the Reforms and Order/Pora Bloc.

During the crisis, the Party of Regions coordinated its statements with Kremlin and Gazprom officials, Mr. Lozowy said. Throughout the crisis, the same statements made by Mr. Yanukovych were almost identically repeated the next day by Kremlin and Gazprom officials, and vice versa, he said.

"It's amazing that a Ukrainian political party would coordinate its actions with a foreign country which is acting against Ukrainian interests in a brutal way," Mr. Lozowy said. "But that is the reality of Ukrainian politics and they can get away with that."

Verkhovna Rada Chairman Volodymyr Lytvyn's conduct was even more egregious, Mr. Lozowy said. The leader of the People's Party of Ukraine traveled to Moscow during the crisis, where he insisted the Yushchenko government apologize for its role in the crisis, even after Western governments almost unanimously criticized the Kremlin, he said.

| Home Page |