6. RUSSIA-UKRAINE GAS ROW GROWS

OUTSIDE VIEW:
By Sergei Kolchin, UPI Outside View Commentator United Press International (UPI) Moscow, Russia, Wed, Dec 21, 2005

MOSCOW – The new round of Russian-Ukrainian gas talks held on Dec. 12 did not produce any visible results, but Russian Industry and Energy Minister Viktor Khristenko said the parties hoped to settle the price issue before the year-end.

He said intensive negotiations would help to prepare the necessary documents to regulate the two countries’ relations in the gas sphere by January 1, 2006.

Earlier that day, Ukrainian President Viktor Yushchenko said he was positive that Kiev and Moscow would find a mutually acceptable settlement of the dispute. “Ukraine is ready to pay for gas under market terms, but with a transitional period,” the presidential press service quoted him as saying. Yushchenko also said he hoped Russia would meet Ukraine half-way.

The dispute between Russia and Ukraine about coordinating gas prices and transit tariffs for next year is gaining momentum. Remarkably, the Ukrainian authorities began speaking of a compromise after the Russian leadership had for the first time voiced its unequivocal support of Gazprom in its confrontation with Ukraine.

This position was announced by Sergei Mironov, head of the parliament’s upper chamber, and leaders of the lower chamber. Moreover, Russian President Vladimir Putin for the first time made a very tough statement on gas relations with Ukraine, signaling that Russia did not intend to put up with Ukraine’s growing gas debt and to preserve unjustified preferences in bilateral gas trade.

Gazprom insists on supplying gas to Ukraine at a market price of $160 per 1,000 cubic meters from 2006. At present the country buys Russian gas at a discount price of $50 per cubic meters and wants to preserve the privilege, pointing to the present inter-governmental agreement valid until 2013. It stipulates that market gas prices and transit tariffs cannot be introduced.

Gazprom, in its turn, refers to Article 2 of the same document, which reads that transit parameters and payments for gas supplies should be adjusted annually in inter-governmental protocols.

Ukraine does not agree, which has been seen not so much in the attitude of Gazprom’s partner, Naftogaz, as in that of the country’s leadership. The reason is clear: ahead of the parliamentary election it is afraid that a possible rise in rates will have a negative influence on voters, as will a probable economic slowdown.

For many years Russia has shown understanding of such reasoning, distancing itself from conflicts between economic agents and even helping to settle them through inter-state agreements (offsetting debts, offering barter, etc.). Now the situation is completely different. There are several reasons for the change.

[1] First of all, Russia’s concessions were to a large degree caused by foreign political motives, notably, post-Soviet regimes’ loyalty to Moscow. Recently, Kiev (as well as Chisinau, Tbilisi and others) has repeatedly announced its commitment to the “Euro-Atlantic choice,” which makes a vast difference.

Although it is hard to grasp what choice they are talking about and how much in line it is with domestic and foreign realities of former Soviet republics, Russia, obviously, can no longer expect any loyalty from its past allies. This is proved by Ukraine’s resumed attempts to aggravate the debates about the Black Sea Fleet deployment in the Crimea.

[2] Secondly, the price of concessions has soared following the developments on the global energy market. Earlier discounted gas prices and transit tariffs were at least comparable, but now it is more profitable for Russia to pay globally accepted tariffs, at the same time supplying energy at world prices. The spread obviously puts it at a disadvantage, taking into account how much gas it exports.

[3] Thirdly, the Russian parliament’s recent decision to remove restrictions on foreign ownership of Gazprom (although the government will retain control through a majority stake of 50% plus one share) creates a new situation, when foreign investors will not agree to their interests being infringed on because of Gazprom’s or Russia’s preferences for one partner or another.

Preserving discount gas prices for Ukraine and other states also contradicts with the strategy of Russia’s gas industry development, which is clearly orientated towards market cooperation.

Given all this, the Russian authorities, perhaps for the first time in recent history, have responded in an unusually tough way to the traditional dispute in Russian-Ukrainian gas relations. The President said he did not want to put his “Ukrainian colleagues at a disadvantage,” but that in his opinion Ukraine was quite able to buy Russian gas at global prices.

In 2006, European consumers will buy Russian gas at $255 per 1,000 cubic meters, while Ukraine insists on continuing to pay $50. Even given lower transit costs, this would be more than extravagant for Russia, which stands to lose $3 billion-4 billion from supplies to Ukraine next year alone. (Gas prices for Ukraine will be $180 lower than for Germany.)

Moreover, as Putin pointed out, Ukraine produces 18 billion cubic meters of gas, which is sufficient to meet the demands of domestic households, so Russia cannot be accused of threatening “to freeze Ukraine.” Besides, household gas prices in Ukraine are lower than in Russia. Why would Russians pay for their neighbors’ comforts?

Given all this, Ukraine’s stance looks provoking. Although its leaders assure that transit of Russian energy to Europe will continue uninterrupted, the very chance of complications in this sphere is blackmail and is unacceptable in healthy international economic relations.

This is encouraged by the prospect of alternative gas supplies across the North-European gas pipeline, the construction of which has been launched recently. At present, about 110 billion cubic meters of Russia’s annual exports to the West goes via Ukraine.

West European consumers of Russian gas have been slow to respond to Ukraine’s ambitions. They seem to believe that the parties to the conflict will settle it on their own, as has always been the case. If not, the West cannot be expected to stand aside and take over the role of subsidizing Ukraine from Russia because of its role as a transit state.

Independent Western analysts say that the loss of cheap Russian gas is the price Ukraine has to pay for establishing its independence. -30-

(Sergei Kolchin is a senior fellow at the Institute of International Economic and Political Studies of the Russian Academy of Sciences. This article is reprinted by permission of the RIA Novosti news agency.)

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2 Comments

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2 responses to “6. RUSSIA-UKRAINE GAS ROW GROWS

  1. Online Editor

    By Sergei Kolchin
    UPI Outside View Commentator United Press International (UPI)
    Moscow, Russia, Wed, Dec 21, 2005

  2. Online Editor

    By Sergei Kolchin
    UPI Outside View Commentator United Press International (UPI)
    Moscow, Russia, Wed, Dec 21, 2005

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