Daily Archives: December 19, 2005


The country has only one gas mask for all to survive this gas attack.

Zerkalo Nedeli on the web, Mirror-Weekly,
International Social Political Weekly, No. 49 (577)
Kyiv, Ukraine, Sat 17-23 Dec, 2005

On June 2, ZN published an article entitled “Ukraine: Hamlet’s Choice,”
which analyzed three ways to build relations with Russia – the main supplier
of natural gas to Ukraine. One option was to develop “corporate
relationships” within the already operational consortium RosUkrEnergo,
which quite suited Kuchma, Putin, and a narrow circle of the “initiated.”

The second option was to engage in “transition-period relationships,” in
which prices for natural gas inevitably would be raised, but Ukraine would
have a couple of years to prepare. (A new go-between structure would be
established to satisfy both Kyiv and Moscow without being too heavy a
burden on the Ukrainian budget.)

The third option involved replacement of corporate relationships with
interstate relationships. In the latter case, payment schemes would be
absolutely transparent and prices for natural gas would rise abruptly.

At first, Ukraine would sustain a heavy blow to its industries but, upon
recovery, it would finally escape cheap Russian fuels and become a truly
independent state.

In any event, it was obvious that Russia would raise the price, and the
Ukrainian government had time to forestall the impact. So did it take any
steps? It should be noted that the idea of monetizing payments for Russian
natural gas belonged to the Ukrainian president, who reiterated it on many
occasions. He authorized Neftogaz Ukrainy President Oleksiy Ivchenko to
raise this issue in negotiations with Moscow.

Yushchenko must have counted on monetizing the “gas relations” within the
existing scheme: Russia supplied certain amounts of gas to Ukraine at $50
per 1,000 cubic meters as payment for transit to Western Europe. But the
scheme did not suit Moscow. And Yushchenko’s statements gave it a perfect
formal pretext for demanding a changeover to European market prices.
Initially, Moscow demanded $120 per 1,000 cubic meters, then $160, and
now as much as $230.

It is naive to think that Russia’s move is aimed exclusively at patching the
hole in its coffers. Vice Prime Minister of Defense Sergey Ivanov said, “In
my opinion, sometimes we don’t formulate our policy in relation to different
CIS countries clearly enough.

And we act too irresolutely when it comes to our economic influence on those
countries’ attitudes to Russia.” According to ZN’s information, Lavrov
promised at a closed-door session of the Duma to employ “all available means
of economic pressure” on the “disobedient” neighbors. Natural gas and oil,
which the Kremlin justly views on par with nuclear arms, is supposed to be
the main diplomatic means.

ZN wrote in January that the Kremlin would by all means exact revenge for
its defeat in the Ukrainian presidential elections as soon as possible. In
fact, the Kremlin did not even have to try that hard: the new Ukrainian
leadership, badly compromised by too many unfulfilled promises and torn
by permanent internal conflicts, discredited itself in the eyes of its

All the Kremlin had to do was to choose the right moment and angle for
knocking down all those loose tenpins.

The Kremlin knew that energy-consuming industries formed the basis of
Ukraine’s economy and the rate of energy consumption per unit of produce
was four times higher than in developed countries. The Kremlin knew that, by
raising the price three to five times, it would simply knock out the country
in which non-industrial consumers paid $37 per 1,000 cubic meter of Russian
natural gas (while the same category of Russian consumers paid $44).

The likelihood of such a move was evident. Moreover, many Ukrainian
politicians and economic experts presumed that, in the long run, such a
move would do Ukraine good. That is, after a certain period of financial
difficulties, this country would emerge politically independent and would
have a reformed system of energy consumption and a more efficient economy
reoriented toward the domestic market. The idea was very rational and
feasible, but there were three prerequisites.

[1] Number one, the new government should have started preparing from
the very first days in office by negotiating terms of gradual price rise with
Russia; by drawing credits and external loans for reequipping industrial
facilities; by searching for alternative sources of fuel supplies.

[2] Number two, the government should have approached negotiations
with Russia and Turkmenistan at an adequate professional level and with
a clear-cut position.

[3] Number three, the government should have made people aware of the
inevitable necessity to pay at European prices. Following the example of
Poland or Latvia, Ukrainians would then be ready to weather a winter in
cold houses in order to preserve their dignity and independence.

The government did none of the above.

In the meantime, Moscow was meticulously preparing for a final cut. Every
move was well-planned: from a series of official statements to a massive
propaganda campaign. President Putin was not idle, either: while the
Ukrainian government was losing ground, he met with the leaders of all major
Ukrainian political forces.

He learned the lesson of the Ukrainian presidential elections and chose not
to put all his eggs in one basket. He met with Yanukovych, Tymoshenko,
Moroz, and Lytvyn – all those who preferred not to react to the announced
fivefold price rise.

Putin interlaid them with “washers”. As a result, Ukraine has loose fingers
versus Russia’s fist.

Roman Bezsmertniy, campaign chief of staff for Yushchenko’s election bloc,
says that Tymoshenko’s demand to sack the government unless it signs a
contract with Russian natural gas suppliers by January 1 is a stab in the
back. He is absolutely right and his patriotic statement demonstrates very
clearly which Tymoshenko is more concerned about: her problems with
Russian prosecutors or her country’s national security.

But what government does Tymoshenko mean? What resignation is she
talking about? The country is divided into sundry political camps, and their
irresponsible inhabitants are too busy lobbying for personal or corporate
interests and entries in the top part of election rolls. In this situation,
the government’s resignation would plunge the country into total chaos.

Does Tymoshenko think that if she were the prime minister, she would
manage to negotiate with Russia more fruitfully? Maybe she would. And
Ukraine really should blame itself for the fix it has gotten itself into.
But it would be incorrect to ignore the fact of Russia’s evident political
and economic pressure.

Now, where is Yushchenko’s party Our Ukraine? Why is it still silent? Are
the national democratic forces following their leader’s advice “not to
politicize the negotiating process?” That is a very good screen for certain
“friends” of his, who make money on shady deals with Russian businessmen.
The gas deadlock is also another opportunity for them to “drown”
Tymoshenko. The impending doom does not seem to worry them much.

Why does Bezsmertniy not mention the statement by National Security and
Defense Council Secretary Anatoliy Kinakh, the leader of a party in
Yushchenko’s bloc? Kinakh offered a compromise solution on the platform of
a joint Ukrainian-Russian gas transportation consortium. Was it not a “stab
in the back?” And was this the unanimous position of the council, whose
session was dominated by the president’s criticisms?

Why do the Socialists keep silent? And does Lytvyn’s muttering about
“unprofessional Ukrainian negotiators” mean that he has nothing more to

The Party of Regions demonstrates utter near-sightedness. Supposing
Ukraine fails in the negotiations and the price for Russian natural gas goes
up fivefold. This defeat may be fatal for Yushchenko: the critical mass of
his errors will drag his team to the bottom in the parliamentary race.

Subsequently, Yanukovych and Akhmetov will win, securing a majority in
the future parliament, which entitles them to form a government. But the
economic impact from the gas price rise will crush their government in a
mere six months.

Besides, the Party of Regions represents the interests of big
financial-industrial groups and its electorate is concentrated in the
heavily industrialized regions of the country, which will suffer from these
price hikes more than others. In view of such prospects, it would be logical
to help the government stand its ground in negotiations with Russia.

It is in their interests to secure the terms of the new gas supply contract,
under which their chemical and metallurgical plants would profit. But do
they move a finger? No. Obsessed by their mania for power, they are ready
to victimize thousands of people employed at their factories, not to mention
the entire country.

But regardless of different ideologies and goals, Ukrainian political forces
should have consolidated vis-a-vis the real external threat. It is the
president who should have coordinated their search for an optimal solution.
Instead, Yushchenko acted very much like Stalin, who refused to believe that
Hitler would breach the non-aggression pact and unleash a war.

Yushchenko keeps assuring everyone that he and Putin are friends: they talk
on the phone every other day, they are going to spend the Christmas holidays
skiing in the Carpathians, and there is no economic threat to Ukraine.
According to Yushchenko, the higher price for natural gas could be exactly
balanced by higher charges for transit services.

However, that could only work if Russia raised the price twofold. But what
if it raises it threefold or fivefold? What if Turkmenistan follows suit?
Yushchenko’s opinion on that score is unknown. It is only known that he
calls upon Putin to “be humane, because we are going to have elections.”

Experts are puzzled: why create a new intermediary company in lieu of
RosUkrEnergo? What makes Yushchenko think that it will help resolve the
gas problem or that Moscow will treat it as “kindly” as Kuchma used to be
treated? Against the background of firm and unambiguous statements by the
Russian leadership, Yushchenko’s placidity means that he is either in the
dark about what is going on or knows something that others do not.

Supposing, Yushchenko does have some secret information. But he should
not forget about the Kremlin’s real goals:

[1] firstly, to discredit Yushchenko and his team in the eyes of the people,
impoverished by imminent price hikes;
[2] secondly, to alter the course of Ukraine’s foreign policy;
[3] thirdly, to buy for a song bankrupt Ukrainian chemical and metallurgical
factories, and then resell them to Russian companies that would make them
profitable again by using dirt-cheap natural gas;
[4] fourthly, to control Ukraine’s gas mains;
[5] fifthly, to aggravate the political and economic crisis in this country
and thus show all other post-USSR countries what may happen to them
should their voters go against the “Russian grain.”

The Russian president took the throne handed down by his predecessor.
The leaders of Belarus and Central Asian republics retain theirs simply by
prolonging their presidency. Voters in those countries only serve as a
“crowd scene” during elections. But Yushchenko became president having
defeated the candidate who was supported by Moscow. So now Moscow is
strongly determined to discredit him (thanks to his own mistakes, this is
anything but a difficult job for the Kremlin).

Judging from the Ukrainian top leaders’ mental paralysis, Putin must have
learned well Carnegy’s recommendations while serving in the KGB.

So what do we have? Russia’s clear intention to use its energy resources for
economic and political pressure on Ukraine; well-coordinated actions by all
Russian pro-government and opposition forces; a nationwide campaign in
Russian mass media, thanks to which the majority of Russians support the
Kremlin’s position and anti-Ukrainian sentiments grow steadily.

Besides, Russian diplomats are breaking their backs to enlist support from
the USA and the EU – the major consumer of Russian natural gas. And the fact
that the main Western players have distanced themselves from the Moscow-Kyiv
dispute may be viewed as a success for Russian diplomacy. Moreover, the
ex-chancellor of Germany is working for Gazprom and the ex-secretary of the
U.S. Energy Department – for Rosneft.

And what do we see in Ukraine? The government is critically short of
managerial and intellectual resources; the president is sure that the
country is not in danger; relations with Turkmenistan are going from bad to
worse (largely owing to the unprofessional managers of Naftogaz Ukrainy);
the selfish political elite is set exclusively on the pre-election campaign;
the opposition forces, chiefly represented by the Party of Regions, are sure
that higher prices for Russian natural gas could help them weaken their
opponents; the parliament keeps turning down all draft versions of the 2006
national budget bill and appears to be seriously poised to sack the

There are not the slightest signs of a coordinated dissemination policy,
even in the government-controlled mass media. There is an outstanding
exception – the position of the 1+1 TV channel: it is a position of those
who understand what national security is and how seriously it is threatened
now. But exceptions only prove the rules. The majority of owners of mass
media are involved in the election race and national interests are secondary
to them.

Ukraine is evidently unprepared for any of the likely scenarios. There are
some attempts to analyze the situation. Fuel and Energy Minister Ivan
Plachkov, for example, has drawn up a summary table of correlated prices for
supplies and transit of natural gas. But the government has no preparation
plans for or response to any of the 15 variants presented in the table.

What can Ukraine juxtapose to Russia’s position?

[1] First of all, legal argumentation (the active gas supply contract, which
has not expired yet, provides for a fixed price).

[2] Secondly, Ukraine may propose raising the price for leasing its land and
naval facilities in Crimea to the Russian Black Sea Fleet. Considering the
skyrocketing market prices of land in the coastal resort area where the
Russian Navy base is stationed, Ukraine could charge it even 100 times more!

Such a step, however, should be preceded by a comprehensive inventory of
the land and facilities leased to Russia. Seven years ago, the State
Property Fund conducted such an inventory. Seven boxes with those
documents are still unpacked.

[3] There is another possible counterweight: several Russian air defense
complexes deployed in Crimea and Transcarpathia, which the Kremlin regards
as vital. Currently, Russia covers a mere 19 percent of expenses for their
operation and maintenance and would be very unnerved to hear about higher

These and other counterweights might help Ukraine obtain some financial and
moral compensation. But if Moscow is so determined to demonstrate its
“power of the stronger,” Ukraine needs to bring in the heavy artillery.

Therefore, the president should [1] immediately set up a crisis group of
lawyers, economists, and experts in the field of natural gas and other
energy resources, irrespective of their political or religious convictions,
nationality, or social status.

Also, [2]it is obviously necessary to replace the Naftogaz Ukrainy
management. Yushchenko should make a hard choice between loyalty and
professionalism. Oleksiy Ivchenko has made a lot of blunders and
irresponsible statements, but he is still the president of Naftogaz. There
is only one explanation: Yushchenko, for some personal reasons, wants
Ivchenko to have his job.

The president should also [3]meet with oligarchs, but not those who trade in
soccer players, contraband vodka, or posts in the government. He should talk
to those who own the country’s basic industrial resources and show them the
limits which the country could never exceed if it wants to remain
independent. For example, the country could not cede its gas transportation
system to Russia, however lucrative the idea of a consortium may appear.

Then the president [4] should hear all their proposals – from terms of
duty-free imports of energy-saving equipment to credits and loans from
foreign banks against the government’s guarantees. As a separate subject,
they should also discuss feasible ways to increase extraction of natural gas
from Ukrainian fields.

[5] A special group of lawyers should develop a mechanism to “uncork” the
country’s gold reserves. After all, the rainy day for which this reserve of
$15 billion is kept, is about to come. And there should be a mechanism for
redistributing the proceeds from the sale of the Kryvorizhstal steel works
according to new priorities.

In case Ukraine fails to dissuade Russia from sharply raising the price of
natural gas, it needs to have enough resources to cushion the impact: from
Western credits to gold reserves and the Kryvorizhstal money. And if the
president wants lawmakers to vote for such forced amendments to the national
budget, he should offer them memorandums on this very issue, not on “fair
elections” or a would-be “coalition of democratic forces.”

The external threat must mobilize and consolidate the Ukrainian political
and economic elites and put an end to mutual accusations and fault-finding.

If Moscow gets what it is after, then Yushchenko (or Tymoshenko or
Akhmetov) will have nothing left to manage.

The country has only one gas mask for all to survive this gas attack.



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