Ukraine Vows To Break Up Russia's Gas Trade Partner

KIEV, Ukraine -- Ukraine said on Friday it will have to negotiate a new gas deal with Russia because of previously-undisclosed plans to break up the republic's existing energy company.

Naftogaz Ukraine

The unexpected announcement came in the heat of the two neighbours' second spat over gas prices in three years and appeared part of a Ukrainian effort to force Russia to ease its negotiating stance over prices.

Prime Minister Mykola Azarov said that the Naftogaz company which signed the 10-year agreement with Russia's monopoly Gazprom in 2009 would be split up into a production company and one responsible for gas distribution and transport.

"There will be a new economic entity," news agencies quoted Azarov as saying.

"There will be new companies on the market and obviously, in light of this, all the agreements that exist today have to be reviewed."

Ukrainian President Viktor Yanukovych later said on his website that the restructuring was being conducted in line with EU demands for better sector transparency and should be presented for formal approval by October 1.

The news broke one day ahead of a regional summit in the Tajik capital Dushanbe that is due to be attended by both Yanukovych and his Russian counterpart Dmitry Medvedev.

The Ukrainian prime minister said Yanukovych would try to hold separate energy talks with Medvedev in Dushanbe but a Kremlin official told Moscow Echo radio that no such meeting was being planned.

Resource-starved Ukraine accepted the terms of the 2009 gas deal after having its supplies cut off in a Kremlin move that also affected parts of central and southern Europe.

Russia has been steadily raising the price it charges former Soviet republics for gas after spending years subsidising shipments and ensuring friendly diplomatic relations in return.

Ukraine argues that it now pays more than some richer EU member states and that Russia's price terms are political.

Medvedev admits that he would lower Ukraine's gas price if it dropped plans to establish free trade relations with the European Union and allowed Gazprom to win control of half of Naftogaz.

Ukraine has firmly refused and instead launched a multi-pronged offensive that includes a vow to take Gazprom to the Stockholm court of arbitration if the dispute is not resolved within the next six weeks.

Court action is also being pursued against Gazprom by Germany's E.ON Ruhrgas amid growing pressure on the Russian giant's use of long contracts whose terms can diverge greatly from the spot price of gas.

Gazprom chief executive Alexei Miller responded to Ukraine's latest threat by sarcastically agreeing that Naftogaz will soon cease to exist -- because it will be taken over by his firm.

"Of course, after its merger with Gazprom, Naftogaz Ukraine will cease to exist as an independent economic entity," Miller said in a company statement.

Analysts meanwhile said Ukraine may simply be trying different tactics as it tries to rework a politically unpopular deal ahead of parliamentary elections next year.

"There will still have to be a legal successor" to Naftogaz, said Institute of Energy Studies expert Dmytro Marunich.

"But Naftogaz would become an extremely attractive company to investors if it was only involved in transport ... and not selling gas to domestic consumers at below-market rates," he said.

Source: AFP