5. OWNERSHIP OF UKRAINE’S TRANSIT SYSTEM – MAIN STAKE IN THE GAS DISPUTE WITH RUSSIA

Gazprom steps up the pressure on Ukraine


ANALYSIS & COMMENTARY: By Vladimir Socor
Eurasia Daily Monitor, Volume 2, Issue 234
The Jamestown Foundation, Wash, D.C., Fri, Dec 16, 2005

The barely hidden stake has now surfaced in full view in the Russia-Ukraine
confrontation over gas prices and transit. The main stake is ownership of
Ukraine’s transit pipelines that carry Russian gas to Europe. Moscow appears
willing to accommodate Kyiv on the gas price if Kyiv accepts the
understandings signed in 2002-2003 on turning Ukraine’s transit system into
a Russian-Ukrainian consortium, possibly with token German participation.

Should Gazprom will stop delivering gas to Ukraine in compensation for the
latter’s transit services, Ukraine would lose 24-25 billion cubic meters of
gas in 2006. Gazprom intends to pump 112 billion cubic meters of gas to
European countries (excluding Ukraine’s compensation share).

On December 13-15, Gazprom stepped up the pressure by threatening to stop
supplying gas to Ukraine as of January 1, unless Ukraine bows to Russia’s
financial terms: more than tripling the price of gas, from $50 to $160 per
1,000 cubic meters, with payments in cash. Moreover, Gazprom now warns
that it might increase the price to $220 “taking into account latest market
trends.” Gazprom chairman Alexei Miller, vice-chairman and Gazexport general
director Alexander Medvedev, and Gazprom spokesman Sergei Kuprianov are

all making televised statements to this effect for maximum political impact in
Ukraine.

The same officials, along with the Kremlin special envoy for relations with
the European Union, Sergei Yastrzhembsky, are publicly accusing Ukraine of
intending to “steal” gas from the transit pipelines, thus “blackmailing”
European countries and “holding European consumers hostage.” In such “theft”
occurs after January 1, Moscow warns, Ukraine will be responsible for the
resulting shortfall in supply to European consumers.

Such arguments are designed to turn the EU and certain European governments
against Kyiv and consent to Russian co-ownership of Ukraine’s transit
pipelines, ostensibly to ensure reliability of supplies to Europe. In their
public statements, Miller and other Russian officials indicate that the
“consortium” proposal is the way out of this situation.

Kyiv’s position — as publicly presented by Prime Minister Yuriy Yekhanurov,
National Security and Defense Council Anatoly Kinakh, and Fuel and Energy
Minister Ivan Plachkov — includes the following elements:

1) Ukraine does not accept the 2002-2003 “consortium” scheme; this could
only apply to newly constructed pipelines on Ukrainian territory.

2) Continuation of the status quo on supply and transit after January 1,
2006, based on the terms valid in 2005, until new contracts are negotiated
and signed by Kyiv and Moscow during the course of 2006.

3) In the absence of contracts for 2006, Ukraine will continue to transit
the full volume of Russian gas destined for European countries after January
1. However, Ukraine could in that case unilaterally retain part of the
Europe-bound Russian gas as due compensation for Ukraine’s continuing
transit service. If so, Gazprom’s actual deliveries to European consumer
countries would fall considerably below the volumes stipulated in the supply
contracts for 2006.

4) Kyiv seeks a gradual transition to Gazprom-demanded “market prices,”
stretching until 2009 or 2010. In that case, Ukraine would compensate
Gazprom for the lost profits. That compensation would take the form of
creating a Russian-Ukrainian joint company on a parity basis, for marketing
Russian and Russian-transited Central Asian in Ukraine. This proposal would
seem to involve turning Ukraine’s internal gas distribution network into a
Russian-Ukrainian enterprise, with a corresponding income transfer from
Ukraine to Russia.

5) While the above proposal does not seem to affect Ukraine’s gas transit
system, a parallel proposal mooted by Kinakh would do so. Short of turning
the transit system into a consortium, it would establish joint trust
management by Ukraine, Russia, and an unnamed third party. -30-


(Interfax-Ukraine, UNIAN, RTR Russia Television, NTV, December 13-15)

The Jamestown Foundation, Washington, DC, http://www.jamestown.org

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