Oil and Gas Features

Ukraine - Russia's ultimate blackmail victim

Jun 17, 2006, 3:59 GMT

Kiev - Bad news for stable European energy prices: the Ukrainians and Russians appear dead set on renewing their natural gas dispute, in the very near future.

Only six months ago Moscow and Kiev cut a 'historic deal' to end Russia's brief cut-off of natural gas to Ukraine - a move which is still causing jitters among European governments and energy consumers.

Under the accord, Russia's state-owned Gazprom hiked the price of natural gas sold to Ukraine from one-quarter to approximately one-half of international market prices, in return for which Ukraine agreed to ship Gazprom's gas to Europe via Ukrainian pipelines at cut-rate transport prices.

A key feature of the contract was a Ukrainian vow to stop its 15- year long practice of pilfering large amounts of Russian gas transiting through the country.

Another change was a shift from barter to money accounting: for the first time a dollar price, rather than a volume of gas compensation, was formally set as the cost of shipping natural gas through a Ukrainian pipeline to Europe.

As Ukrainian President Viktor told Deutsche Presse-Agentur dpa at the time: 'This is absolutely the best agreement we could have hoped for, and very favourable for Ukraine. Tell me please, where else in Europe can one buy gas (at half international market rates)?'

By the standards of developed European countries with lots of experience in international agreements, not much time has passed since January, and Yushchenko's brave words.

In the former Soviet Union, however, time moves at a different rate - especially when it comes to contractual terms.

The former Soviet republics are currently once again firing energy-related broadsides at one another, just as Europe was hoping to settle down to stable gas prices following the apparent resolution between the Ukrainians and the Russians.

The terms of the five-year deal, energy experts on both sides are now pointing out, are subject to review every six months, with changes allowable if both sides agree to it.

The Ukrainian position on that is clear and simple.

'We have a contract, and we are completely satisfied with its terms,' said Ukraine Prime Minister Yury Ekhanurov in an April speech. 'And the gas agreement cannot be changed unilaterally.'

However, in the former Soviet Union, especially in big business, there is no such thing as an ironclad contract. A case in point was the January crisis, throughout which Ukraine argued, unsuccessfully, the Russians had no right to renegotiate the deal.

Although Gazprom's management says it will not seek to review the terms of the agreement unless the Ukrainians ask for it first, Russian President Vladimir Putin has repeatedly declared that Ukraine, like other Gazprom customers, should pay the international market price for gas, currently around 230 dollars per thousand cubic metres.

'Independent' Russian political experts with close ties to the Kremlin, such as Gleb Pavlovskiy of the Moscow-based Effective Politics Foundation, have in recent weeks appeared on Russian news programmes (which are viewable in Ukraine).

They were pushing the same ominous message: The Ukrainians aren't paying enough for their Russian gas, they are breaking the present contract's terms by both pilfering gas destined for Europe, and they also pilfer by failing to pay for the gas.

Ukrainians analysts, of course, beg to differ and argue the gas Russia is selling Ukraine is not purely Russian, but blended with gas from Central Asian nations, for which Ukraine also has existing contracts with fixed prices.

Their position is: The Russians are paid up in full for gas used by Ukraine, pilfering is a thing of the past, and the real problem is Moscow is not crediting Ukraine in full for gas Kiev ships to Europe.

And then there are Ukraine's stormy domestic politics to consider. New constitutional changes in the country drastically reduce the ability of the Ukrainian President to make international contracts, transferring the authority to parliament and a parliament-elected Prime Minister.

Ukraine held parliamentary elections in March, and thorny coalition talks have prevented the naming of a new cabinet. But already, there is a strong front-runner for the Prime Minister job: Julia Timoshenko, Ukraine's top female politician, who made her fortune during the 1990s in importing Russian natural gas into Ukraine.

Timoshenko, a populist politician who trounced Yushchenko's own party during the recent elections by promising to end graft and corruption, has made the 'review' of the gas agreement with Russia the top item of on her list of things to do, if she becomes Premier.

'It is an illegal agreement violating every business principle and absolutely not in the interests of the Ukrainian people,' Timoshenko told Deutsche Presse-Agentur dpa in a March interview. 'It is in the interests of corrupt politicians and I absolutely will do everything I can to oppose it.'

'I think we will see some changes,' she added.