Russia/Ukraine: Pipeline Conflict Resurfaces

PRAGUE, Czech Republic -- With the December deadline for signing a new gas-supply contract approaching, Ukrainian and Russian officials have been holding preliminary meetings to sound each other out.

Mikhail Fradkov no doubt knew that it would not require a great deal of effort to interest Gazprom in gaining some control over Ukraine's pipeline system.

As in past negotiations, the issue is not only the price Ukraine will pay for gas in 2008, or how much Russia will pay Ukraine in transit fees -- the major question is about who will control the vital Ukrainian gas-pipeline network to Europe, an asset that Russia's state-owned gas monopoly, Gazprom, has persistently sought to obtain.

Unfinished Business

Speaking at a press conference with visiting Ukrainian Prime Minister Viktor Yanukovych in Moscow on June 23, Russian Prime Minister Mikhail Fradkov referred to the construction of the Bohorodchany-Uzhhorod pipeline, a partially completed 240-kilometer extension of the planned Novopskov-Uzhhorod main-trunk pipeline that would transit natural gas from eastern to western Ukraine.

The extension has a projected annual capacity of 19 billion cubic meters of gas and will cost about $560 million.

Ukraine views the completion of this extension as a strategically important project that would increase the throughput capacity of its gas-transportation system to Europe.

However, in April, the deputy chairman of the management committee of Russia's state-controlled gas monopoly Gazprom, Valery Golubev, said that construction of the extension was unjustified because there is no demand in Europe for additional Russian gas.

And in a revealing statement made in May, Golubev said that "if politicians make a decision to establish closer economic ties between our countries, this will guarantee lower gas prices. However, if the politicians decide to separate these ties, then the price of gas for Ukraine will be same as for Germany. Does Ukraine really want this? I want to stress that Russia does not need this."

In his June 23 comments, Fradkov downplayed Golubev's threats. "The issue of the Bohorodchany-Uzhhorod pipeline is one of the links in the broader question of deeper cooperation between the countries in the gas sphere," he said. "In this context we are trying to generate interest in Russian companies, particularly Gazprom, to take part in the Ukrainian gas-transportation system."

Fradkov no doubt knew that it would not require a great deal of effort to interest Gazprom in gaining some control over Ukraine's pipeline system, but by linking the completion of Bohorodchany-Uzhhorod to that issue he pushed the Ukrainian side into a corner and set the stage for a new confrontation.

Stage Set

Yanukovych was noncommittal in his response. He said the project has very good prospects and that a decision would be reached this autumn, adding that Ukraine would take into consideration its own interests as well as those of Russia, Central Asian states, and European consumers.

The joint venture to build the Novopskov-Uzhhorod pipeline, at a cost of $2.2 billion-2.8 billion, was formed in 2004 between Naftohaz Ukrayiny and Gazprom. It was originally scheduled to be completed by 2009, but construction was postponed from 2005 to February 2006. Since then little, if anything, has been done.

The pipeline, if and when completed, would give Ukraine the capacity to increase by 25 percent its flow of Russian gas to Europe -- a significant money-making proposition for Kyiv.

Ukrainian planners also believe that Novopskov-Uzhhorod would insure the country against breakdowns of the aging Urengoi-Uzhhorod pipeline, parts of which have been in operation for 20-30 years.

Fradkov has not been the only one to set the stage for confrontation.

In February, Russian President Vladimir Putin stirred up a hornet's nest when he publicly announced that the Ukrainian government had approached Russia with the idea of unifying the countries' respective gas-pipeline networks.

Putin hailed the overture as a "revolutionary development" that was in the "interest of both countries."

In response to Putin's announcement, the Ukrainian parliament almost unanimously passed legislation forbidding the sale or transfer of ownership of Ukraine's trunk gas pipeline to another country. An investigation was also launched to determine just who may have been responsible for making such proposals.

Ukrainian leaders have not responded to Fradkov's latest offer, but it is becoming evident that Ukrainian President Viktor Yushchenko is willing to counter Russia's latest attempt to gain influence over Ukraine's gas pipelines by initiating an investigation into the operations of UkrHazEnergo, a joint venture between Ukraine's Naftohaz and RosUkrEnergo, the Swiss-based middleman which holds the monopoly for providing Ukraine with gas from Central Asia.

UkrHazEnergo's participation in the Ukrainian domestic gas-distribution system was essentially forced upon Ukraine by Gazprom during the January 2006 gas dispute with Russia.

Central Figure

Addressing a meeting of the National Security and Defense Council in June, Yushchenko complained about the role played by Ukrainian businessman Dmytro Firtash, whose company Centragas owns 50 percent of RosUkrEnergo, (the other 50 percent is owned by Gazprom) and thereby exerts substantial influence on UkrHazEnergo's activities.

According to a confidential memo summarizing this meeting, Yushchenko stated that the Security Service of Ukraine (SBU) believes that UkrHazEnergo's monopoly on gas distribution to industrial clients in Ukraine could be contributing to Firtash's growing presence in Ukraine's chemical industry.

Firtash owns two important chemical plants in Ukraine -- an industrial soda plant in the Crimea (Crimea Soda) and a fertilizer plant (Rivnoazot). In addition he controls Crimean Titan, a titanium plant.

Yushchenko also expressed alarm about a growing conflict between UkrHazEnergo and the Industrial Union of the Donbas (IUD) over the price UkrHazEnergo was charging the IUD for gas. The implication being that UkrHazEnergo was price gouging the IUD in order to enrich Firtash and Gazprom.

In 2006 Firtash received $365 million from RosUkrEnergo as his share of 2005 profits. Some in Kyiv believe this to be an extravagant sum for a principle of a company that does not own any gas fields, pipelines, or other assets.

By comparison, Gazprom Chairman Aleksei Miller receives a salary $1.4 million in addition to $1.4 million in stock options, according to the Russian website

Source: Radio Free Europe/Radio Liberty


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