Ukraine Hit on Gas

MOSCOW, Russia -- Russia, Ukraine, and Turkmenistan are on the brink of a full-scale gas war. On June 20, Saparmurat Niyazov, the president of Turkmenistan, demanded that Ukraine switch to paying for deliveries of Turkmen gas in cash, calling the present practice of payments in kind an unprecedented fraud and a default on obligations. Gazprom has also demanded that Ukraine switch to cash payments. In response, the Security Service of Ukraine (SBU) has announced an investigation of the activities of RosUkrEnergo (the agent for sales of Turkmen gas in Ukraine) and its shareholders. According to the SBU's information, these activities probably involved the overlapping interests of high-ranking Ukrainian and Russian bureaucrats.

Ukrainian President Viktor Yushchenko (L) and President of Turkmenistan Saparmurat Niyazov

A strained situation in trilateral relations between Russia, Ukraine, and Turkmenistan has developed in the course of two processes. On the one hand, since the beginning of 2005, Turkmenistan has been trying to get Ukraine to pay more for gas and, starting in 2006, to get better offers for gas purchases, which could compete with offers already agreed upon with Gazprom in 2003 for purchases of all Turkmen export gas starting in 2007. On the other hand, during negotiations with Naftogaz Ukraine, Gazprom has been trying to get either a switch to cash payments in full at European rates for purchases and transit of gas from Russia or long-term strategic concessions in the gas sector from the Ukrainian company. After the latest unsuccessful round of negotiations between Naftogaz Ukraine and Gazprom on June 13, relations between the parties were heated to the boiling point.

The situation boiled over on June 20, when Saparmurat Niyazov, the president of Turkmenistan, publicized the content of negotiations with the Ukrainians in a strongly worded speech on national television after a meeting in Ashkhabad with Aleksey Ivchenko, the head of Naftogaz Ukraine. According to President Niyazov, Turkmenistan was demanding immediate payment of $600 million in debts on deliveries of clearing goods as payment for Turkmen gas in 2004. He accused Naftogaz Ukraine of unprecedented fraud in settlements with Turkmenistan and announced that, starting in 2006, the country would insist on cash payments only for gas delivered to Ukraine.

“You're making a fine lot of fools out of us, while money is swirling around you. We will not agree to this now or in the future. If you have no goods, don't make commodity agreements. Switch to currency-only payments,” Turkmenbashi [as Niyazov is known] said to the Ukrainian authorities on Turkmen national television after a telephone conversation with Ukrainian President Viktor Yushchenko.

We note that Gazprom is making more diplomatically worded but similar demands on Ukraine in negotiations on a gas transit and delivery schedule for 2005. Gazprom is proposing to increase prices for gas deliveries and transit to average European levels (to $160-170 per thousand cubic meters from the present $50), a switch to full cash payments instead of payments in kind for transit, and a change in the method of calculating gas prices.

Deputy Prime Minister of Ukraine Anatoly Kinakh responded to these proposals yesterday at the Ukraine–Russia 2005 investment forum in Kiev. In his words, both the Russian and Turkmen proposals are absolutely unacceptable to Ukraine. According to Kommersant's information, the government of Ukraine is now insisting on an extension to 2013 of the regime of gas agreements with Russia and Turkmenistan in force until 2006. Recall that this regime assumes that Ukraine will settle by means of goods clearing; it also assumes payment for gas transit with gas deliveries in the $40-60 range and the operation of intermediate companies on the gas market.

Yury Boiko, the former head of Naftogaz Ukraine, commented on the situation in a different tone at a special press conference yesterday. “In the last several months, people who want to return to the old business ties and old gas delivery and payment plans have appeared in country. This primarily concerns Itera,” he said, without naming any names.

Boiko's insinuations apparently refer to Ukrainian Prime Minister Yulia Timoshenko, who last week accused the former management of Naftogaz Ukraine of complicity in the affair of “sales” of 8 billion cubic meters of Gazprom's gas in the winter of 2004/2005. According to Kommersant's information, Itera representatives, who worked with structures owned by Timoshenko in the mid-1990s, have recently been negotiating for the company's return to Ukraine's gas market. Boiko claimed that a large-scale gas crisis is looming as a result of the actions of Naftogaz and the Ukrainian government.

Ukraine has no effective economic resources to protect it from pressure from Russia and Turkmenistan. Therefore, as Kommersant predicted earlier, the Ukrainian government has started to play one of its main trump cards – information on Russian–Ukrainian agreements in the summer of 2004 concluded with the assistance of then prime minister of Ukraine Viktor Yanukovich, the Russian government, Naftogaz, and Gazprom, within which the intermediate company RosUkrEnergo.

In an interview with the local weekly Zerkalo Nedeli on June 21, Security Service Chairman Aleksandr Turchinov said that his agency had instituted a criminal case in the activities of the former management of Naftogaz. He named the activities of the Swiss company RosUkrEnergo, a trader in Russian–Austrian capital guaranteeing gas deliveries to Ukraine and the successor to Itera and Eural Trans Gas in the delivery schedule in effect since the mid-1990s, as some of the interesting features in the case. Gazprombank and Raiffeisen Investment (RI), an investment subdivision of Raiffeisenbank, each own 50 percent of RosUkrEnergo's capital. Turchinov confirmed Kommersant's earlier speculations that RI is only the nominal owner of the stake in RosUkrEnergo. “RI is merely a nominal shareholder, but the real shareholders are hiding behind this nominal mask,” he said, noting that, according to his information, private individuals are hiding behind Gazprombank's stake (he called Gazprombank a Gazprom affiliate). Turchinov, like Boiko before him, did not name any names, hinting only that he thought there was a particular interest in the activities of this company [RosUkrEnergo] at the highest level in both Ukraine and Russia.

Gazprom representatives reacted rather inarticulately to Turchinov's accusations. Aleksandr Medvedev, the president of OOO Gazexport, said only that claims of RosUkrEnergo's involvement in clearing payments for Central Asian gas was contrary to fact. Meanwhile, Kommersant sources close to Gazprom made it clear that the company was trying to distance itself from the dispute between Ukraine and Turkmenistan and considered that the situation with Gazprombank's nonexistent stake in RosUkrEnergo did not concern it.

However, Turchinov's statement may be only the start of the conflict. The Russian–Ukrainian transit business has always been a focus of the most secret and nonpublic connections between Ukrainian and Russian businessmen with close ties to the government, and the publication of information on the real motive for the gas agreements of the summer of 2004 could become a political bomb in both Ukraine and Russia. The list of names that Turchinov apparently had in mind may include bureaucrats and businessmen involved in the formation of RosUkrEnergo and Eural Trans Gas from both presidential and governmental structures of both countries, Vneshtorgbank and Vneshekonombank, Gazprom, Itera, the Russian Embassy in Ukraine, and businessmen from Central Europe and Israel. It is also not inconceivable that the SBU will look into other aspects of the pre-election agreements of 2004. The internal political struggle in Ukraine and the situation around Naftogaz Ukraine leaves little hope that the conflict will die down by itself.

Source: Kommersant