THE ACTION UKRAINE REPORT – AUR" – Number 627

 “THE ACTION UKRAINE REPORT – AUR”
           An International Newsletter, The Latest, Up-To-Date
                In-Depth Ukrainian News, Analysis and Commentary

                “Ukrainian History, Culture, Arts, Business, Religion,
    Sports, Government, and Politics, in Ukraine and Around the World”

                           
                    CALL IT PETROKREMLIN 
            A vast state-run energy conglomerate has been assembled
                             over the past year, some experts say, 
           to fuel Russia’s bid to revive Soviet-style great power status. 
                                      
“THE ACTION UKRAINE REPORT – AUR” – Number 627
Mr. E. Morgan Williams, Publisher and Editor
Washington, D.C., WEDNESDAY, DECEMBER 28, 2005
                        ——–INDEX OF ARTICLES——–
                
1.              KREMLIN REASSERTS CONTROL OF OIL, GAS
                                        Call it PetroKremlin
World’s second-largest oil producer, sees energy as key foreign policy tool.
By Fred Weir, Correspondent, The Christian Science Monitor
Boston, Massachusetts, Wednesday, December 28, 2005

2.               “GAZPROM BECOMES THE BEAR OF RUSSIA”
By Andrew E. Kramer, The New York Times
New York, NY, Tuesday, December 27, 2005

3.     VLADIMIR PUTIN’S CHIEF ECONOMIC ADVISER QUITS

                  Critic of the Kremlin’s grab for economic power.
            Advisor says Russia has stopped being free and democratic
By Neil Buckley in Moscow, Financial Times
London, United Kingdom, Tuesday, December 27 2005

4.    BASIC DIRECTIONS OF UKRAINE’S ENERGY STRATEGY
SPEECH: By Prime Minister of Ukraine, Yuri I.Yekhanurov
US-Ukraine Energy Dialogue, Inaugural Event
Dirksen U.S. Senate Office Building
Washington, D.C., Wednesday, November 2, 2005

Translated by Heather Ferniuk for the AUR
The Action Ukraine Report (AUR), Issue 627, Article 4
Washington, D.C., Wednesday, December 28, 2005

5.               RUSSIA AND UKRAINE WIDEN GAS DISPUTE
By Judy Dempsey, International Herald Tribune (IHT)
Neuilly Cedex, France & The New York Times

New York, New York, Wednesday, Dec 28, 2005

6.             RUSSIA DENIES COMPROMISE WITH UKRAINE
Jim Heintz, The Associated Press (AP), Moscow, Russia, Tue, Dec 27, 2005

7RUSSIA WARNS OF ‘FATAL’ CONSEQUENCES FOR UKRAINE
                           AS GAS PRICE ROW ESCALATES
By Michael Mainville in Moscow, The Independent Online Edition
London, United Kingdom, Wednesday, 28 December 2005

8.     UKRAINE HOPING FOR COMPROMISE WITH GAZPROM

                                  OVER GAS PRICES
AFX Europe (Focus), Moscow, Russia, Monday, Dec 26, 2005

9.     GAZPROM TEST LIMITS OF CUSTOMERS’ DEPENDENCE
By Judy Dempsey, International Herald Tribune (IHT)
Published by The New York Times
Neuilly Cedex, France, Monday, Dec 26, 2005

 
10.               “UKRAINE MUST STAND UP TO BLACKMAIL”
ANALYSIS & COMMENTARY: By Oleksandr Paily
Ukrayinska Pravda (UP), Kyiv, Ukraine, Wed, December 21, 2005

11WRITE TO VLADIMIR PUTIN: TELL HIM WHAT YOU THINK
                          ABOUT BLACKMAIL WITH GAS
Ukrayinska Pravda (UP), Kyiv, Ukraine, Wednesday, Dec 21, 2005

12.         GAS PRICE HIKE A BITTER BUT NEEDED PILL FOR

                        UKRAINE’S ECONOMY EXPERTS SAY
Agence France Presse (AFP), Kiev, Ukraine, Sun, Dec 25, 2005

13.                                    “RUSSIA HAS WON”
ANALYSIS & COMMENTARY: by Igor Luzenko,
‘Power of the Money’ for Ukrayinska Pravda (UP)
Kyiv, Ukraine, Saturday, December 24, 2005

14.                             “WHAT FRIENDS ARE FOR”
                   The Price of the question is $230 per 1000 cu. m.
COMMENTARY: by Mikhail Zygar
Kommersant, Moscow, Russia , Friday, Dec. 23, 2005

15.              “THE UNKNOWN VALUES IN GAS EQUATION”
ANALYSIS & COMMENTARY: By Lidiya Skurativska
Ukrayinska Pravda (UP), Kyiv, Ukraine, Sat, December 17, 2005

16REVIEW OF UKRAINE BASE LEASE ‘FATAL’ RUSSIA SAYS

REUTERS, Moscow, Russia, Wed, December 28, 2005

17UKRAINE, RUSSIA TO BRINK OVER HUGE GAS PRICE RISE

Tom Parfitt in Moscow, The Guardian
London, United Kingdom, Tuesday, December 27, 2005

18.      UKRAINE ENERGY: A GAS CALAMITY IN PROSPECT?
The Economist Intelligence Unit Limited
The Economist, London, United Kingdom, Friday, December 23, 2005

19.                CAN GAZPROM RENEW RUSSIA’S IMAGE?
By Heidi Brown, Forbes.com Daily Newsletter
New York, New York, Tuesday, December 27, 2005
========================================================
1
              KREMLIN REASSERTS CONTROL OF OIL, GAS

                                          Call it PetroKremlin
World’s second-largest oil producer, sees energy as key foreign policy tool.
                 
By Fred Weir, Correspondent, The Christian Science Monitor
Boston, Massachusetts, Wednesday, December 28, 2005

MOSCOW – Call it PetroKremlin. A vast state-run energy conglomerate
has been assembled over the past year, some experts say, to fuel Russia’s
bid to revive Soviet-style great power status.

To date, the Kremlin has effectively renationalized almost a third of the
formerly private oil-and-gas sector. Other developments also point to
growing state ambitions:

[1] A $15-billion Siberian pipeline, due to begin pumping in 2008, will
shift Russian crude exports to Asia, particularly China, where Moscow is
cultivating fresh strategic relationships.

[2] A 737-mile gas line being laid under the Baltic Sea will cut out
middlemen Ukraine and Poland, whose relations with Moscow have recently

soured, while locking in Russia as Western Europe’s key energy supplier.

[3] State-run Gazprom has teamed up with several foreign partners to develop
a vast Barents Sea gas field whose production, converted to liquefied
natural gas (LNG), could begin supplying the US market by 2010.

[4] A long-delayed law on subsoil resources, to be passed by the Duma next
year, is expected to ban foreign-owned companies from exploring or
developing Russian oil fields and other key mineral resources.

“Amazing changes are happening swiftly, because Putin has understood that
energy is Russia’s key card to play at the international table,” says
Michael Heath, a political analyst with Aton, a Russian brokerage. “Instead
of the military force the Soviet Union used to project its power, Russia is
using oil as a major tool of foreign policy.”

Russia is the world’s second-largest producer of petroleum – about 8 million
barrels of crude per day – which accounts for nearly 40 percent of the
country’s GDP. Spiking global oil prices over the past five years have
wafted state budgets into the black, fueled a modest economic boom, and
enabled the Central Bank to rack up reserves of $170 billion.

But far beyond taxing windfall energy profits, the Kremlin has moved to take
over the industry. Russia’s third-largest oil firm, Yukos, was dismantled in
parallel with the prosecution of its politically defiant owner, Mikhail
Khodorkovsky, and its main production units gobbled up by the state oil
company Rosneft.

Earlier this year, the government took a controlling 51 percent stake in
Gazprom, the natural-gas giant that holds a quarter of the world’s reserves,
and Gazprom paid $13 billion to purchase Russia’s fifth-largest oil company,
Sibneft.

Sibneft, now effectively state-owned, moved this month to purchase a 25
percent stake in the huge Lopukhov oil field, on Russia’s Pacific coast,
formerly held by TNK-BP, a Russian-British joint venture.

“Now the state directly controls about 30 percent of petroleum production in
Russia and the big question is, how much more will it take?” says Valery
Nesterov, an energy expert with Troika Dialogue, a Russian investment bank.
“This is a big cause of concern for Russian and foreign oil investors.”

In the short run, the Kremlin’s oil grab may have damaged Russia’s energy
prospects, Mr. Nesterov says. Growth in oil production has plunged from
an average 9 percent in Putin’s early years to just 3 percent this year.
Exploration has virtually ground to a halt, as both foreign and domestic
investors wait to see what the new rules of the game will be.

Inner-Kremlin squabbling appears to have halted a planned merger between
Gazprom and Rosneft that would have created a gargantuan state-run
petroleum conglomerate.

Tightened state control could prove good news for foreign investors who
want a piece of Russia’s oil pie but don’t insist on controlling rights. Up
to 49 percent of Rosneft may soon be sold to outside investors, to raise

cash to repay $7.5 billion the state borrowed to acquire a majority stake in
Gazprom. Curbs on foreigners seeking to buy shares in Gazprom will also
soon be lifted, experts say.

“The new rule is that not less than 50 percent must belong to the state,”
says Nikolai Nikitin, editor of Neftegazovaya Vertikal, a Russian petroleum
industry journal. “No longer will private companies be allowed to get fat
from Russia’s mineral resources.”

Experts say the Kremlin aims to blunt international criticism of its
takeover of the energy sector by offering a few symbolic management
positions to prominent foreigners such as former German Chancellor Gerhard
Schröder, who has reportedly agreed to head the new North European gas
pipeline project, which will carry Russian gas directly to Germany. Earlier
this month, Putin personally offered former US Secretary of Commerce
Donald Evans the post of Rosneft chairman, a job Mr. Evans turned down.

Putin has appointed some of his top aides to run the Kremlin’s newly
acquired empire.The daily Nezavisimaya Gazeta estimated earlier this year
that seven people from Putin’s inner circle now control nine state companies
with total assets of $222 billion, which is equal to 40 percent of Russia’s
GDP.

Some experts argue that the unregulated “oligarchic” capitalism of the 1990s
brought on a public backlash and made the state’s return to economic
intervention necessary. “Many private oil companies were not serving the
national interest, and those mistakes had to be corrected,” says Nazit
Boikov, an expert with the official Institute of World Economy and
International Relations in Moscow.

Others allege that a new Kremlin elite is simply helping itself to Russia’s
riches, much as the oligarchs of the past decade did. “Just ignore all that
rhetoric about returning resources to national control,” says Stanislav
Belkovsky, director of the independent Center for National Strategy. “A
certain group of people are using nationalization as a mechanism to enrich
themselves; that’s the bottom line.”

Last week Kremlin economic adviser Andrei Illaryonov slammed what he
called the transformation of Russia into a giant corporation. “The main
outcome of this year is the formulation of a new corporatist model for
political, economic, social, public, and international life,” said the
outspoken Mr. Illaryonov, who Tuesday offered his resignation.

“Until recently, no one put any restrictions on me expressing my point of
view. Now the situation has changed,” the Associated Press reported him
as saying.

While there may be confusion over the long-term domestic impact of Putin’s
policies, there seems little doubt that direct control over Russia’s vast
petroleum resources offers the Kremlin substantial foreign-policy clout in
an increasingly energy-starved world.

At a meeting of the Association of Southeast Asian Nations in mid-December,
Putin pledged to ramp up oil deliveries to Asia, from the present 3 percent
of Russia’s total exports to 30 per cent by 2020. In a joint statement,
leaders of the 10-nation group pledged to build a “comprehensive
partnership” and boost trade and security cooperation with Russia. A new
Siberian pipeline should start pumping crude in 2008, with early deliveries
going mainly to China.

“Russia has been seeking a more active role in the Asia-Pacific region, and
it’s been recognized that only oil that can facilitate this,” says Yury
Sinyak, head of energy studies at the official Institute of National
Economic Forecasting in Moscow. “It’s an open question whether Russia
actually has enough oil to fulfill all the political promises.”

If the Kremlin is demonstrating that energy supplies can be dangled like a
carrot, it has also realized they can be wielded like a stick. Ukraine,
which broke free of Moscow’s orbit in last year’s “Orange Revolution,”
was hit last month with more than a quadruple price hike for natural gas
supplies – from $50 per 1,000 cubic meters to $230.

Kiev has protested that it cannot adjust to such a rapid price hike, but
Gazprom has threatened to shut down gas deliveries to Ukraine on New
Year’s Day if it doesn’t comply. Ukraine announced Tuesday an agreement
had been reached but a Gazprom spokesman in Moscow denied the claim.

Meanwhile Belarus, Moscow’s most loyal former Soviet ally, has contracted
with Gazprom to pay just $46 per 1,000 cubic meters of gas.  -30-
———————————————————————————————-
LINK: http://www.csmonitor.com/2005/1228/p01s01-woeu.html
———————————————————————————————

[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
2.                   GAZPROM BECOMES THE BEAR OF RUSSIA

By Andrew E. Kramer, The New York Times
New York, NY, Tuesday, December 27, 2005

MOSCOW, Dec. 24 – Last winter, the Kremlin-backed candidate in
Ukraine’s contested presidential election lost to Viktor A. Yushchenko,
the pro-Western leader of the Orange Revolution.

This winter, Russia is demanding almost a fivefold increase in the price of
gas supplied to Ukraine, a change widely seen as payback for Moscow’s
embarrassment a year ago.

At the center of this geopolitical game is Gazprom, Russia’s natural gas
monopoly, the country’s largest company and the producer of a third of the
world’s supply of natural gas. Gazprom is a corporation aspiring to join the
ranks of energy majors like Exxon Mobil and BP, with the scope and bulk to
operate worldwide. It is also a powerful instrument of Russia’s emerging
foreign policy doctrine, which rests on energy exports – and the power and
prestige they bring – in place of lost military might.

Gazprom, which opened its shares to foreign buyers this month, is seeking
institutional investors and acceptance in Western markets to further its
goals. In the conflict with Ukraine, however, Gazprom is at risk of
appearing as a tool of the Kremlin – used to punish a pro-Western
government in Eastern Europe – rather than as a modern company that
could claim to be attractive to institutional investors.

Yet Gazprom’s new pricing policy in Ukraine would also benefit stock-
holders; Gazprom could earn more than $3 billion next year by raising
prices.

Far from being a mere tool, some analysts see Gazprom – Russia’s most
important company – as a driving force in pushing the Kremlin’s Ukraine
policy with the intention of increasing profits from energy sales.

“If you own Gazprom stock, you accept that it is a political arm of the
Russian government,” said William F. Browder, the chief executive of
Hermitage Capital Management here.

The negotiation of market prices in Ukraine comes amid a larger,
long-running effort at Gazprom to streamline – moving away from its origins
as a Soviet ministry and into its role as modern corporation – with
uncertain results so far.

Gazprom accounts for 10 percent of Russia’s economic activity. But it is
sprawling, inefficiently managed and overstaffed, with divisions running
everything from newspapers to poultry farms far outside its core business,
and it is often seen as a slush fund for the Kremlin’s off-the-books needs.

Still, Gazprom is one of the world’s largest energy companies, as measured
by the volume of its proven reserves. It controls more crude oil and
equivalent in natural gas than Iraq. The company has rights to huge,
unexplored fields in eastern Siberia; it is expected to win tax concessions
next spring to develop them.

It is also actively opening new markets. The company is in the midst of a
program to redraw the energy map of Europe by building underwater
pipelines in the Black and Baltic Seas, extending the reach and scale of its
sales to the West and competing with efforts by companies in the United
States to sell liquefied natural gas from the Middle East in Europe.

In the Far East, Gazprom is promising to supply China’s exploding energy
needs with two gas pipelines; it has promised gas to Japan and South Korea
as well.

Yet Gazprom trades at a fraction of the price of other oil majors, partly
because of the restriction on foreign ownership, but also because of
uncertainty over the company’s role.

With the effort to liberalize ownership, Gazprom is feeling the friction
between its traditional role within the Russian government and its need to
act like a major corporation amid energy prices that are bringing in
billions of dollars in profits, at a scale exceptional even for a company
that has always been rolling in cash.

Aramco, the Saudi Arabian state oil company that is not publicly traded,
holds more reserves. But Gazprom is projected to become, with the
liberalization, the largest emerging market stock and the largest freely
traded energy company in the world.

“Gazprom is the beautiful girl at the dance,” Mr. Browder said.

Gazprom expects to earn $66 billion next year. But the company is
capitalized at $159 billion, or roughly half that of the world’s largest
company by stock value, the General Electric Company, which has a
market capitalization of $373 billion, according to the Reuters news agency.

Analysts and diplomats who follow Russian energy policy say the company
will easily double in value in the next year or two, after share
liberalization.

President Vladimir V. Putin signed a decree Friday lifting a 20 percent cap
on foreign ownership and a prohibition on nonresidents owning shares traded
on Russian domestic stock exchanges.

The wide acquisition of Gazprom stock by the Moscow elite in recent years
means that now many of the same people who craft Russia’s foreign policy are
also large Gazprom stockholders, according to analysts. Their inclination to
use Gazprom as a foreign policy tool is thus tempered by their personal
stake in seeing the company run as a business.

Mr. Putin installed new management, including Aleksei Miller, the chief
executive, and, as chairman, Dmitry Medvedev, who is also a deputy prime
minister. Both are members of a young faction in the Russian leadership from
St. Petersburg, Mr. Putin’s hometown. Mr. Miller’s compensation includes
Gazprom stock.

Mr. Browder said, “On any yacht in the south of France this summer
chartered by Russians, you would hear talk about the price of Gazprom
stock.”

Mr. Putin has also discussed Gazprom’s importance to Russia’s broader
national interest, asserting that the country’s economic well-being is
riding on energy exports. In televised comments on Thursday, Mr. Putin said
that bringing good corporate governance to energy companies was in Russia’s
national interest.

“We need more than digging in the ground and sometimes barbarically
extracting resources,” Mr. Putin said.

The company held a conference call last week, wooing analysts and investors
with promises of cost-cutting and management reforms; it promises to break
with the past and operate a business as clean and powerful as the fuel it
sells.

“We’re looking for institutional investors,” a Gazprom spokesman, Sergei
Kupriyanov, said in an interview. “Calpers is our dream investor,” he said,
referring to the California Public Employees’ Retirement System, which
handles the pension accounts of 1.4 million state and municipal workers and
retirees and is one of the largest pools of investment capital in the world.

High on the list of changes at Gazprom that investors are seeking is
leveling prices between Western Europe, the former Soviet Union and
Russia’s domestic market. Prices range from $30 or so in Russia to more
than $200 in Western Europe.

The effort is uneven, however, and tainted by politics.

Gazprom is not raising prices in Belarus, a country firmly in Moscow’s
orbit. Under the 2006 contract, gas will sell there for $47 for 1,000 cubic
meters. Gazprom says the lower price is justified because Belarus has
surrendered control of its transit pipeline to Gazprom.

As payment in Ukraine, Gazprom has offered to take shares in Ukrainian
companies or, as in Belarus, take partial control over the gas pipelines.

[On Monday, Bloomberg News reported that Ukraine’s prime minister, Yuri
I. Yekhanurov, had rejected Gazprom’s offer to guarantee fuel supplies in
exchange for a stake in the country’s pipeline network. “Ukraine will not
sell its gas pipeline system,” Mr. Yekhanurov said in Zhytomyr, Ukraine, in
remarks broadcast by Channel 5 television. “It’s prohibited by law.”]

To some in Ukraine, Gazprom’s talk of market pricing rings hollow. “It’s a
myth,” Volodymyr I. Polokhalo, a senior researcher at the Institute of
International Relations in the Ukrainian Academy of Science, said. “What
market price can grow three or four times in a year? This is political
blackmail.”

Mr. Polokhalo said Mr. Yushchenko’s inability to get a deal from Gazprom
would play into the hands of pro-Russian opposition parties in parliamentary
elections in March, including the Party of Regions of Viktor Yanukovich, the
Kremlin-backed candidate who lost in the Orange Revolution.

Rising gas prices would strike hardest at the industrial belt in eastern and
central Ukraine, Mr. Yanukovich’s stronghold, deepening Ukraine’s political
divide and damaging Mr. Yushchenko. “In this case Gazprom isn’t a company.
It’s an instrument entirely in the hand of the president,” of Russia, Mr.
Polokhalo said.

Back in Russia, Gazprom shares keep going up. The locally traded stock rose
150 percent this year; American depository receipts traded in London rose
118 percent.

“The goal is to drive the price of Gazprom through the roof,” said one
Western diplomat who spoke on condition of anonymity because of protocol.
“For Gazprom it’s a nice twofer. You punish Ukraine and make money doing it.
There’s a few hundred guys in the Kremlin with financial interest in
Gazprom.”  -30-
————————————————————————————————   
http://www.nytimes.com/2005/12/27/business/worldbusiness/27gazprom.html
————————————————————————————————

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3.      VLADIMIR PUTIN’S CHIEF ECONOMIC ADVISER QUITS
                  Critic of the Kremlin’s grab for economic power.
            Advisor says Russia has stopped being free and democratic

By Neil Buckley in Moscow, Financial Times
London, United Kingdom, Tuesday, December 27 2005

MOSCOW – Andrei Illarionov, President Vladimir Putin’s chief economic

adviser but also an acerbic critic of the Kremlin’s grab for economic power,
offered his resignation on Tuesday, saying Russia was “no longer free”.

Mr Illarionov famously described Russia’s partial renationalisation of the
Yukos oil company 12 months ago as the “scam of the year”; days later he

was stripped by Mr Putin of his role as Russia’s “sherpa”, or representative,
to the Group of Eight industrialised nations.

Still, he survived in his post as economic adviser another year despite
evermore blunt outbursts, prompting some analysts to consider him a
“court jester” kept on to promote the appearance of plurality and tolerance
within the Kremlin.

The resignation of one of the most prominent champions of liberal economic
reform occurred days before Russia takes over the presidency of the G8 amid
scrutiny of its record on democracy and freedom of speech. It came as

Russia’s upper house on Tuesday approved controversial controls on charities
and human rights groups.

“It is one thing to work in a country that is partly free,” Mr Illarionov
said yesterday, saying Russia still qualified for that description when Mr
Putin came to power six years ago. “It is another thing when the political
system has changed, and the country has stopped being free and democratic.

“I did not sign a contract with such a state, and therefore it is absolutely
impossible to remain in this post,” he said.

Mr Illarionov added he had considered it important to remain in his job “as
long as I had the opportunity to do at least something including speaking
out”, implying he no longer had that freedom.

His announcement came a week after a press conference in which he said
Russia was moving to a “corporatist” model, dominated by state-controlled
companies chaired by government representatives which did not always
function according to economic criteria.

He said the “scam of the year” for 2005 had been a combination of events,
including several takeovers of private companies by state-controlled
giants – notably the $13.1bn acquisition of Roman Abramovich’s Sibneft by
Gazprom, the state gas company.

He also cited the Russian state’s increasing tendency to use energy as a
“weapon” in relations with other countries.

A year ago, he described as a “scam” state-owned oil group Rosneft’s
acquisition of the main production unit of Yukos by means of a forced
auction.

“In six years, the situation in the Russian economy has changed radically,”
Mr Illarionov said. “There is no longer any possibility of conducting a
policy of economic freedom.”  -30-
——————————————————————————————–
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4.     BASIC DIRECTIONS OF UKRAINE’S ENERGY STRATEGY

SPEECH: By Prime Minister of Ukraine, Yuri I. Yekhanurov
US-Ukraine Energy Dialogue, Inaugural Event
Dirksen U.S. Senate Office Building
Washington, D.C., Wednesday, November 2, 2005

Translated by Heather Ferniuk for the AUR
The Action Ukraine Report (AUR), Issue 627, Article 4
Washington, D.C., Wednesday, December 28, 2005

Honorable Senator Richard Lugar, sponsor of the dialogue!
Honored conference participants, ladies and gentlemen!

I am especially glad today to speak at this conference.  I am convinced that
our meeting today attests to the significance of Ukraine in the creation of
a safe, reliable, environmentally-friendly energy space.

We consider the organization and holding of this forum not only as a show
of respect for the democratic aspirations of the Ukrainian people, but also
as an acknowledgement of Ukraine’s special role in the context of ensuring
energy security of the entire European continent.

Energy was and remains the main strategic prerequisite for economic
development, the foundation for providing for all types of society’s vital
activities. Hence the fixation and realization of its developmental
directions is a priority task in the ensuring of national security, the
political and energy independence of the country, and [the country’s]
economic development.

The next several years will be decisive for all nations of the world in the
context of the search for answers to energy challenges.  Strivings to
improve the standards of life are innate for all peoples.  At present,
mankind has not found a way to provide for the growth of the standard
of living without the essential increase in the use of energy. But we are
witnesses of disproportionate energy consumption in many countries.

Today the directions and tempos of a society’s development are dictated in
large measure by general tendencies in world energy markets, and also in the
energy sectors of every country of the world. This holds particularly true
for economies of those nations who recently switched to the market
economy path for development.

For Ukraine, the energy sphere is particularly important, since it affects
the state of the national economy and the social clime in the country.

It will not be an exaggeration to say that precisely the energy sector was
that sphere that ensured the rebirth of a national economy in the long-term
perspective.  At the same time substantial challenges regarding the
continued, stable development of our state are contained namely within the
energy sphere.

Today the energy sphere in Ukraine remains a highly developed system. A
confirmation of this is not only the stable indicators of the work of
companies in this field, but also the field’s development, particularly in
such high-tech components, such as atomic energy.

It is important to establish and maintain steady international cooperation
and to be a participant in integration processes of the energy sphere.

Today Ukraine’s energy sector is in a state of realization of large-scale
and complex objectives, and I am certain that these objectives cannot be
reached without broad international cooperation.

For Ukraine, a key moment in such cooperation is that it be based on
economic expediency. We are open to cooperation with all interested
potential partners.

Ukraine is a unique bridge that draws together many regions that are rich
in energy resources with countries that need them. This uniqueness is
conditioned not only by the advantageous geographic location of our
country.

A component of this uniqueness is the highly developed existing
infrastructure for transporting energy resources that has substantial
reserves for expansion, and the high scientific and personnel potential.

We consider Ukraine’s dedication to international commitments, not only
within the framework of bi-governmental agreements, but also within the
framework of signed multilateral documents, to be a key element for the
further development of cooperation.

Today Ukraine is the author of a number of initiatives, the goal of which is
an assurance of guaranteed supplies of energy resources to world markets,
the necessity of an increase in their volumes, and a diversification of the
sources of their origin.

But the potential for international cooperation with Ukraine in the energy
sphere is not limited to major initiatives. With the introduction of market
principles and their incorporation into the energy sector of Ukraine, and
the renewal of the financial viability of energy companies, the foundation
is laid for further stable development of this field, namely on the basis of
investment and through commercial and scientific-technological cooperation
with leading companies of the world, including U.S. companies.

I would like to dwell more in detail on the basic directions of Ukraine’s
energy strategy.

One of the decisive factors of a state of economic upheaval of a country is
its energy supply. According to the prognoses, in 2005 the energy supply in
Ukraine will reach four tons of conventional fuel per person. By this
indicator Ukraine significantly lags behind developed countries of the
world, and it is essential for us to do a lot to eradicate this discrepancy.

A key driving force for every country is providing for its energy security,
a component of which is energy dependency. Ukraine’s energy dependence
on the import of organic fuel for the years 2000-2004 comprised over 70%.
This is an average European level, but for Ukraine it is characterized by an
absence of diversified delivery sources of energy carriers, principally of
oil, natural gas and atomic fuel.

On the one hand, Ukraine is limited by its own natural gas, oil and atomic
fuel resources, but on the other hand, it has sufficient coal supplies and
atomic fuel components, including uranium and zirconium. The country’s
energy system in general requires radical reconstruction.

A heavy burden for Ukraine’s economic development is the high energy volume
of GDP, which constitutes 0.89 kilograms of conventional fuel for one US
dollar counting the parity of actual buying power that surpasses the average
level of energy volume in countries of the world by three-four times, and is
the reason for a continual increase in the import of hydrocarbons.

It should also be noted that the high level of wear on Ukraine’s
infrastructure combined with the related necessity of modernization and
reconstruction of basic equipment prompts the introduction of the latest
technologies.

Considering the modern state of development of Ukraine’s fuel-energy
complex and the development tendencies of the energy sector by global
standards, we brought about certain changes in the priorities in the process
of reconsidering the conceptualization of the development of the fuel-energy
complex by 2030.

According to the conceptualization, irrespective of the forecasted savings
of energy products as a result of structural and technological energy
conservation, the absolute growth of their consumption until 2030 due to an
increase in GDP and the development of the social sphere is expected.

The scope of consumption of basic fuel-energy resources in the year 2030
will increase:

     [1] Electric power – by 2.2 times and will reach about 380-400 billion
           kWh;
     [2] Coal products – by 2 times and will reach 130 million tons;
     [3] Oil for internal use – by 30% and will reach 24 million tons;
     [4] Uranium of our own production – by 7.5 times.
     [5] On the other hand, consumption of natural gas will decrease
          by one third and will become 49 billion cubic meters.

We plan to secure our energy product needs by accomplishing the following:

     [1] First of all, decreasing energy capacity of GDP;
     [2] Second, increasing our own output of coal, Uranium, oil and gas;
     [3] Third, increase the manufacturing of electricity at atomic energy
           plants using our own atomic fuel;
     [4] And finally, increasing the volumes and depths of oil refinement.

Based on the foreseen needs of electric power for the prognostic period and
given the optimized balance of the development of solar, nuclear and hydro-
power, the production of electrical power at Ukraine’s atomic energy
stations (AES) will increase until 2030, approximately doubling from 95 to
219 billion kWh.

The atomic energy development strategy foresees:

     [1] Lengthening the term of energy blocks by 15 years;
     [2] Bringing the established power factor to 87-90%.

It is planned that the production of AES electric power will be carried out
with maximum use of uranium and zirconium of our own production and by
mastering the atomic fuel production technology. It is foreseen that 65% of
electric power in 2010 will be produced thanks to uranium extracted in
Ukraine, and beginning in 2015-100%. Anticipated also are the increase of
production of uranium concentrate and the increase of the Ukrainian
component in atomic fuel from 20% to 40%.

An important problem is the handling of spent atomic fuel and radioactive
byproducts. At present we have only one of our own waste dumps for spent
atomic fuel and waste products. The main task regarding the handling of
spent atomic fuel is the creation of a central disposal site of the “dry”
type.

It is predicted that the development of solar energy will be due to an
increase in the use of coal, a portion of which in the fuel chambers of
solar energy stations will reach approximately 80% by the year 2030.

It is foreseen that special attention will be paid to the formation of
public opinion regarding energy conservation and support for an

ecologically acceptable development of the country’s energy.

The reconstruction and modernization of all generator output and the
introduction of 24 million kW of new force is also foreseen.

In harmonizing the development of atomic energy and energy from organic
fuel, due attention will be paid to hydroelectricity, non-traditional
sources and energy conservation.

In the year 2030, the production of energy by means of non-traditional
sources, specifically wind energy, small hydro-electric stations, solar
panels, etc., is expected to increase to 2 billion kWh.

Ukraine’s geographic location allows varied sources of oil supply by
independent pathways from Azerbaijan, Kazakhstan, and Turkmenistan,

thereby strengthening the role of government-transporters between oil-
extracting areas of the Caspian region’s countries and important selling
markets in Europe.

The oil transport system “Odesa-Brody” creates technical opportunities

for the import of oil both from the Caspian region, as well as from the
countries of the Persian Gulf, North and West Africa. The strategic purpose
of the oil pipeline “Odesa-Brody” remains unchanged:  to ensure the delivery
of oil to the European market.

It is also anticipated that by the year 2015 the Ukrainian pipelines’ load
will increase to 17 million tons per year. The increase in oil transit
volume is expected to take place due to stage-by-stage realization of the
oil pipeline “Druzhba” and “Adria” integration project, and also due to the
step-by-step realization of the Euro-Asiatic oil transit corridor project
for ensuring oil transit from the countries of the Caspian region
(Kazakhstan, Azerbaijan) and the countries of the Persian Gulf (Iran, Iraq
and others) to 10 million tons by 2010 and to 20 million tons by 2015.

Ukraine has significant reserves for increasing the transit volume of
natural gas through its territory to the countries of the European Union.
With the presence of relatively small investments, the Ukrainian gas
pipeline system could secure an increase in transit volume by a minimum
of 50 million cubic meters.

We are studying a number of projects for transporting gas from the

Caspian and Central Asian regions, Turkmenistan, Iraq, and Iran.

One of such perspective gas transit projects could become the gas line
project Aleksandrov Grove (border between Kazakhstan and Russia)-
Novopskov (Ukraine)-Uzhhorod (western border of Ukraine). Such a pipeline,
realized within the framework of an international project, would allow
laying the shortest and most economic route for the transportation of

Central European gas to Ukraine and beyond to European countries.

Ukraine is interested in joining the gas pipeline project “Nabukko,” by
which means it is planned to transport gas from the Caspian region through
Turkey, Bulgaria, Romania, Hungary and Austria. Since this gas pipeline will
pass through countries that neighbor with Ukraine, a technical opportunity
of organizing an alternate route arises.

Radical changes in the development strategy of Ukraine’s coal industry are
foreseen. The creation of non-governmental enterprises in the indicated
field is in planning.

I would like to dwell on the problem of energy conservation.  The volumes

of real energy product savings due to energy conservation are so great, that
they almost double the fuel potential of our country. Simply by employing
inexpensive, short-term organizational-technical measures in the nearest
one-and-a-half to two years the conservation of energy products could
realistically comprise 12-14 million tons of conventional fuel each year.

The realization of energy conservation possibilities is restrained by: the
fact that to this time no working, economical investment-stimulation
mechanism has been developed in the country; the development and
introduction of energy conservation measures; and also low tariffs on
electrical energy, compared with other countries.

We are beginning preparation of an action program that addresses more
extensive collaboration in the area of energy efficiency, that will promote
incorporation of renewing sources of energy and the enacting of measures
with regards to solving the problem of global climate change, including
emissions into the atmosphere, and also the use of a joint-mechanism of
realization within the Kyoto Protocol.

One of the ways to reduce consumption of primary energy products is to
develop non-traditional and renewing sources of energy.

Ukraine has the potential for renewing sources of energy, the main usage
trends of which are harnessing the hydro-electric potential of Ukraine’s
smaller rivers, bio-masses, secondary energy products, and also wind.
Despite the existence of such potential of non-traditional and renewing
energy sources their segment in the country’s energy balance today barely
exceeds 5%.

Significant investment resources are needed to ensure effective development
of the energy sector. Experts calculate the general sum of funds needed to
fund the perspective measures foreseen by the year 2030 to be over 200
billion US dollars.

 The financing of the energy sector’s development is expected due to:

     [1] The optimization of price and tariff policies
     [2] The securing of foreign credit resources and investment
     [3] The use of funds from the realization of the Kyoto Protocol
           regulations.

Ukraine is open to dialogue with foreign partners not only in deciding
concrete questions of collaboration, but also in matters of forming a
combined strategy and of creating maximum optimal conditions for its
further development.

I wish all participants of the forum interesting and fruitful discussions
and new business contacts, and I look forward to our continued
cooperation.

Thank you for your attention.  -30-

       [SPEECH: By Prime Minister of Ukraine, Yuri I. Yekhanurov]
====================================================
NOTE:  Translation by Heather Ferniuk for The Action Ukraine
Report (AUR). The early November speech by Prime Minister Yuri I,
Yekhanurov is published by The Action Ukraine Report (AUR) as a
public service in cooperation with the organizers of the US-Ukraine
Energy Dialogue: Center for US-Ukrainian Relations, American Foreign
Policy Council, Ministry of Fuel and Energy of Ukraine, Ukrainian
Congress Committee of America (UCCA) and the Congressional
Ukrainian Caucus (CUC).

The Program Coordinator for the US-Ukraine Energy Dialogue Series
is Walter Zaryckyj, Executive Director/Center for US-Ukrainian
Relations A/Associate Professor of Social Sciences/New York
University, waz1@nyu.edu; http://www.cusur.org.
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5.                 RUSSIA AND UKRAINE WIDEN GAS DISPUTE

By Judy Dempsey, International Herald Tribune (IHT)
Neuilly Cedex, France & The New York Times

New York, New York, Wednesday, Dec 28, 2005

BERLIN – Gazprom, Russia’s state-owned natural gas monopoly, sharply
criticized Ukraine on Tuesday after that country’s prime minister asserted
that Ukraine had a right to take 15 percent of the gas that Russia exports
via Ukraine to Western Europe, fanning a dispute that has pitted the Kremlin
against a former satellite and one of Russia’s most important neighbors.

Characterizing Ukraine’s plans as theft served to escalate a war of words
while Gazprom moved forward with plans to more than quadruple the price
it charges Ukraine for gas at the start of the new year. The acrimony
reflects a determination by both sides to hold out over a dispute that could

have long-term consequences for the foreign policy of both nations.

“If Ukraine holds out and manages to strike a compromise with Russia,

then Russia’s ambitions to restore its influence in this part of the former
Soviet empire could be finished,” said Bruce Jackson, president of Project
on Transitional Democracies, a U.S. group that has supported former
Communist countries joining the NATO military alliance.

“This is Russia’s last chance to influence Ukraine,” he said. “And it is no
coincidence that it is using energy as its tool against President Yushchenko
before Ukraine’s parliamentary elections that take place in March,” he
added.

President Viktor Yushchenko told President Vladimir Putin of Russia by
telephone Tuesday that Ukraine is seeking liberalized prices for the supply
and transit of Russian gas, according to a statement issued by Yushchenko’s
office.

The two agreed Yushchenko would send the Ukrainian energy minister, Ivan
Plachkov, to Moscow on Wednesday as part of a continuing effort to reach
a compromise on the widening dispute.

Their conversation came hours after Ukraine’s prime minister, Yury
Yekhanurov, drew a blistering response from Gazprom after he said the
country could take 15 percent of the gas Russia exports via Ukraine to
Western Europe. Russia sends more than 80 percent of its gas to Western
Europe through Ukraine.

Gazprom also denied a report Tuesday that it had agreed to moderate the
quadrupling of gas prices it has said it would start charging Ukraine as of
Sunday, and said that any siphoning by Ukraine of Russian gas destined for
Europe would be considered “theft.”

“The time when a sheep could be traded for an ax has passed,” Gazprom said
in a statement. “The price of 150 cubic meters of gas is not the same as the
transit cost for this volume of gas. Ukraine refuses to understand that.”

Alexander Medvedev, deputy chairman of Gazprom said the company was
simply applying market principles to Ukraine. “Since the EU has applied a
market economy status to Ukraine then Ukraine should live up to that,” he
said during a recent interview.

Under the terms of a 2003-2013 intergovernmental agreement, the gas price
paid by Ukraine was set at $50 per 1,000 cubic meters, or 35,300 cubic feet,
and the transit rate was set at $1.09 per 1,000 cubic meters per 100
kilometers, or 62 miles, until 2009. Neither side could change the
arrangements unilaterally.

Since the Orange Revolution in Ukraine last year, in which Yushchenko was
elected president, Ukraine’s foreign policy has shifted toward the European
Union and NATO.

While the Kremlin finally accepted its former satellites in the Baltic
States and throughout Eastern and Central Europe joining the EU and
NATO, it has been reluctant to see Ukraine go in the same direction
because of its size, geography and importance to Russia’s foreign policy
goals and economic interests.

Energy experts said Gazprom’s tough statement against Ukraine reflected
the struggle between Moscow and Kiev.

For weeks, Ukraine has said it would be willing to increase the price it
pays for receiving gas from Russia or indirectly from Turkmenistan as well
as place all its energy relations with Russia on a cash basis instead of a
semi-barter system. It wanted, however, a two-year transition period during
which it was prepared to gradually raise the prices to European levels,
raise domestic energy prices and introduce energy-saving changes.

In a recent report on the impact of higher natural gas and oil prices on
Ukraine, the World Bank estimated that if the price of Russian gas to
Ukraine was increased from $50 per 1,000 cubic meters of gas to $106 the
negative impact on gross domestic product “would be roughly 4 percent
in the first year.”  -30-
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LINK: http://www.iht.com/articles/2005/12/27/business/ukraine.php

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6.                RUSSIA DENIES COMPROMISE WITH UKRAINE

By Jim Heintz, The Associated Press (AP), Moscow, Russia, Tue, Dec 27, 2005

MOSCOW – Russia on Tuesday denied reports that it was ready to

compromise on demands that Ukraine pay four times as much for Russian
gas, a dispute that threatens to cut off about a third of the gas that Ukraine
relies on for heat and industry.

The denial, made by Russian energy minister Viktor Khristenko, came hours
after Ukraine’s energy minister claimed that a compromise had been reached
in the politically charged dispute. Ukraine’s relations with the Kremlin
have been stiff since Ukrainian President Viktor Yushchenko came to power

in January on a platform of moving Ukraine into closer integration with the
West.

President Vladimir Putin and Yushchenko spoke by telephone Tuesday

evening about the brewing crisis, Yushchenko’s office said. Ukraine’s
energy minister is to come to Moscow on Wednesday for talks, the
president’s office said.

About a third of Ukraine’s natural gas comes from Russia and Ukrainian
officials say jacking the price up from the current $50 per 1,000 cubic
meters could cripple Ukraine’s energy-intensive heavy industry and impede
the country’s efforts to boost its economy. Russia’s state-controlled
Gazprom gas monopoly argues that Ukraine should pay $220-$230, more

in line with world prices and portrays the demand as putting the gas sphere
in line with market-economy demands.

In the United States, natural gas futures traded near $11 per 1,000 cubic
feet Tuesday on the New York Mercantile Exchange.

Ukraine, a country of 48 million, doesn’t argue with the market-economy
theory and Yushchenko’s office said he told Putin Tuesday that he supports
price liberalization. But Ukraine wants the price increases to be phased in
over a period of five years.

However, Khristenko, in remarks shown on state-controlled Channel One
television, said “no other offers will be made.”

Gazprom says it is prepared to shut off gas to Ukraine on Jan. 1 if an
agreement isn’t reached. Officials in both countries have raised the
prospect of sending the issue to the Arbitration Institute in Stockholm,
Sweden, which both sides recognize as a neutral body for resolving trade
disputes. But the institute cannot undertake the case unless both parties
request it.

Earlier Tuesday, Ukrainian Energy Minister Ivan Plachkov said at a
round-table discussion that an agreement had been reached for a gradual
phase-in of gas price increases, his spokeswoman Lilya Klochko said.
However, a Gazprom spokesman quickly denied that any agreement had been
reached and Plachkov’s office could not be reached later for clarification.

Despite Russia’s arguments that market forces demand the price increase,
Gazprom is charging significantly less to some ex-Soviet countries. On
Tuesday, the company reached agreement to sell gas to Belarus for $46.68
(about euro37) per 1,000 cubic meters – just 20 percent of what it wants
Ukraine to pay. Belarus is closely allied to Moscow.

The Russia-Ukraine dispute also has raised concerns about gas supplies to
Europe – about half the natural gas consumed in the European Union comes
from Gazprom and most of that is shipped in pipelines that cross Ukraine.

On Tuesday, Ukrainian Prime Minister Yuriy Yekhanurov claimed Ukraine has
the right to take 15 percent of the Europe-bound gas shipments that cross
Ukraine.

Ukrainian companies “have the legal right to take 150 cubic meters of gas
from every 1,000 as a transit fee” under the contract with Gazprom, he said
in comments released by his office.

Sergei Kuprianov, a Gazprom spokesman, called the claim “legally illiterate”
and Khristenko said “there cannot be talk of 15 percent, or 10 percent or 2
percent.”

Ukraine uses almost 80 billion cubic meters (312 billion cubic feet) of gas
annually, receiving 25 billion cubic meters from Russia, and 36 billion
cubic meters from Turkmenistan, pumped via Russia. Ukraine itself produces
some 18 billion cubic meters.

Plachkov said that Ukraine and Turkmenistan have signed a deal on gas
imports, but declined to announce the price. News reports said Yushchenko
will announce prices for the Turkmen gas in his New Year’s address to the
nation. Natural gas is one of the key export commodities for Russia, whose
economy heavily depends on exports of natural resources.

As the price dispute intensified, Ukrainian officials began suggesting that
the country hike the rent it charges Moscow for the Russian Navy’s Black

Sea Fleet facilities in Ukraine. The port in Sevastopol provides the Russian
navy its only convenient access to the Mediterranean.

Russian Defense Minister Sergei Ivanov sharply warned Tuesday that any rent
increase could have “fatal” consequences. But his Ukrainian counterpart
Anatoliy Grytsenko said no rent hike would be made unilaterally. -30-
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========================================================
7. RUSSIA WARNS OF ‘FATAL’ CONSEQUENCES FOR UKRAINE
                           AS GAS PRICE ROW ESCALATES

By Michael Mainville in Moscow, The Independent Online Edition
London, United Kingdom, Wednesday, 28 December 2005

MOSCOW – A dispute between Russia and Ukraine about gas prices has
escalated, with Kiev threatening to tap Russian gas shipments heading for
Europe – and Moscow warning that attempts to raise the rent it pays to
base its Black Sea fleet in a Ukrainian port would have “fatal”
consequences.

The two are locked in a dispute over plans by the state-controlled Russian
gas giant Gazprom to more than quadruple the price it charges Ukraine for
natural gas, from about $50 (£29) per 1,000 cubic metres to $230, in line
with world prices. Gazprom provides one-third of Ukraine’s gas and has
warned it will turn off the taps on Sunday if Kiev refuses.

Ukraine has sought to have the increase phased in over several years and
upped the stakes this month by saying it was considering raising the $98m in
annual rent Moscow pays for the use of its naval base in Sevastopol, on
Ukraine’s southern Crimean peninsula.

The Russian Defence Minister Sergei Ivanov warned yesterday any attempt to
change the terms of Moscow’s lease would threaten agreements recognising
Ukraine’s post-Soviet borders. “The accord on conditions for the presence
of the Russian Black Sea fleet is part of the main Russian-Ukrainian treaty,
the second part of which includes the point on recognition of the
inviolability of state borders ,” he told state television. “To revise those
agreements would be fatal.”

The Ukrainian Prime Minister, Yuriy Yekhanurov, said Ukraine had the
“unquestionable legal right” to take 15 per cent of Russian gas shipments to
Europe that pass through its territory as a transit fee. About 80 per cent
of Gazprom’s European exports pass through Ukraine and the company
supplies about half the European Union’s gas.

Sergei Kuprianov, at Gazprom, said any attempt by Ukraine to siphon off
gas destined for Europe would be regarded as theft. “All responsibility for
shortage of Russian gas supplies to European customers will lie completely
with Ukraine.”

Mr Kuprianov denied claims by Ukraine’s Energy Minister Ivan Plachkov that
a deal had been reached to phase in the price rise. Mr Kuprianov called Mr
Plachkov’s statement “a provocation.” Russia’s Energy Minister Viktor
Khristenko also denied an agreement was in place.

Russian officials insist the gas price rise is financially justified because
it will end Moscow’s long-standing energy subsidies to its former Soviet
satellite. But many Ukrainians see the move as punishment for the country’s
pro-Western course under President Viktor Yushchenko, elected after last
year’s Orange Revolution.

Gazprom has also announced gas price rises for Georgia and Moldova, both
ex-Soviet republics seeking stronger ties with the West, but has extended a
deal with Belarus, which is strongly allied with Russia, that will price
natural gas at $46.68 per 1,000 cubic metres.

Mr Yushchenko’s deputy chief of staff, Anatoly Matviyenko, raised the issue
of the Black Sea fleet this month, saying if Gazprom wanted to charge world
prices for gas, Ukraine “has the right to raise the question about suitable
world prices… for the existence of foreign troops.”

A dispute between Russia and Ukraine about gas prices has escalated, with
Kiev threatening to tap Russian gas shipments heading for Europe – and
Moscow warning that attempts to raise the rent it pays to base its Black Sea
fleet in a Ukrainian port would have “fatal” consequences.

The two are locked in a dispute over plans by the state-controlled Russian
gas giant Gazprom to more than quadruple the price it charges Ukraine for
natural gas, from about $50 (£29) per 1,000 cubic metres to $230, in line
with world prices. Gazprom provides one-third of Ukraine’s gas and has
warned it will turn off the taps on Sunday if Kiev refuses.

Ukraine has sought to have the increase phased in over several years and
upped the stakes this month by saying it was considering raising the $98m
in annual rent Moscow pays for the use of its naval base in Sevastopol, on
Ukraine’s southern Crimean peninsula.

The Russian Defence Minister Sergei Ivanov warned yesterday any attempt to
change the terms of Moscow’s lease would threaten agreements recognising
Ukraine’s post-Soviet borders. “The accord on conditions for the presence
of the Russian Black Sea fleet is part of the main Russian-Ukrainian treaty,
the second part of which includes the point on recognition of the
inviolability of state borders ,” he told state television. “To revise those
agreements would be fatal.”

The Ukrainian Prime Minister, Yuriy Yekhanurov, said Ukraine had the
“unquestionable legal right” to take 15 per cent of Russian gas shipments to
Europe that pass through its territory as a transit fee. About 80 per cent
of Gazprom’s European exports pass through Ukraine and the company
supplies about half the European Union’s gas.

Sergei Kuprianov, at Gazprom, said any attempt by Ukraine to siphon off
gas destined for Europe would be regarded as theft. “All responsibility for
shortage of Russian gas supplies to European customers will lie completely
with Ukraine.”

Mr Kuprianov denied claims by Ukraine’s Energy Minister Ivan Plachkov that
a deal had been reached to phase in the price rise. Mr Kuprianov called Mr
Plachkov’s statement “a provocation.” Russia’s Energy Minister Viktor
Khristenko also denied an agreement was in place.

Russian officials insist the gas price rise is financially justified because
it will end Moscow’s long-standing energy subsidies to its former Soviet
satellite. But many Ukrainians see the move as punishment for the country’s
pro-Western course under President Viktor Yushchenko, elected after last
year’s Orange Revolution.

Gazprom has also announced gas price rises for Georgia and Moldova, both
ex-Soviet republics seeking stronger ties with the West, but has extended a
deal with Belarus, which is strongly allied with Russia, that will price
natural gas at $46.68 per 1,000 cubic metres.

Mr Yushchenko’s deputy chief of staff, Anatoly Matviyenko, raised the issue
of the Black Sea fleet this month, saying if Gazprom wanted to charge world
prices for gas, Ukraine “has the right to raise the question about suitable
world prices… for the existence of foreign troops.”  -30-
——————————————————————————————-
LINK: http://news.independent.co.uk/europe/article335339.ece
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8.      UKRAINE HOPING FOR COMPROMISE WITH GAZPROM
                                          OVER GAS PRICES

AFX Europe (Focus), Moscow, Russia, Monday, Dec 26, 2005

MOSCOW – Ukraine said it hopes for a compromise over gas prices with

Russian state-controlled gas group Gazprom ahead of a Jan 1 deadline.

“Ukraine acknowledged and does acknowledge the need to charge

international prices, but the key issue is the timetable for that,” chief of the
presidential secretariat Oleg Rybachuk said as quoted by ITAR-TASS,
adding that “no country triples its prices overnight.”

Gazprom has threatened to shut off gas supplies to Ukraine at 10 am on Jan

1 if agreement on a new market-based pricing structure is not reached.

In an interview on Russian television, Gazprom deputy chairman Alexander
Medvedev noted late Sunday that the European Union formally recognized
Ukraine as a market economy on Dec 1 and described Kiev’s complaints that it
could not pay world market rates for Russian gas shipments as disingenuous.

Gazprom plans to start charging Ukraine standard market rates for the
natural gas it receives from Russia, abolishing the current barter system
under which Ukraine receives cheap gas in exchange for use of the gas
pipeline system in its territory. (cb-cal/bm/gf/tr) -30-
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9.       GAZPROM TEST LIMITS OF CUSTOMERS’ DEPENDENCE

By Judy Dempsey, International Herald Tribune (IHT)
Published by The New York Times
Neuilly Cedex, France, Monday, Dec 26, 2005

BERLIN – As Gazprom seeks to wean former Soviet states from subsidized
energy, the state-owned Russian company is walking a delicate line between
reaping the benefits of world market prices and pushing its customers toward
diversifying their energy sources so as to reduce their dependence on
Russia.

With the stakes high for Gazprom – 70 percent of its revenues are earned
from the third of its gas sales that go to Europe – some countries are
beginning to seek alternative sources of energy or start long overdue
economic reforms aimed at saving energy and generating renewable energy
resources.

Ukraine is one of those countries seeking ways to reduce its dependence on
Russia. Locked in bitter dispute with Gazprom over its plans to raise the
price of gas from $50 per 1,000 cubic meters to over $220, Ukraine has
publicly suggested that the dispute could precipitate an overhaul of its
energy sector.

Unable to resolve the dispute so far, Gazprom said Monday that it was
prepared to go to the Arbitration Institute of the Stockholm Chamber of
Commerce, one of the world’s leading arbitration institutions. “If need be,
we will go to this court,” a Gazprom spokesman said.

Oleg Rybachuk, chief of staff for Ukraine’s president, Viktor Yushchenko,
said over the weekend that the Russian push for higher prices was giving
Ukraine the incentive to improve its economy.

“However paradoxical it may sound,” Rybachuk said, “the situation is
positive for Ukraine and gives the country a chance, for example, to
strengthen its energy security and introduce energy-saving technologies.”

He acknowledged that such reforms and energy-saving measures could not be
introduced immediately, which is why he repeated Ukraine’s position that it
was willing to pay world market prices for its Russian gas provided the
increase was phased in over a period of two or three years.

But Gazprom kept to its hard line on Monday, saying Ukraine had itself been
avoiding the gradual approach for years. “Ukraine has missed its chance by
not phasing in the prices when it said it would,” a Gazprom spokesman said.
“We still intend to immediately introduce the price increases by Jan. 1.”

Russia and Ukraine have little room to maneuver. Unlike many of the former
Soviet republics that will also pay higher prices for gas, the two countries
are highly interdependent. Russia relies on Ukraine’s transit gas pipeline
to transship Russian gas to Europe, which imports a third of its energy from
Russia. And Ukraine, despite talk of diversification, imports 75 percent of
its gas from Russia.

There is a great deal of prestige and money riding on this dispute. Russia
is set to earn an extra $3.8 billion a year by increasing its energy prices
to Ukraine, according to the Center for Eastern Studies in Warsaw.

Gazprom’s gains could be dented if Ukraine raises transit charges for
Russian gas supplies to Europe, as it has threatened to do. Ukraine charges
$1.09 per 1,000 cubic meters per 100 kilometers. According to Naftogaz,
Ukraine’s state-owned operator of the transit network, it annually sends 170
billion cubic meters to Western and Eastern Europe.

Claudia Kemfert, energy expert at the German Institute for Economic
Research, said it was understandable that Russia wanted Ukraine to pay world
market prices for its gas. But she questioned Gazprom’s tactics.

“If Gazprom cuts off its gas supplies to Ukraine, it would be very damaging
for Russia,” Kemfert said. “It would show that Russia is using Gazprom not
just as its powerful economic tool but also as a powerful political tool as
well.”

But Alexander Medvedev, deputy chairman of Gazprom, said in a recent
interview that the company was simply exercising market conditions by
demanding that Ukraine pay higher gas prices. “The European Union this month
granted Ukraine market economy status,” he said. “That means it has to pay
market prices for its energy.”

Yet Gazprom has announced that starting on Jan. 1 it will raise gas prices
across the former Soviet empire, from the Baltic States in the north to
Moldova and Georgia in the south. In most cases, the increases do not match
world market prices; nor are they all the same.

For example, Ukraine is being asked to accept the greatest price increase,
from $50 per 1,000 cubic meters to over $220 per 1,000 cubic meters.

Moldova, whose government has shifted its foreign policy away from a
pro-Russian stance to one seeking closer ties with the EU and NATO, will
have its gas prices increased from $70 to $150-$160.

The Baltic states, which joined the European Union in May 2004, will next
month pay $120 instead of $80.

Armenia, which is trying to reduce its dependence on Russian energy by
building a gas pipeline with Iran that should be completed in 2006, will pay
$110 for its Russian gas instead of $56.

Georgia, which has blocked attempts by Russia to buy a stake in its gas
pipeline, will pay $110, an increase of 70 percent.

The only country that will face no immediate price increase will be Belarus,
Russia’s small western neighbor, which will continue to pay $47.

When Medvedev was asked why, if Gazprom believed in applying market rules
for countries that bought its gas, Ukraine was being charged the most, other
countries were being charged less and Belarus was exempt, he replied: “It’s
because Gazprom owns the transit pipeline across Belarus.”

Gazprom, however, holds only a 32 percent stake in the pipeline, and
President Alexander Lukashenko of Belarus has repeatedly refused to sell
Russia a majority stake in that pipeline, which also ships gas to European
markets.

Katarzyna Pelczynska-Nalecz, energy analyst at the Center for Eastern
Studies in Warsaw, said the aim of the gas increases was to reduce the
difference between gas prices in Russia’s former empire and the EU.

However, she said, “the economically unclear mechanism for establishing

the different prices suggest that while taking measures to increase the
profitability of the gas it supplies, Russia wants to continue using gas
prices as a tool of political pressure.”
                                RUSSNEFT HEAD OWNS 70%
Mikhail Gutseriev, president of Russneft, a midsize Russian oil company,
said on Monday that he controlled 70 percent of the company, Reuters
reported from Moscow. “I own a controlling stake of around 70 percent,” he
said at a news conference. “The rest belongs to my relatives.”

Gutseriev built up Russneft, whose oil daily output is 280,000 barrels, with
the help of Glencore, a Swiss-based oil trader, in just three years and aims
to push production to about 500,000 barrels a day by the end of 2006 on the
back of new acquisitions.   -30-
———————————————————————————————
LINK: http://www.iht.com/articles/2005/12/26/business/gazprom.php
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10.              “UKRAINE MUST STAND UP TO BLACKMAIL”

ANALYSIS & COMMENTARY: By Oleksandr Paily
Ukrayinska Pravda, Kyiv, Ukraine, Wed, December 21, 2005

When president Yushchenko makes an appeal not to make gas supply a
political issue, there is no doubt he has common sense. This is the only
way to cool down and create optimal conditions for the negotiations to
go ahead.

However this matter had become a political issue long ago. In August “RIA
Novosti”, a Russian pro-government information agency, put a lot of effort
into publicising a leak from the Foreign Office, in which the Russian
minister claims that Russia is commencing to use the energy-related linchpin
to regain domination in Eastern Europe.

This policy is being put into action as Russia asks a new price for gas from
the 1st of January 2006 at $160 per thousand cubic metres in the form of an
ultimatum, and then the sum of $230 is mentioned.

Ukraine has an agreement with Russia which sets the price for gas at $50
until 2009. Russia demanding Ukraine paying the new price immediately is an
equivalent of Ukraine is demanding that the Black Sea Fleet leave Sevastopol
before the 1st of January 2006 regardless of any technical obstacles related
to such a move.

Certain rules apply when such an agreement becomes subject to review. For
instance, Georgia demanded an immediate withdrawal of the Russian military
bases from their territory, however after the protracted negotiations the
parties had agreed on a 3 year term.

That is why when Russia demands Ukraine to pay twice the price it is
charging the Baltic states, that is solely due to political considerations.
The Baltic states are protected by NATO and EU and Russia had lost the
main means of manipulating there.

Russia is provoked by the Ukrainian temporary vulnerability which enables it
to subject Ukraine to various experiments as it is not a member of the clubs
mentioned above.

Russian historical tendency to breach agreements represents an issue in any
negotiations with this country. German Chancellor Bismarck once said that
all agreements signed with Russia are not worth the paper on which they are
written.

(Moscow breached the non-aggression pact with Poland dated 1936
(breached in 1939), Romania in 1934 (breached in 1940), the agreement
with Lithuania, Latvia and Estonia annexed by the USSR in 1940 and the
agreement with Afghanistan in 1976 (breached in 1979).

Ukrainians know as well, that the Treaty of Pereyaslav signed by Bogdan
Khmelnitsky was breached two years later when Moscow established a
truce with Warsaw.

Russia recognised the territorial integrity of the Ukraine according to the
agreement between the two states, however in November 2003 Russia came
up with a factual territorial claim, questioning Cosa Tuzla island being a
Ukrainian territory. In the view of all these historical cataclysms Russia’s
unwillingness to comply with the agreements on gas prices looks a mere
trifle.

Modest Colerov, who is currently responsible for the Kremlin’s policies
regarding CIS states, and is fighting “orange revolutions” on post soviet
territories, once said that Russia “has got no moral reservations for
re-establishing control in the Baltic states by military intrusion”.

Moral reservations is something very alien for Russian politicians. Under
such circumstances moral preponderance or the opponent being right are
not worth a penny.

That is why in relationships with Russia, and this is not restricted to gas
only, one has to hope for the best and expect the worst. The gas blackmail
and Putin’s remarks about Bolivar (a horse from O. Henry’s story), on whose
back 2 can’t ride, are of the same origin as the porno starring Tymochenko
and Russian mass media spreading the rumours that Yushchenko’s face
condition was caused by an attempt of rejuvenation.

That is why to solve the current problems only one little thing is required.
The Ukraine has to stand up to the pressure. Zbignev Bzejinsky once
commented aptly “Russians are very smart and they can’t stand losers”.

All reserves must be utilised: energy saving, increasing the amount of coal
used by the economy, resuscitation of the old coal mines (Donetsk region
will definitely approve!) and oil and gas fields, and putting the price up
for gas transit for Russia.

If the Ukraine sets the price for Russian gas transit at $10 for
transportation per thousand cubic meters for 100 km, Ukrainian budget
receives over $7 billion as the result which constitutes one third of its
total.

It is an option to get greedy and set the price at $20 dollars. Russia who
is a monopolist demanding such gas prices, should face the same monopolist
and pay prices set by the Ukrainian side.

Obviously in such case the Ukraine loses Turkmenian gas, and this is going
to be a shock for the economy. However the Ukraine, which during past
decades has survived Chernobyl and Kuchma, can cope with it. Especially
with such finances.

The president and the government have taken the right political stand
regarding the gas issue today. The Ukrainian position is levelled and not
hysterical.

Neither president Yushchenko, nor Prime Minister Yekhanurov has made any
rigid statements, as opposed to the Russian side. At the same time the
Ukraine keeps on producing some trumps from the sleeve from time to time,
which should help Russia to cool down.

If Moscow has more incentive not to cause any damage for Russia, than to
damage the Ukraine, then in theory there is a chance it can stay in tune
with the situation when the trumps keep appearing.

Amidst these trumps there is appropriating Russian gas as smuggled
commodity after it crosses the Ukrainian border illegally.

And there are as well some other ones, for instance the hints that there
will be no cooperation in the areas of critical importance for Russian
defence, Americans possibly getting access to the missile tracking systems
in Sevastopol and Mukachevo, and the increase in payment for the Black
Sea Fleet stationed on the Ukrainian territories as well.

It is possible that such politics will work, and Russian government will
“sabre rattle” for a little bit longer and then sign a compromise agreement.

However such developments are not guaranteed. It is not due to the
negotiators who represent the Ukrainian side, but it is Russia’s willingness
to punish the Ukraine because we “dared” to choose our own way and to
elect our own government independently. Moscow openly admits such an
attitude.

Under such circumstances it does not matter how brilliant the negotiator is,
even if he can speak not only Russian with no interpreter, but hindi and
urdu as well.

The main argument in relationship between the Ukraine and Russia is our
present trumps. And the strength and unity the country can show. However,
there are some problems with the latter. A great number of politicians, even
from the so called “orange camp”, are criticising the way the government
moves in the negotiations.

The negotiations have not even reached their final stage yet, and the cause
of crisis does not allow it to keep the government responsible. It will not
pay to betray the country’s strategic interests just for “a tiny sniff” of
gas.

However Russian politicians turned out to be much more mature than the
Ukrainian ones. Even if they do submit their government foreign policies to
criticism, they do it quietly, not to display the weaknesses and thus help
the opponent.

In Ukraine this criticism, which is highly inappropriate under the current
circumstances, causes damage to the national interests and looks as if it is
ingratiating to foreigners. That is why such critics have to understand that
united we stand and divided we fall and shut up.

Fortunately Ukrainian society is much more patriotic than the Ukrainian
politicians. The majority of the latter is a product of long lasting anti
Ukrainian selection.

Gas matters are now being discussed in the kitchens of Ukrainian households
which is a great power. Prior to the Orange revolution the author wrote for
Ukrainskaya Pravda, that Ukrainians, who are stubborn by nature, are not
going to give in to pressure exerted by foreigners and would elect whoever
they see fit.

However, the foreigners found it hard to believe. If now the general public
receives the information that it was Yanukovich himself who asked Putin to
stop gas supplies to the Ukraine (and the forecasts for “Big Problems” in
that area were voiced by Yanukovich in the beginning of summer, when he
toured Moscow suburbs and visited Kremlin), his political allies will not
get even 12%.

Thus, this is the way, from crisis to crisis, Ukrainian political nation is
maturing. During the Tuzla conflict, a Russian speaking local “granddad”
with berdanka (9.2 calibre gun used by Russian in hunting big animals
including manhunt) was running along the sea coast in Crimea ready to
combat the aggressor.

During the Orange revolution there were hundreds of thousands of such
“granddads”. And they grow in numbers.  -30-
————————————————————————————————
Original text in Ukrainian. Translated by Olga Semikhova.
Contact: ukrpravda@gmail.com
LINK: http://www.pravda.com.ua/en/news/2005/12/21/4940.htm
——————————————————————————————-
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========================================================

   Be A Vice-President In Charge Of The Continuing Orange Revolution 
========================================================
11.  WRITE TO VLADIMIR PUTIN: TELL HIM WHAT YOU THINK
                          ABOUT BLACKMAIL WITH GAS

Ukrayinska Pravda, Kyiv, Ukraine, Wednesday, December 21, 2005

KYIV – The Jihad, sponsored by Russian government against post-
revolutionary Ukraine, deserves a proper response. “Ukrayinska Pravda”
calls upon all not to hold back any emotions, feelings and lexical
expressions when writing directly to the main ideologist of the “Gas War”
– Vladimir Vladimirovich Putin.

The plan of action is simple. To contact Mr. Putin and let him know your
thoughts, this can be done in a number of ways.

[1] First method – postal delivery. The address consists of three words:
Russia, Moscow, Kremlin. Zip code: 103 132.
To whom: President of Russia Vladimir Putin
Example: Vladimir Putin  Kremlin  Moscow  Russia 103132
An alternative presidential address as provided on the official website is
Russia, “4, Staraya Square, Moscow, 103132.”

[2] Second method – telegram. Same address – Russia, Moscow, Kremlin
zip code 103 132.

[3] Third method and probably most accessible is Email. Mr. Putin may be
contacted by using an online form located at Kremlin’s website. Access the
form by clicking here.

[4] And for true zealots, there is always the telephone. In our opinion, the
best way to place a phone call to Kremlin is by contacting the head of a
special directorate in the Presidential Executive Office – the Presidential
Directorate for Correspondence from Citizens. The name of this person is
Mironov Mikhail Olekseyevich .

The telephone number (if calling from Ukraine): +8 10 7 095 206 46 36. If
calling from elsewhere, consult local interstate dialing guidelines. The
Kremlin number is then 7 (country code) 095 (city code; the zero may
have to be removed to place a call) followed by 206 46 36.

It is worth noting that only a mass public campaign of Ukrainians and
sympathizers can make this action a success. Additionally, you ought to
remember that money spent on stamps, telegrams, and long-distance calls
will be going into the budget of Ukraine.

Perhaps in this way we will fill the treasury for the new increased prices
of Russian natural gas? -30-
——————————————————————————————–
Contact: ukrpravda@gmail.com
LINK: http://www.pravda.com.ua/en/news/2005/12/21/4941.htm
——————————————————————————————-
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12.         GAS PRICE HIKE A BITTER BUT NEEDED PILL FOR
                          UKRAINE’S ECONOMY EXPERTS SAY

Agence France Presse (AFP), Kiev, Ukraine, Sun, Dec 25, 2005

KIEV – Tense talks with Russia over natural gas supplies are almost certain
to result in higher prices for Ukraine, a hike that analysts say would be a
bitter but necessary pill for the ex-Soviet nation’s notoriously
energy-inefficient economy.

While the two sides have yet to agree on the price at which Russia will
provide Ukraine with gas in 2006, it is clear that it will be a significant
jump from the below-market rates that Ukraine gets under current barter
arrangements. “There is no way to escape rising prices on imported energy,”
the Expert business magazine wrote recently.

An increase in the price of Russian gas, which accounts for about one third
of Ukraine’s annual energy needs, will strike a blow to the nation’s economy
that is powered by industrial exports and is already under pressure because
of falling world prices on metals, one of Ukraine main exports.

“One of Ukraine’s largest natural comparative advantages has been access to
cheap energy and obviously a portion of that would be taken away if gas
prices were to increase to global levels,” Roland Nash, head of research at
the Renaissance Capital brokerage, told AFP.

But more expensive gas will also speed up long-overdue reforms in industry.
“At low prices Ukraine has not had sufficient incentive to reduce energy
intensity and vulnerability to energy supplies,” the World Bank said in an
year-end note on Ukraine.

“The existence of subsidized energy has made it possible to defer these
reforms,” Paul Bermingham, the bank’s director for Ukraine, told reporters.
At present, “the energy intensity of use in Ukraine is perhaps the highest
in the region,” the bank said. “For every dollar of GDP, Ukraine consumes
four times the amount of energy than in Germany.”

Much of the waste lies in the industrial sector, where equipment dates back
to the Soviet era. “Conditions of facilities are such… that 70 percent of
energy (received) is lost,” said Dejan Ostojic, a senior energy specialist
at the bank.

President Viktor Yushchenko has also said that higher gas prices will force
industry to become more efficient and competitive, with the government
estimating that industry can cut its annual use of gas by two-thirds by
modernizing equipment and switching to alternative forms of fuel. “The
faster we liberalize the price of gas, the faster we will become
competitive,” Yushchenko said recently.

“Unfortunately, Ukraine’s industrial giants have gotten used to paying next
to nothing for (energy)… and therefore have not invested funds toward
modernizing equipment,” he said.

Because those changes will take time, Ukraine’s government and industry
wants a world market price for Russian gas be phased in over two to three
years. “In the short-term, it will be impossible to neutralize the negative
effect” from a hike in the price of gas, said Olexiy Belov, general director
of Azovstal, a steel concern.

According to World Bank estimates, a doubling of current gas prices to 100
dollars (84 euros) per 1,000 cubic meters (35,316 cubic feet) could slice
four percent off gross domestic product (GDP) in 2006 and three percent the
following year.

“A sudden jump from… low energy prices to world energy prices can cause
quite a violent squeeze on the economy,” Nash said.

Meanwhile Russia’s Gazprom monopoly wants to more than quadruple the
price of gas it ships to the Ukrainian market starting on January 1 and has
threatened to cut supplies to Kiev altogether if new terms aren’t agreed by
the end of the year.

While Yushchenko has rejected the threat as “blackmail,” Gazprom insists it
is ready to act on the warning. “If there isn’t a (new) contract, there
won’t be deliveries,” Alexander Medvedev, the chief of Gazprom’s export

arm, told reporters in Moscow on Friday.  -30-
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13.                                      “RUSSIA HAS WON”

ANALYSIS & COMMENTARY: by Igor Luzenko,
‘Power of the Money’ for Ukrayinska Pravda (UP)
Kyiv, Ukraine, Saturday, December 24, 2005

Kremlin did not manage to raise the gas prices yet (and it is unlikely to
gain any substantial success there), but Putin’s team can already celebrate
victory. They achieved in harming Ukraine and notably without any losses
from their side. It was enough to threaten about raising the gas prices and
the results of this were not delayed.

Now it can be stated, that the majority of Ukrainians believe Russia capable
of making a ‘Gas massacre’ on Ukraine and that our country is completely
defenseless in the energy field etc.

Now insecurity rains in the society. Business is the first to suffer from
this insecurity, – for what gas price should it prepare in the coming year?
How will (if at all) the main energy dependent sectors of Ukrainian
economy work? What will be the supply and what will be the demand?

Entrepreneurs need to have answers to these questions otherwise they
will cut their activity. That is probably what they are doing now.

The only reason for this negative tendency is that, inside the whole country
nobody managed to relay the true state of affaires to the public.

1. It is untrue that Ukraine buys gas for $50 from Russia! The process of
buying is simply non – existent! There is a treaty, that states that for
transit of Russian gas in the European direction Ukraine receives around
2.195% of the gas for every 100km of the way. That’s all. All of the
numerical money values in the contract are notional.

2. Ukraine is not totally dependent on Russian gas. In the last few years
the ‘blue fuel’ from Russia is only one third of the total Ukrainian
consumption! For example, 17 billion of cubic meters of gas, that Ukraine
hopes to receive next year as payment for transit from Russia – is
approximately 25% of the total consumption. Around 20 billion cubic meters
of gas is the planned extraction of the Ukrainian gas. Everything else comes
from Turkmenistan, that by the way, is unable to sell its gas to Russia even
for ‘non-market’ $60.

3. Russia cannot stop gas deliveries to Ukraine. First of all, if she does
it, ‘Gazprom’ will suffer large penalties from its EU partners. Secondly,
how can Russia plan to transport gas without paying for it, i.e. – without
giving those 2.2% for every 100km to Ukraine? This is impossible on legal,
physical and logical basis – why ‘Naftogaz’ should ever consider
transporting gas for free?

4. Until 2009 a contract exists between Russia and the Ukraine, where
conditions for delivery of gas to the Ukraine are stated.

None of the sides can change this contract unilaterally! Even if, lets say 5
years ago, Ukraine arranged to buy the gas for $20 until 2009, legally
Russia would be unable to terminate the contract. Even if she thought
$2000 to be the market price. This should have been clearly explained to
everyone – Ukrainians are not stupid, they do understand what a written
contract is, that cannot be influenced by any future events.

5. After almost three month of Ukraine being harassed by this ‘market price’
the President at last spoke of defining what it is.

Where were you before Mr. Yushchenko? Where were you, when Russian
media spread half – lies and outright lies as our businessmen were left
ignorant of what will happen to the gas price with which they needed to plan

for the year ahead? Where were you Mr. Ivchenko, Yekhanurov and Plachkov?

Will the Ukrainian authorities make the conclusion that they need to govern
and not to dream?

Will the president at last understand that multiplication of foreign
advisors from Washington and Brussels will not make Ukraine a country,
capable to defend her interests on her territory, even in a favorable
situation?

Russia has won at least the first round in the gas war. What will happen
next?  -30-
——————————————————————————————–
Article translated by Vladyslav Kostyuk. Contact: ukrpravda@gmail.com
LINK: http://www.pravda.com.ua/en/news/2005/12/24/4944.htm
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14.                             “WHAT FRIENDS ARE FOR”
                   The Price of the question is $230 per 1000 cu. m.

COMMENTARY: by Mikhail Zygar
Kommersant, Moscow, Russia , Friday, Dec. 23, 2005

A joke has been going around Kiev lately: Vladimir Putin has congratulated
Viktor Yanukovich on his first year in office. In Ukraine, they still
remember the comic situation when the Russian authorities stubbornly
refused to believe in the Orange victory.

They remember that embarrassment in the Kremlin too. But Moscow spent
a year acting as tough that didn’t happen. Russian President Vladimir Putin
received Ukrainian President Viktor Yushchenko, shook his hand and never
got his name mixed up. Newscasters on the state television stations
unsmilingly called him “the president of Ukraine” and not the “leader of the
Orange junta.”

At some point, it seemed that Yushchenko had never been poisoned and
Russian television had never shown massive, hysterical support for Viktor
Yanukovich, that Yanukovich did not visit Putin at his residence in
Novo-Ogarevo on his birthday and did not march in a parade with him on
Kreshchatik. The Russian defeat was so cutting that, it seems, they decided
to forget about it forever.

But a year went by and everything fell through. Or rather came back. The
Kremlin got a chance to get even. Parliamentary elections are coming up in
the Ukraine and Russia’s beloved Viktor Yanukovich is running again. His
Party of the Regions is in the lead. It can form a coalition with
pro-Russian forces, pick the prime minister and everything in Ukraine will
be the same as it ever was, just as if there never was a Maidan. But, as
usual, Yanukovich needed a little help. Just a little. And, at the same
time, they could strangle the Orange bunch – or rather gas them.

Maybe the Kremlin hasn’t understood that the outcome of their gas attack
will again be exactly the opposite of what they hoped for. Yanukovich will
be its biggest victim. Ukrainian voters, seeing how Gazprom is rudely and
cruelly pressuring Ukraine, will surely vote Orange, even if they didn’t
before. After such a hit from Russia, Ukrainian will rally around
Yushchenko, and not love Moscow and Yanukovich more.

This time Gazprom has embarrassment waiting for it. The militantly price of
$230 per 1000 cu. m. of natural gas is unacceptable for Ukraine and will
never be acceptable. That means that Gazprom will have to lower the price
sooner or later. And then it will have to act as if nothing ever happened,
just as Putin did after congratulating Yanukovich on his victory.

The current gas war is a personal duel between Viktor Yushchenko and
Vladimir Putin, their second. Yushchenko won a year ago. If he wins again,
he will look like Superman – the man who beat Putin twice and lived. And
Putin will look like the man who picked the same losing fight two years in a
row.

Too bad about Viktor Yanukovich. He is the butt of jokes again. Russia is
willing to use its gas for his sake. It’s a Ukrainian saying. What gives you
life will kill you too.  -30-
——————————————————————————————–
LINK: http://www.kommersant.com/page.asp?idr=527&id=638078
——————————————————————————————-
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15.              THE UNKNOWN VALUES IN GAS EQUATION

ANALYSIS & COMMENTARY: By Lidiya Skurativska
Ukrayinska Pravda, Kyiv, Ukraine, Sat, December 17, 2005

On Wednesday December 14 an event occurred which does not leave much
space for doubts that the “gas blackmail” exercised by Russia has got
nothing to do with the gas itself. The “Gasprom” stand with regard to the
price of gas had undergone a miraculous change. The price that the Russian
monopolist is demanding for its product has gone up from $160 per 1000
cubic meters to $230.

This means that a fair price is absolutely out of the question if to
consider the Russian motivation in this matter. Simply because prices for
such a commodity never undergo rapid changes, and no one is known to
change a stand in business negotiations in such a manner.

That means that the gas pressure exerted on Ukraine is a part of the major
battle that is going on behind the curtains, which is a battle for the world
domination.

The Russian side is acting out of despair, and is trying to save the
situation. One can only guess what Russia is aiming to achieve, and against
whom the effort is directed. If to consider the possible gains for Russia,
Ukraine has to face some rather unpleasant conclusions.
                                            PLAYING FOOL
On 14 December 2005, 20 days before the New Year, Gazprom management has
decided to reject a “compromising” price for gas for Ukraine in 2006 at $160
per thousand cubic meters and now is willing to charge the “market” price
for $220-230 per thousand cubic meters. This indicates an end of the interim
period for Ukraine.

“As the negotiations were in progress, the prices had been rising in Europe.
Today it is obvious, that Ukraine has missed the moment when the market
price constituted $160 for thousand cubic meters. If to take into account
the dynamics of growth for the energy resources in the world markets, with
regards to Ukraine.

Commencing in 2006 the generally accepted formula is going to be used for
all transactions, which would be based on the market conditions and the real
market prices for oil based products”, – Olexandr Medvedev, the Deputy of
Gazprom Managing Director, threatens according to the reports given by the
mass media representatives.

Mr Medvedev could face some tough questions to answer after making

this statement.

[1] First of all, there is a question of which methods should be used to
determine a so called “market” price on the market, where there is no such
price by definition. The gas market is a monopoly, and gas transportation is
a monopoly as well. Consequently there is no free market where sellers and
buyers may interact, have free access to the commodity and thus determine
the price. In Germany the manufacturers pay 200 Euros for the gas they
consume, but the population pays 500 Euros (that is in the same country).

What is a market price for gas? One more example – December 14, 2005 at
three o’clock 1 thousand cubic meters on the New York Stock Exchange
(almost an ideal market) costs 14,60 per 1000 cubic feet, so more than 157
for 1000 cubic meters. This means less than 230.

[2] Secondly, Gazprom has rejected an offer made by Turkmenistan to buy
at a “market” price of 60 dollars. In other words, Gazprom is certain that
the market price is less than 60 dollars. If to take into account
transportation, the market price for Ukraine defined by the actual
activities, not by the statements made by Gazprom, must be nearing $80-90.

Please pay attention, that the actions are a much more powerful signal for
the market then any claims. So who are the spectators on the 230-dollar
show?

[3] Thirdly, no one changes their position so promptly and so insolently in
business negotiations, no reputable company will ever do that. This is more
like the methods known as “the counter is working” used by racketeers in the
beginning of the 90’s, when they made the victims pay using the following
system: today you own us $100, tomorrow $200, the day after tomorrow $300.
This position is unmotivated.

Had Ukraine accepted the Russian proposal and allowed the unilateral breach
of the contract, Russia would have resorted to the same means claiming that
in a few months’ time the prices would have gone up again and a new contract
has to be written to supply gas at higher cost.

There are plenty of examples which demonstrate the artificial radicalism of
Russian position, for instance, the arguments related to the increase in oil
prices despite of the present tendency for these price to go down, but,
perhaps, the Gazprom representatives are completely unaware of this fact.

However this is not so important. The most important is that Gazprom has
received an order to pressurize until the maximum is reached, and to make a
harsh proposal.

The aim of such tactics is far not the Gazprom’s income growth at the
Ukrainian expense. The aim is clearly not limited to the gas sphere. At
least it is more significant than the price pressure Ukraine has been
submitted to.
                                   A HIDDEN THREAT
There are two trivial reasons on which Russia’s hysteria is based.

[1] The elections is an obvious one. To display the major tension between
the brotherly nations (that is how Russians and Ukrainians were referred to
earlier), to accuse the orange powers in escalating hostility. To show how
the opposition diplomacy such as Andrei Klyuev’s and Viktor Yanukovich’s
voyages to Moscow release the tension, because those famous “hodoki”
(walkers) are being listened to.

It is quite possible that the gas claims are going to be dropped
triumphantly at the request of some Party of Regions or to arrange some
other kind of a political theatre. However nothing is as simple as that.

In reality, to make enemies not only in the West, but in the East, which is
highly reliant on gas, would mean to create more enemies than friends. Such
Russian behaviour is “not by the book” (racketeer term meaning “not
acceptable”) for Donetsk representatives, who would be the first on the list
of those who will suffer from gas prices.

That is why strategically the gas manipulation turns out to be very
expensive and in the political sense as well, not to mention the enormous
damage to the economy. That is why this explanation of the Russian
motivation is not a hypothesis that is likely to give answers to all
questions.

[2] The second motive is the background for North European pipeline (NEP)
to be built. NEP is going to be laid on the bottom of Baltic see from
Vologda region to the German coast and possibly further.

To jog the memory, its capacity -20 billion cubic meters of gas a year with
view of expansion up to 55 billion during first few years of exploitation.
For the comparison, the Ukrainian gas transport system capacity is
approximately 140 billion cubic meters, and in reality it is not working at
its full capacity, it is transporting 110 cubic meters a year.

This is not the only reason this joint Russian-German project does not look
very promising from the economic feasibility perspective in the middle term.

[1] The construction costs for NEP are quite substantial even now – up to
5-6 billion dollars. It is going to increase in the years to come.

[2] Secondly, the possibility to obtain some economic gains from this
project is rather remote. In the absence of large gas storage facilities,
this project can’t be successful. Only the Ukrainian gas transportation
system has such facilities, they have to be built in the north. How much it
is going to cost is not clear at the moment, but the hundreds of millions
figure is looming.

[3] Finally, there are many political issues the project will face which
means some additional construction costs.

Here is an obvious conclusion. The Russian hyperactivity regarding the
Ukrainian gas issue is explained by the desire to create an alternative
route to Europe, which is NEP. Under such circumstances any position, does
not matter how hopeless it may seem, will do, and even more bloated prices
could prove to be useful, because they show what really could be done to the
damned Ukrainians if the NEP project goes ahead.

Until then the “Naftogaz Ukraine’s” monopoly for fuel transportation to
Europe does not give the opportunity for all of the wishes of an “all
embracing Russian soul” to become true.

This hypothesis has the right to exist. However Russians in their mass media
are not promoting the topic of importance of NEP as a means of exerting
pressure on Ukraine. Moreover, NEP is going to be built, does not matter
what the circumstances are, that is why the “slaughtering” of Ukraine does
not make much sense to Gazprom.

The key to understanding the harshness of the Russians lays in the
manifestation of despair. Such a struggle is rooted in the fear of losing
the neighbouring ally forever. And the question of Ukraine’s independency is
not the major consideration here.

Russians are less scared of such developments because then they still can
strike a deal with Ukrainian leaders. They have had a hunch that Ukraine is
being influenced more and more by the USA which is the main geopolitical
adversary of German-Russian alliance.

For Russia it is evident that there is a high likelihood of both gas and
military agreements being denounced after the elections. This time the move
is going to originate in Ukraine. Gazprom is going to have restricted access
to the markets in Eastern and Southern Europe – this area will be dominated
by Norwegian-American joint stock ventures.

The Russian military bases in Crimea are going to be at least neutralised by
the NATO presence. Russian oil corporations are going to be ousted from
Ukraine – some progress have been achieved by the American investors
building an oil refinery in Brody.

The Odessa-Brody project is advancing without any extra efforts on behalf of
the Ukrainian authorities. The necessary agreements with the Caspian region
representatives as well as with Azerbaijan and Slovakia in Eastern Europe
have been reached.

The presence of the Russian geopolitical adversaries in Ukraine is not so
noticeable just yet, and their influence is not obvious. But the reaction of
the Russian side (the country where the secret services are much more
informed than any ordinary Ukrainian citizen) can only make it clearer that
yet one more time the Ukrainian nation as well our northern neighbour is
being ruled by the government that outlines the country’s course secretly
and without people’s approval.

Thus, it is not the course itself which is a problem, but there are two
unpleasant things happening. First one is the secrecy surrounding the
decision making process, the second one is relying on the foreign forces
that are alien. This does not agree with the main goal the new government
has set out to achieve which is to give more influence to the people that
inhabit the country.   -30-
—————————————————————————————-
Original text in Ukrainian. Translated by Olga Semikhova
Contact: ukrpravda@gmail.com
TEXT: http://www.pravda.com.ua/en/news/2005/12/17/4931.htm
——————————————————————————————-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
          Power Corrupts and Absolute Power Corrupts Absolutely.
========================================================
16.    REVIEW OF UKRAINE BASE LEASE ‘FATAL’ RUSSIA SAYS

 
REUTERS, Moscow, Russia, Wed, December 28, 2005

MOSCOW – President Vladimir Putin’s defence minister warned a defiant

Kiev on Tuesday that attempts to review the status of a key Russian naval
base in Ukraine could reignite a potentially dangerous border row.

Ukrainian President Viktor Yushchenko, who is resisting Russia’s demand for
a nearly five-fold increase in gas prices in 2006, has hinted Ukraine could
hit back by reconsidering the terms of leasing the Sevastopol base in the
Crimean peninsula.

“The agreement on the Black Sea fleet base is one part of a bilateral
treaty, the second part of which contains recognition of mutual borders,”
Sergei Ivanov said in televised comments. “Trying to revise the treaty would
be fatal.”

The 1997 pact gave new legal status to the historical home base of the Black
Sea fleet, which Russia inherited from the Soviet Union, and ruled out
Moscow’s territorial claims to Ukraine.

After the Soviet Union fell apart in 1991, Russian nationalists have staged
an aggressive campaign to take back Crimea, handed over to Ukraine in a
symbolic gesture by Soviet leader Nikita Khrushchev in the 1950s.

Ukrainian nationalists, for their part, have demanded that Russia withdraw
the Black Sea fleet from Sevastopol, where it has been based since the 18th
century.

But the pact, under which Russia leases the Sevastopol base until 2017 for
an annual fee of $98 million, came under fresh attack after Russia’s
monopolist Gazprom demanded that Ukraine pay $230 per 1,000 cubic

meters of gas, up from this year’s US$50.
Yushchenko, looking for ways to compensate for losses from the gas price
hike which Kiev sees as Moscow’s punishment for its pro-Western policies,
suggested last week that Ukraine could revisit the price of the Sevastopol
base lease.

Some other Ukrainian officials have questioned the status of the base and
suggested that the whole treaty should be reviewed.

But Ukrainian Defence Minister Anatoly Hrytsenko moved to ease Russian
concerns. “Ukraine is not going to undertake any unilateral actions
concerning Russia’s Black Sea Fleet,” Itar-Tass news agency quoted him
as saying in reply to Ivanov’s remarks.

In the middle of the row, Moscow has sent a senior envoy to the Crimea to
hold consultations with influential pro-Russian public groups there. -30-

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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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17. UKRAINE, RUSSIA GO TO BRINK OVER HUGE GAS PRICE RISE
                

Tom Parfitt in Moscow, The Guardian
London, United Kingdom, Tuesday, December 27, 2005

MOSCOW – Russia and Ukraine are on the brink of a political crisis over
gas prices that symbolises the widening gulf between the two former Soviet
countries.

The state-controlled Russian gas monopoly, Gazprom, is threatening to cut
off flows on January 1 if Ukraine does not agree to pay quadrupled prices
for the energy that comprises a third of its needs.

Ukraine currently buys Russian gas for its homes and factories at a heavily
subsidised $50 (£29) per 1,000 cubic metres but a disgruntled Moscow
wants to raise the cost to $230, in line with world prices.

Kiev has retaliated by threatening to increase tariffs for gas transit to
western Europe and raise the rent paid by the Russian navy to keep its Black
Sea fleet in the Ukrainian port of Sevastopol.

The dispute is just one of a number of disagreements between the two
countries that have hardened since Ukraine’s “orange revolution” wrenched it
from Moscow’s influence and set it on a course to European integration last
winter.

Observers say the Russian president, Vladimir Putin, is flexing his muscles
as his country increasingly adopts the role of a “natural resources
superpower” that conducts foreign policy though control of energy. Both have
promised to do their utmost to halt any disruption of gas supplies to Europe
through Ukrainian pipelines.

However, at the weekend Gazprom staged an ostentatious practice run for
turning off the taps that provide supplies to Ukraine itself.

In a television interview, the company’s deputy chairman, Alexander
Medvedev, said it was prepared to go to the international arbitration court
in Stockholm if Kiev resorted to siphoning off gas.

“Eighty percent of our exports pass through Ukraine,” he said. “Apparently
there is some blackmail, or pirate-like behaviour on the part of our
Ukrainian colleagues. However we live in the civilised world, not the
jungle, so I hope that reason will prevail.”

After weeks of on-off talks, negotiations over the price were conducted in
Moscow yesterday but no resolution was found. The Kremlin argues the new
price is purely economic and its neighbour no longer has a right to demand
cheap energy supplies for steelmaking and other industries that compete with
Russia’s own.

Ukraine’s Naftogaz said yesterday that it produced enough gas to continue
supplying homes, but factories in the east could be hit hard. Last week
President Viktor Yushchenko criticised Gazprom for its “irresponsible
approach”, calling for a gradual transition to higher prices.

The Russian foreign minister, Sergei Lavrov, denied yesterday that raising
the fee was a political act. But recent deals with other former Soviet
countries such as Belarus have kept prices low, raising suspicions that
Ukraine is being punished for its push to join the EU and Nato.

Alexander Lebedev, a Russian MP critical of the Kremlin’s hardline stance,
said brinkmanship over prices risked angering Russia’s western European
partners ahead of it taking over the G8 presidency on January 1. “Russia’s
stance is irrational,” he said. “We are not reprimanding the orange
leaders – we are only helping them consolidate their support by providing a
foreign threat with a gas weapon.”

However, most analysts agree Ukraine’s Soviet-style economy must reform
to compete in European markets without the prop of cheap energy supplies.
———————————————————————————————
LINK: http://www.guardian.co.uk/russia/article/0,2763,1673955,00.html
——————————————————————————————-
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18.      UKRAINE ENERGY: A GAS CALAMITY IN PROSPECT?

The Economist Intelligence Unit Limited
The Economist, London, United Kingdom, Friday, Dec 23, 2005

Russia and Ukraine are sparring on the issue of gas prices, with Russia
demanding a hike of more than 300% in 2006 and threatening to cut supplies
if no agreement is reached. This threat, in turn, raises the risk that
Ukraine will tap the pipeline by which Russia delivers gas to Western
Europe.

To some extent, Ukraine can offset the impact of higher prices through
increased transit fees-at present, those fees are, like the gas prices, much
lower than the European average. Yet if prices rise by more than 200% in
2006, Ukrainian industry could grind to a halt-and pro-Russian parties could
recover their political dominance.

On December 20th Ukraine’s president, Viktor Yushchenko, accused Russia
of seeking to blackmail Ukraine over gas supplies. His comments followed
the failure, one day earlier, of a prime ministerial meeting arranged to
settle the issue of gas prices that Ukraine will pay Russia in 2006.

The dispute is between Gazprom, Russia’s gas monopoly and the world’s
largest gas producer, and Ukrainian gas utility Naftohaz Ukrainy. Currently,
Ukraine receives 24bn cubic metres of gas per year from Russia at a rate of
US$50 per 1,000 cu metres. In practice, this is a barter arrangement as
Ukraine charges a transit fee of US$1.09 per 1,000 cu metres per 100 km on
the 129bn cu metres of Russian gas that crosses Ukrainian territory each
year. The total sums are identical, at around US$1.2bn.

Ukraine has long enjoyed a price substantially below that of Gazprom’s
customers in Western Europe. As European gas prices have risen this year,
following the sharp rise in world oil prices, the differential has widened
considerably. The average West European price is 2005 is estimated to be
around US$190 per 1,000 cu metres, sharply up from the US$110-120 level
seen 1-2 years earlier, and could rise to US$240 per 1,000 cu metres in
2006.

 
Ostensibly for this reason, the Russian side-government included-insists
that the time has come for Ukraine to pay a market price.
                                        CHICKEN GAME
At the start of December, Gazprom announced that it wanted to charge
Ukraine a tariff of US$80 per 1,000 cu metres. Naftohaz Ukrainy refused and
on December 8th Russia’s president, Vladimir Putin, upped the ante by
announcing that Ukraine should pay a tariff of US$180 per 1,000 cu metres
in 2006. More recently Russia has demanded US$220-230 per 1,000 cubic
metres from the start of 2006 and has threatened to cut supplies entirely if
an agreement is not reached.

The Ukrainian side, for its part, has refused to cave in. It has signalled a
willingness to see prices rise over the next few years, but seems to
consider that an appropriate tariff would be the US$110-125 per 1,000 cu
metres to be paid by the Baltic states from the start of 2006. However, the
Ukrainian side almost certainly envisages increasing transit fees over the
same period, to offset the cost of rising gas prices.

The deputy head of Ukraine’s presidential administration, Anatoliy
Matvienko, has also said that if Russia insists on charging a “European”
tariff for gas, Ukraine should insist on a “European” rental fee for
Russia’s use of the Black Sea Fleet base at Sevastopol. On December 21st

Ukrainian officials began an inventory of the base-a preparatory step to a
demand for a sharply higher rental fee.
                                      COUNTING THE COST
Ukraine consumes around 70bn cu metres of gas annually, 18bn cu metres of
which comes from domestic sources. Because the country obtains a further
24bn cu metres of gas each year via the barter trade with Russia, its gas
import bill is around US$2.2bn-the price it pays for 36bn cu metres of gas
from Turkmenistan, delivered via Russia.

If Russia were to raise gas prices to US$230 per 1,000 cu metres, Ukraine
would be able to insist on a substantial hike in transit fees. The highest
level that Poland has applied on Russian gas exports in recent years is
US$2.28 per 1,000 cu metres per 100 km, in line with the US$2-2.50
“European market” level quoted recently by Russian newspaper Vremya
Novosti.

Other sources indicate that an EU level could be as high as US$3.25 per
1,000 cu metres per 100 km. Assuming that Ukraine applied that higher level,
it would receive US$3.6bn for gas transit but would pay Russia US$5.5bn for
gas supplies. As a result, Ukraine’s important bill would nearly double, to
over US$4bn.

Although Ukraine could probably weather this situation without too much
discomfort, the scenario assumes-unreasonably-that the price Ukraine pays
for Turkmen gas (made up of the price demanded by Turkmenistan and a
transit fee levied by Gazprom) would remain the same.

In reality, it is probable that the price of Turkmen gas would rise to
parity with that of Russian gas. As a result, the price of gas imports from
Turkmenistan would rise to US$8.3bn and the total import bill would rise
nearly fivefold overnight, to US$10.2bn.
                                    CALAMITY IN PROSPECT
Even if gas prices rise to US$160 per 1,000 cu metres-and assuming that
Ukraine is able to levy a transit tariff of US$3.25 per 1,000 cu metres per
100 km-Ukraine’s gas import bill would rise by 270% to US$6bn. The
impact of a rise of this magnitude would be considerable.

[1] FIRST, Ukraine’s government would have to decide to what extent it could
afford to cushion industry and households from the effects of the gas price
hike. Although Ukraine has generated a profit of around US$4bn from the sale
of steel mill Kryvorizhstal this year, a large portion of that windfall has
already been committed to other expenditure.

As a result, it is reasonable to assume that household tariffs would rise by
at least 50-100% and that industrial tariffs would double-even if the
government decided to do all it could to cushion the impact. Moreover, such
a policy would not be sustainable beyond 2006 or 2007 without major changes
to the structure of government spending.

[2] SECOND, the political effect of a 50-100% increase in household tariffs
would be immense-particularly as parliamentary elections are scheduled for
March. These are especially important because in 2006 constitutional changes
will come into effect that increase the power of parliament vis-à-vis the
presidency.

Since coming to power, President Viktor Yushchenko and the other leaders
of the “Orange Revolution” have largely failed to match popular
expectations: the government is perceived to have been paralysed by

in-fighting, which culminated in the dismissal of Yulia Tymoshenko as
prime minister in September, and it has overseen a dramatic slowdown
in the economy.

GDP growth is estimated to be just 3% in 2005, down from 12.1% in 2004. A
hike in gas prices could prove to be the decisive blow for the popularity of
Mr Yushchenko and his allies ahead of the parliamentary election campaign.
Even on current polling, they will struggle to form a parliamentary majority
and thus have the opportunity to form the next government.

If the electorate suffers a gas price shock, however, it could hand victory
to parties aligned with the elite that surrounded the previous president,
Leonid Kuchma. Although these are by no means avowedly pro-Russian, they do
enjoy Moscow’s support in the Ukrainian domestic arena. If they were to gain
a parliamentary majority, alongside the communists, Mr Yushchenko would
become a lame duck president and the Orange Revolution’s pro-western agenda
would be all but finished.

[3] THIRD, the Ukrainian economy would suffer terribly from an immediate
doubling or trebling of gas prices, particularly because the dominant
enterprises-metallurgy and chemicals-are heavily energy-intensive. The World
Bank director for Ukraine, Paul Bermingham, has estimated that a doubling of
gas prices would reduce GDP by 3-4 percentage points. If that is correct, on
EIU forecasts the Ukrainian economy would be close to stagnation in 2006,
while its industrial base would contract and unemployment rise.
                         PREPARED FOR THE INEVITABLE?
There is no doubt that Ukraine is a grossly inefficient energy user and that
it should be consuming much less gas than the present 70bn cu metres per
year-a level far in excess of French gas consumption, for example. A
comparison with the UK, which has a similar level of reliance on gas within
its energy mix, is revealing.

In 2004 the UK consumed 98bn cu metres compared with Ukraine’s 70bn cu
metres. UK GDP, however, was US$2,131bn compared with Ukraine’s
US$65bn.

A comparison with Poland also shows the inefficiency of Ukraine’s gas
consumption: although Poland has a population of 38m, compared with
Ukraine’s 48m, it consumed only 13.2bn cu metres of gas in 2004 and had
a GDP of US$252bn.

In the long term, the increase in gas prices to a market level would be
positive for Ukraine. It would increase energy efficiency in the economy,
removing the distortions of the present energy-price regime. It would also
free the country from its reliance on the gas transit trade-which would be
most welcome if Russia succeeds in building more export pipelines to
bypass Ukraine.

In the short term, however, the effects are certain to be destructive and
highly disruptive. Although Ukraine could sharply reduce its gas demand
through the application of gas-saving technology, it the government has
made no preparations for this. Nor has it sought credit facilities with
international financial organisations to help cushion the shock of a
gas-price hike.

This merely underlines the importance for Ukraine of securing an agreement
that allows for gas prices to rise to European levels (meaning around US$180
per 1,000 cu metres at the Russian border) in stages, rather than as a
one-off. Such an agreement may well be in Russia’s interest, as Gazprom
needs Ukrainian co-operation to ensure that it meets its gas export
obligations to Western Europe.

If Russia were to unilaterally hike gas prices to US$230 per 1,000 cu
metres, Ukraine could steal gas from the pipeline or else dramatically hike
transit tariffs and the rent it charges the Black Sea Fleet and other
Russian military installations in Ukraine.

Even if a 2-5 year transitional agreement is reached, however, it will
oblige Ukraine’s government to make swift and wide-ranging preparations
so that the country is ready for a new energy reality, where gas prices are
more than three times higher and consumption falls by at least 50%. The
government’s performance to date inspires little confidence that it is up to
the task.  -30-
——————————————————————————————-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
19.                  CAN GAZPROM RENEW RUSSIA’S IMAGE?

By Heidi Brown, Forbes.com Daily Newsletter
New York, New York, Tuesday, December 27, 2005

NEW YORK – Investors who stuck by Russia through the ups and downs
of 2005 were richly rewarded. Even Yukos now seems like a distant memory,
with the main Russian exchange, the RTS, up 84% this year.

There is a host of reasons to be optimistic about the country’s investment
prospects. In 2004, $1 billion of global equity investments flowed into
Russia–double the 2003 total. And that despite the Russian government’s
seizure of oil giant Yukos and the imprisonment of its CEO, Mikhail
Khodarkovsky.

Some 316 Russian companies listed in Moscow this year, and the pace is
likely to keep up in 2006. Most exciting for investors outside of Russia,
Gazprom’s so-called ring fence is being removed. On Friday, President
Vladimir Putin signed the law lifting restrictions on foreign ownership of
the world’s largest gas company, and on Wednesday, the official orders
authorizing the end to the restrictions are expected to be issued.

Until now, foreigners have been able to hold only 20% of all Gazprom shares,
and these are richly valued ADRs, which trade largely in London and New
York. Foreigners who want direct ownership have had to go through “gray
schemes” run out of Russia. Now, foreigners will be allowed unrestricted
access to 49% of Gazprom shares, with the state continuing to hold 51%.

When Morgan Stanley recalculates the company’s rankings in its MSCI
Emerging Markets Index, the consensus is that Gazprom, which holds
nearly one-third of the world’s natural-gas reserves and contributes 25% of
Russia’s tax receipts, will come out on top of the list, ahead of behemoths
like Samsung Electronics. The likely result: billions of dollars flowing
into Russia, as index and pension funds rush to rebalance their portfolios

to conform to the reweighting.

With all the good news, Russia suddenly seems to be on its way to shedding
the Yukos hangover–and its status as a high-risk investment.

Russia is certainly doing much to improve its macroeconomic fundamentals.
It’s maintaining moderate inflation of around 11% and paying back external
debt ahead of schedule. The central bank now has $170 billion in reserves.
And thanks to the strong cash flow generated by oil prices hovering in the
$60 range, Russian companies’ access to capital has also improved
dramatically: They have raised $65 billion domestically this year, most of
it in corporate debt.

Bernard Sucher, a veteran Russian banker and chairman of Alfa Capital, a
unit of Mikhail Fridman’s Alfa Group, thinks Russian investors’ interest in
their own bourses is a sign of the development of the country’s financial
system.

“I used to call [the exchanges] ‘financial markets,’ not ‘capital markets,’
because they didn’t raise capital. They were basically casinos for insider
trading,” he says. “But now we’re seeing that Russians can raise money
from Russian companies in significant amounts and varieties.”

Foreign firms are also looking to the Moscow exchanges as a venue for
raising capital. This fall, Deutsche Bank (nyse: DB – news – people ) raised
$1.5 billion on the RTS from the sale of its remaining 10% stake in No. 1
wireless operator MTS. So-called second-tier stocks, which include
fast-growing regional oil company Bashneft, cosmetics-maker Kalina and
popular-retailer Sedmoi Kontinent, have become an area of active trading for
domestic investors.

Russian companies have also been looking aggressively abroad for capital.
Though six Russian companies are already listed on the New York Stock
Exchange, as well as six on the main London exchange and 14 others with
partial or over-the-counter listings in London, Russian companies still have
a relatively low profile in the U.S.

But the New York Stock Exchange says a couple of large Russian companies
are in discussions about a listing in the near future. Gazprom officials,
who have made no secret about their ambition for a New York listing,

recently met with NYSE president Catherine Kinney.

Some problems still cling stubbornly to the booming country, however, says
Standard & Poor’s sovereign ratings director Helena Hessel. Speaking at a
recent conference on investment in Russia sponsored by Moscow’s
Renaissance Capital, she cautioned against becoming too lax in any analysis
of Russia.

“Serious political risk continues to be a key ratings constraint, and as a
result, the operating and financial risks facing corporations continue to be
high or even growing,” she said darkly. Her particular worries are the
unpredictable regulatory environment, poor corporate governance and
persistently intimate ties between government and business.

Despite those worrisome risks, there is near-exuberance among Russian
investors about the coming Gazprom liberalization. Don’t forget, these are
folks who have hung on during wild market swings and aren’t afraid to ride
out more.

“Once you have a stock like [Gazprom], you’ll ask yourself, ‘What else is
there to buy?'” predicts Harvey Sawikin, co-founder of Firebird Management,
a New York City-based firm that invests in Eastern Europe and Russia. “The
MSCI [reweighting] will go part of the way toward improving Russia’s image.
But a listing on the NYSE or a major stock exchange would go a long way.
And there is a high likelihood of a listing on the NYSE.” -30-
————————————————————————————————-
http://www.forbes.com/2005/12/23/gazprom-russian-markets-cz_hb_1227gazprom.html?partner=daily_newsletter
————————————————————————————————-
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