THE ACTION UKRAINE REPORT – AUR – Number 635

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”

THE ACTION UKRAINE REPORT – AUR – Number 635
Mr. E. Morgan Williams, Publisher and Editor
Washington, D.C., THURSDAY, JANUARY 5, 2006

——–INDEX OF ARTICLES——–
Clicking on the title of any article takes you directly to the article.
Return to the Index by clicking on Return to Index at the end of each article

1. RUSSIAN-UKRAINIAN GAS WAR: MONUMENTAL RUSSIAN MISTAKE
ANALYSIS & COMMENTARY
: By Anders Åslund
Senior Fellow, Institute for International Economics (IIE)
Published by The Action Ukraine Report (AUR), #635, Article 3
Washington, D.C., Thursday, January 5, 2006

2. RUSSIA AND UKRAINE REACH COMPLEX, MURKY DEAL
Benefits are obscured behind the secrecy surrounding the intermediary,
RosUkrEnergo, and vague promises by Ukrainian officials that this
company would be reformed in the months ahead
.
By Andrew E. Kramer, The New York Times
Published in International Herald Tribune (IHT)
Neuilly Cedex, France, Wednesday, January 4, 2006


3. RUSSIAN GAS ACCORD DOESN’T CALM EUROPE’S JITTERS
Swiss-registered company called RosUkrEnergo involved
By Gregory L. White in Moscow and Chip Cummins in London
The Wall Street Journal, New York, NY, Thursday, January 5, 2006

4. RUSSIA’S REPUTATION SUFFERS IN GAS ROW
Gazprom has granted a key role in this deal to Rosukrenergo
Such an obscure company, with undisclosed ultimate owners,
should have no place in a high-profile international deal
LEAD EDITORIAL COMMENT
: Financial Times
London, United Kingdom, Thursday, January 5 2006

5. SERIOUS QUESTIONS RAISED ABOUT RUSSIA/UKRAINE
GAS DEAL INTERMEDIARY ROSUKRENERGO
FPM Yuliya Tymoshenko calls RosUkrEnergo, a “criminal enterprise.”
ANALYSIS
: By Roman Kupchinsky
Radio Free Europe/Radio Liberty (RFE/RL)
Prague, Czech Republic, Wednesday, January 4, 2006

6. PACT HELPS SECRETIVE GROUP TIGHTEN GRIPOVER UKRAINE
Meteoric rise of RosUkrEnergo, created with help from Leonid Kuchma
Its dominance of Ukraine’s gas imports is likely to be an

embarrassment for Kiev’s pro-western President Viktor
Yushchenko, when he fights elections in March.
By Tom Warner in Kiev, Financial Times
London, United Kingdom, Thursday, January 5 2006

7. NEW JV OF NAFTOGAZ UKRAINY AND ROSUKRENERGO
TO SUPPLY NATURAL GAS TO MOLDOVA
[Controversial RosUkrEnergo involved with Ukraine in another new deal]
Interfax-Ukraine, Kyiv, Ukraine, Wednesday, January 4, 2006

8. UKRAINE’S GAS DEAL WITH RUSSIA DRAWS CRITICISM OVER
ROLE OF INTERMEDIARY TRADING COMPANY ROSUKRENERGO
By Aleksandar Vasovic and Yuras Karmanau
AP Worldstream, Kiev, Ukraine, Thursday, Jan 05, 2006

9. FORMER SECURITY SERVICE HEAD AND YULIYA TYMOSHENKO
BLOC LEADER CONDEMNS UKRAINE-RUSSIA GAS DEAL
RusUkrEnergo suspected of global speculation and corruption
Interfax-Ukraine news agency, Kiev, in Russian 1336 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

10. ROSUKRENERGO PREPARING FOR IPO WITHIN 18 MONTHS
Reportedly half owned by unidentified Russian and Ukrainian shareholders
RosUkrEnergo chosen to facilitate gas deliveries to Ukraine
By Greg Walters, Dow Jones Newswires
Moscow, Russia, Wednesday, January 4, 2006

11. EXPERTS CANNOT UNDERSTAND THE AGREEMENT BETWEEN
RUSSIA AND UKRAINE. WHAT IS ‘ROSUKRENERGO’ FOR?
OSTROV, Research Center of Donbass Social Perspectives
Donetsk, Ukraine, Wednesday, January 4, 2006

12. RUSSIA-UKRAINE GAS-PRICE DEAL MAY NOT END
PRESSURE FROM RUSSIA’S PUTIN
RosUkrEnergo exclusive distributor f
or gas imports to Ukraine
Andreas Cremer in Berlin and Reed V. Landberg in London
Bloomberg, Berlin & London, Thursday, January 5, 2006

13. TANGLED RUSSIAN-UKRAINIAN GAS DEALS PROVIDE
OPPORTUNITIES FOR CORRUPTION, INFLUENCE
Corruption has been especially prevalent in two Russian-Ukrainian
consortiums (Eural TransGas and RosUkrEnergo) created to
facilitate the delivery of Turkmen gas to Ukraine and Europe.
ANALYSIS & COMMENTARY
: By Taras Kuzio
Eurasia Daily Monitor (EDM), Vol. 2, No. 163
The Jamestown Foundation, Washington, D.C., Fri, August 19, 2005

14. UKRAINE LOSES CREDIBILITY IN GAS ROW, RUSSIAN EXPERTS
Pres Yushchenko is a weak politician and running the country badly
This will leave a dark stain on the country’s reputation
RTR Russia TV, Moscow, in Russian 1700 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

15. GAS AGREEMENT GREAT VICTORY FOR RUSSIA AND NOW
UKRAINE MUST CHOOSE BETWEEN THE WEST AND RUSSIA
RIA Novosti, Moscow, in Russian 1649 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

16. RUSSIAN LAWMAKERS, OFFICIALS SAY GAS CONFLICT
EXPOSES INTERNAL POLITICAL CRISIS IN UKRAINE
Itar-Tass, Moscow, Russia, Tuesday, January 3, 2006

17. PUTIN’S GAS LOGIC IS IN SHORT SUPPLY
Perhaps he let himself be carried away by the special situation of Ukraine.
COMMENT & ANALYSIS
: By Columnist Quentin Peel
International Affairs Editor of the Financial Times
Financial Times, London, United Kingdom, Wed, Jan 4, 2006

18. POTEMKIN COMPROMISE
Four-day skirmish leaves Russia’s image badly bruised
In standing up to the Russians, Ukraine’s inexperienced democrats
passed a major test. The rest of Europe got a useful wake-up call.
REVIEW AND OUTLOOK
: The Wall Street Journal
New York, New York, Thursday, January 5, 2006

19. GAS PRESSURE: WHY PUTIN IS SQUANDERING WORLD
PRESTIGE IN HIS SQUABBLE WITH KIEV
By Neil Buckley and Thomas Catan, Financial Times
London, United Kingdom, Wednesday, January 4, 2006

20. OBNOXIOUS, BUT GAS WAR IS NOT PUTIN’S WORST CRIME
It was stupid of President Putin to turn off the gas to Ukraine
FOREIGN EDITOR’S BRIEFING
: By Bronwen Maddox
The Times, London, United Kingdom, Wednesday, January 4, 2006

21. EU RELIEF AS KIEV AND MOSCOW REACH GAS DEAL
Russia appeared stung by criticism that it had tarnished its
reputation as a reliable energy supplier at a time when it has
assumed the presidency of the Group of Eight industrialised nations.
Reporting by Thomas Catan in London, Tom Warner in Kiev, Neil Buckley
in Moscow, Sarah Laitner in Brussels and Bertrand Benoit in Berlin
FINANCIAL TIMES, London, United Kingdom, Thursday, Jan 5 2006

22. ACTING ACCORDING TO TYPE IN PUTIN’S OIL PLOY
COMMENTARY: By Jim Hoagland, The Washington Post
The Wall Street Journal, NY, NY, Thursday, January 5, 2006
========================================================
1
. RUSSIAN-UKRAINIAN GAS WAR: MONUMENTAL RUSSIAN MISTAKE

ANALYSIS & COMMENTARY: By Anders Åslund
Senior Fellow, Institute for International Economics (IIE)
Published by The Action Ukraine Report (AUR), #635, Article 1
Washington, D.C., Thursday, January 5, 2006

Early on January 4, Gazprom and Ukrainian gas officials reached an
agreement on gas deliveries to Ukraine in Moscow. This was in many
ways an excellent agreement, but most of all so for Ukraine.

First, it is a five-year agreement lasting till the end of 2009, which means
that stable conditions for gas deliveries should have been accomplished.
Amazingly, Russia is offering Ukraine five years of stable natural gas
prices at a time of rising gas prices and increased gas scarcity, while most
countries face annual price revisions.

Second, a consortium is being set up that involves gas deliveries from four
producers, Russia and Turkmenistan, but also Kazakhstan (whose production

of associate gas is rising fast) and Uzbekistan (a marginal exporter), and at
least one consumer, Ukraine. To Ukraine, this means that it obtains access
to gas also from Kazakhstan and Uzbekistan. It appears as if Russia is
reinforcing its control over gas deliveries from Central Asia. The formation
of such a consortium, though not concluded, should stabilize gas trade
relations.

Third, the price agreed – $95 per 1,000 cubic meters (mcm) seems perfectly
sensible. It is almost twice what Ukraine paid last year, but less than the
$110 per mcm that Georgia and Armenia are to pay, and the Baltics are
supposed to pay slightly more, and far from the 230 per mcm that Gazprom
originally demanded. The Russian claim that Gazprom would be paid $230

per mcm seems nothing but a face-saving devise. Possibly, the portion of
Russian gas delivered to Ukraine will decline so much that this becomes
true.

Fourth, the transit fee situation is improving considerably. Ukraine will
now be paid its transit fee in cash from Gazprom rather than through barter.
The transit fee through Ukraine rises from $1.09 per 1 mcm and 100 km to
$1.60, which is a more reasonable though somewhat low price.

In addition, Ukraine will buy all gas from Russia and Central Asia at the
Russian-Ukrainian border, while it previously bought gas on the
Russian-Turkmenistan border being compelled to haggle over the transit

fee with Gazprom. Therefore, Ukraine is not likely to actually pay more
for the Central Asian gas than the $44 per mcm it paid last year, though
it is said to pay $65 per mcm this year.

The only really disturbing element is that the enterprise Rosukrenergo will
be in charge of the gas deliveries to Ukraine. It is a joint venture between
Gazprom and a legal entity under the auspices of Raiffeisen Bank, which

took over two years ago from Euraltransgaz, which took over in 2001
from Itera.

These companies appear to have been created only to skim off profits
from Gazprom. Hermitage Fund assesses that the unjustified profit of
the Raiffeisen entity is $500 million a year.

The US government alleges that the partners of this entity are the organized
criminal Semen Mogilevich (Ukrainian Jew who lives in Moscow), former
Naftohaz Ukraina chairman Boiko and top people in the Kremlin. Prime
Minister Yekhanurov emphasized that Russia insisted on Rosukrenergo’s
involvement and that the Ukrainian government was not involved in it.

The economic outcome is relatively easy to calculate. If Ukraine will import
60 bcm of natural gas this year, it would have to pay $5.7 bn to compare
with $2.9 bn for 62 bcm last year, that is, an increase of $2.8 bn. However,
from this we need to deduct an increase transit income of Ukraine of $500
million and decreased transit costs for Turkmen gas of about $800 million,
which leaves us with a net increase of $1.5 bn or barely 2 percent of
Ukraine’s GDP. Given how energy prices have risen around the world, this
appears a very good deal indeed for Ukraine, and the question arises whether
Russia will really stick to this settlement.

Two industries in Ukraine will be hit by the higher gas prices, the chemical
industry (especially mineral fertilizers) and the steel industry, which are
very dependent on gas and in direct competition with Russian industries

that only pay $35 per mcm for gas.

For Russia, the whole gas conflict appears a monumental mistake for

at least six different reasons.

First, market economic arguments, but the massive price discrimination
ranging from $47 per mcm for Belarus to $250 per mcm for Western
Europe makes clear that the conflict is really political.

Second, for long the Kremlin has made clear that its main objective has

been to influence the Ukrainian parliamentary elections on March 26 to the
benefit of Yanukovich’s party the Regions. This is bound to backfire to the
benefit of Yushchenko and Yekhanurov. Once again, the Kremlin is running
Yushchenko’s election campaign for him.

Third, Russia does not appear to have realized that it has a very weak
position in gas negotiations with Ukraine. Much of Russia’s export gas is
virtually worthless without Ukraine’s gas pipeline, which is the only road
to the outside world for most of the gas until 2009, when the St. Petersburg
LBG plant and the North European pipeline to Germany are supposed to

come on line. Gazprom is under the heel of Ukraine’s transportation
monopoly. Russia was cheated by Ukraine persistently from 1992 to 1999
but does not appear to have learned to appreciate its weakness.

Fourth, legally Russia was bound by a five-year agreement concluded with
Yanukovich in 2004, guaranteeing Ukraine the price of $50 per mcm. Ukraine
could have taken Russia to international arbitration in Stockholm and would
no doubt have won.

Fifth, by taking immediate and drastic action, reducing gas supplies to

much of Europe, Russia has severely damaged its reputation as a reliable
supplier of gas that it has nurtured for the last four decades. Two days of
minor disruption are evidence enough. At a time when much of Europe is
considering the choice between Russian gas through pipelines or LNG
from anywhere this can potentially be highly damaging, as energy decisions
tend to be more political and emotional than rational. Especially considering
that this happens at the very time that Russia becomes chairman of G-8,
the damage to Russia’s international reputation is likely to be palpable.

Sixth, the Kremlin’s insistence on using the non-transparent vehicle
Rosukrenergo is likely to increasingly discredit it as people realize what
it actually is.

In short, Russia could hardly have done worse until the agreement today.

It has appeared aggressive, uninformed, reckless and foolhardy.

For Gazprom, however, this does not look all too bad. It has shown that

it is really interested in raising prices to a reasonable level to boost its
profits. It has reached a sensible agreement pretty fast, even if it could
have left the prices to be renegotiated each year or raised by some formula,
which Ukraine accepted. The big question is how seriously two days of
minor supply disruption will be taken by potential European customers.
—————————————————————————————————
NOTE: Dr. Anders Åslund is a Senior Fellow at the Institute for
International Economics in Washington, D.C., E-mail: aaslund@iie.com

———————————————————————————————
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
2. RUSSIA AND UKRAINE REACH COMPLEX, MURKY DEAL
Benefits are obscured behind the secrecy surrounding the intermediary,
RosUkrEnergo, and vague promises by Ukrainian officials that this
company would be reformed in the months ahead

By Andrew E. Kramer, The New York Times
Published in International Herald Tribune (IHT)
Neuilly Cedex, France, Wednesday, January 4, 2006

KIEV – Russia and Ukraine settled their price dispute over natural gas on
Wednesday when national energy companies in both countries surrendered
control over all of the gas supply to Ukraine to a middleman company of
uncertain ownership.

The murky solution allowed both nations to claim victory, though Russia
emerged with its reputation on world energy markets bruised after disrupting
natural gas supplies to Europe in the middle of winter. Ukraine’s gas
utility bill will about double.

Under the deal, Russia will sell natural gas to the intermediary company at
the price it had demanded from Ukraine, $230 per 1,000 cubic meters, while
Ukraine will buy gas from that company as it comes into the country for $95.

Ukraine has been paying at a rate of $50 to Russia.

The company will balance out the price at $95 by selling Ukraine less of the
expensive Russian natural gas and more lower-priced gas from Central Asia.
The gas from the Central Asian nations of Turkmenistan and Kazakhstan will
sell for only $50 and $60 per 1,000 cubic meters.

At the center of the complex deal is an offshore energy trading company that
has for a decade, under various names, shipped natural gas to Ukraine from
the Central Asian country of Turkmenistan, a business exploiting the price
differentials in former Soviet markets.

Exactly who walked away from the negotiating table with what benefits was
obscured behind the secrecy surrounding the intermediary, RosUkrEnergo,
and vague promises by Ukrainian officials that this company would be
reformed in the months ahead to fulfill its new role.

Ukraine’s national security adviser, Anatoly Kinakh, said in an interview
that the deal would increase the importance of Central Asian natural gas in
Ukraine’s fuel mix, moving away from Russian supplies.

That dovetailed with Ukraine’s efforts to diversify its sources of fuel, he
said – though Russia still controls the pipelines leading to Ukraine, and,
according to analysts, a majority interest in RosUkrEnergo through
unidentified proxy owners.

“We have reached an agreement that is mutually beneficial and therefore
mutually acceptable,” Aleksei Ivchinko, the director of Ukraine’s national
gas company, Naftogaz, said in Moscow after signing the agreement.

The deal, Ivchinko said, would guarantee Ukraine’s domestic supply as well
as the transshipment of Russian gas to other European countries – something
that had Europe and world energy markets jittery in the opening days of this
year. Crude oil prices dipped slightly on the latest news.

The companies also reached agreement on the price that Ukraine will charge
Russia for shipping gas across its territory to Europe.

Gazprom, Russia’s natural gas monopoly, will pay $1.60 to ship 1,000 cubic
meters for 100 kilometers, up from the current price of $1.09, according to
Ivchinko.

The higher price that Ukraine will pay for natural gas may prove a Pyrrhic
victory for Russia, as Western European countries that are Moscow’s
primary natural gas customers said Wednesday they will seek to diversify
their sources of energy.

The disruption in the natural gas flow from fields in the Siberian Arctic
and Central Asia was the first ever, according to Martin Bartenstein, the
economy minister of Austria, which holds the rotating presidency of the
European Union. The Soviet Union began exporting natural gas to Western
Europe in 1968.

Russian gas supplies will remain “the backbone of European energy supplies,
but certainly we will have to learn the lesson of what has happened in the
last few days,” Bartenstein said, according to Reuters.

President Vladimir Putin of Russia, speaking at his dacha outside Moscow,
called the settlement reached Wednesday a guarantee of energy supplies to
Europe. “I think undoubtedly this success will have a positive effect on the
whole sphere of Russian-Ukrainian relations,” Putin said. “We can work not
just with each other but also together in the market of third countries.”

Ukraine’s prime minister, Yuriy Yekhanurov, said that the higher prices
would impel Ukrainian industry to become more energy efficient, perhaps in
the longer-term forcing the pace of modernization at mammoth Soviet-era
factories, but added that the immediate consequences of higher prices could
be bankruptcies at some chemical and metallurgical plants. These two
energy-intensive sectors form the core of Ukraine’s exports.

“I will not say who won or who lost,” Yekhanurov said. “The people of
Ukraine and Russia won. Europe won because it will calmly receive gas.
Common sense won.”

Behind the announcements lies a company with a troubling history in Ukraine,
one that in the 1990s carved the most lucrative bits of Ukraine’s gas market
for itself and won exclusive, and profitable, rights to transship gas over
Gazprom’s domestic pipeline system.

The company first conducting this business was known as Itera, one of the
many subsidiaries, daughter companies and joint ventures that tapped into
the vast and then poorly audited revenue flows of Gazprom, according to
analysts who follow Gazprom. When Putin brought new management to
Gazprom, many such schemes dried up. But the Ukrainian middlemen
stayed in business.

Former executives at Gazprom and Naftogaz had interests in the deal,
according to Jérôme Guillet, a Paris-based banker and authority on
Gazprom’s business practices. “The names change every year, but it’s
always been the same mechanism,” he said in a telephone interview.

“The Ukrainians that were previously part of the deal are being kicked out,”
after the change of leadership in Ukraine after the Orange Revolution, he
said. “The new leaders are trying to put their people in. You have a huge
trade with hundreds of millions of dollars being captured by a small number
of people.”

Until officials specify how the company will operate in its new role, he
said, the significance of Wednesday’s settlement remain murky.

Some Ukrainian officials appeared almost giddy Wednesday after staring
down Russia in the dispute, even though the country will now pay higher
gas tariffs. “The price of freedom just went up a little bit,” said one
official, who said he did not want to further aggravate relations with
Russia by speaking publicly of victory.

Yet the elevated role of RosUkrEnergo troubled others in Ukraine’s
turbulent political class.

“The point was to eliminate a suspicious intermediary,” Grigory Nemurya,
an adviser to Yulia Tymoshenko, the former prime minister and leader of
the Orange Revolution who this autumn fell out with President Viktor
Yushchenko of Ukraine. “Now Ukraine depends on this company even

more.It’s another time bomb that could explode later, further down the
road
.” -30-
———————————————————————————————
LINK: http://www.iht.com/articles/2006/01/04/news/gazprom.php
———————————————————————————————

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3. RUSSIAN GAS ACCORD DOESN’T CALM EUROPE’S JITTERS
Swiss-registered company called RosUkrEnergo involved

By Gregory L. White in Moscow and Chip Cummins in London
The Wall Street Journal, New York, NY, Thursday, January 5, 2006

Russia and Ukraine reached a face-saving compromise in a dispute over
natural-gas prices that they said would secure Russian exports to Europe.
But the pact did little to calm newly revived fears in Europe about the
continent’s dependence on its eastern neighbor for fuel.

“Russian gas supplies will remain…the backbone of European energy
supplies, but certainly we will have to learn the lesson of what has
happened in the last few days,” said Martin Bartenstein, the economy
minister of current European Union president Austria.

After Russia briefly cut off supplies to Ukraine on Sunday and European
customers reported a drop in supplies of Russian gas shipped via Ukraine,
politicians across Europe called for seeking alternative gas suppliers and
energy sources, including nuclear power, which has long been taboo.

German Prime Minister Angela Merkel said she plans to raise the gas issue
in a meeting with Russian President Vladimir Putin in Moscow later this
month.

Officials in the U.S. and Europe accused the Kremlin of using energy as a
political weapon against Ukraine’s pro-Western government in the crisis.
Because Russia is such a huge and close source of energy supply for Europe,
countries like Germany, Italy and Poland will be hard-pressed to find viable
alternatives.

Russia provides a quarter of Europe’s gas, and hopes to boost that share.
Major gas fields elsewhere in the region are in decline and demand for the
clean-burning fuel is rising. Major European energy companies and utilities
have lined up to make deals with Russian state-controlled gas monopoly
OAO Gazprom, which sits on the world’s largest reserves of the fuel.

Russian officials yesterday defended their decision to cut off supplies to
Ukraine and said this week’s crisis underlined the need for routes to bring
Russian gas to Europe. “This situation has rather clearly shown for all
where the risks are,” said Industry Minister Viktor Khristenko. “It’s a very
good stimulus for our European partners to understand the need for
diversifying the routes of Russian supplies.”

About 80% of Russia’s gas exports to Europe are carried in Soviet-era
pipelines across Ukraine. Several times in the 1990s Kiev siphoned off fuel
meant for export amid price disputes with Moscow. Gazprom made up the
missing gas to export customers from its own supplies. And in the early
1990s, Russia cut gas shipments to former satellites, affecting European
supplies and prompting a similar outcry in Western Europe.

Last year, Russia and Germany agreed to build a pipeline along the bottom
of the Baltic Sea to carry Russian gas directly to Germany. Moscow also is
considering expanding a pipeline to Turkey to carry gas as far as Italy.

Well before the Ukraine shock, European governments had backed a host
of projects that will start to diversify supply from Russia, including
pipelines from North Africa. Poland is looking at sources, including
building a terminal to accept liquefied-natural-gas tankers, which would
reduce its vulnerability to shocks from Russia. Such projects will be years
in the building.

European officials welcomed yesterday’s deal between Russia and
Ukraine. Under the five-year agreement, which replaces a series of murky
barter-and-discount arrangements, Russia will pay market prices in cash
to Ukraine for the transit of its exports to Europe.

Kiev in turn agreed to Russia’s demand that it pay prices tied to
world-market levels for the Russian gas it buys. That would bring its
current price to about $230 per thousand cubic meters instead of the $50
it paid in past years. Gazprom said it would get about $3.5 billion in
additional revenue from the deal this year.

For Ukraine, the economic blow of the price increase will be partially
offset by reduced purchases of Russian gas and increased supplies from
Turkmenistan, Uzbekistan and Kazakhstan, at rates of about $50 to $65
per thousand cubic meters, according to Gazprom, which carries those
shipments to Ukraine.

As a result of the complex deal, Ukraine will pay $95 for its gas this year,
up nearly 50% from 2005. Ukrainian Prime Minister Yuri Yekhanurov
vowed an immediate campaign of conservation.
[Swiss-registered company called RosUkrEnergo]
While Russian officials hailed the new deal’s transparency, it turns all of
Ukraine’s gas imports over to a Swiss-registered company called
RosUkrEnergo. The company is half-owned by Gazprom and half by a
unit of Austria’s Raiffeisen Bank, which officials say is a nominee for
several unnamed Ukrainian investors.

It wasn’t clear which side sought the company’s participation, but Gazprom
officials have said in the past they would have preferred to eliminate the
intermediary. Ukrainian authorities last year investigated the company on
suspicion of ties to organized crime, but no charges were filed and
Raiffeisen officials deny any criminal links.

The new agreements are retroactive to Jan. 1, and Gazprom officials said
they won’t pursue their allegations that Ukraine was stealing gas during the
period of the cutoff. Ukrainian officials denied they stole gas, insisting
they were contractually entitled to the volumes they used. (David Crawford
in Berlin contributed to this article.) -30-
———————————————————————————————-
Write to Gregory L. White at greg.white@wsj.com and Chip
Cummins at chip.cummins@wsj.com
——————————————————————————————–
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4. RUSSIA’S REPUTATION SUFFERS IN GAS ROW
Gazprom has granted a key role in this deal to Rosukrenergo
Such an obscure company, with undisclosed ultimate owners,
should have no place in a high-profile international deal

LEAD EDITORIAL COMMENT: Financial Times
London, United Kingdom, Thursday, January 5 2006

Russia and Ukraine have seen sense in bringing their bitter gas dispute to
a speedy end and lifting the threat of a Europe-wide energy crisis.

Although some of the settlement’s details are unclear, it seems Moscow has
given up more than Kiev. Gazprom, the Russian gas giant, says Ukraine will
pay $230 per 1,000 cubic metres for Russian gas – exactly as Gazprom
demanded and a huge increase on the current $50. Ukraine argues that its
average price will be only $95 per 1,000 cubic metres because expensive
Russian gas will account for only about one-quarter of supplies. Gazprom
will pipe the rest from central Asia at just $50 per 1,000 cubic metres.

This settlement cleverly gives both sides scope to claim commercial victory.
But in political terms, Moscow has been left with egg on its face. It was
Russia that raised the stakes during the row, for example televising live
the moment when Gazprom cut Ukraine’s supply. Russian president Vladimir
Putin clearly intended to humiliate Kiev – and punish Ukrainian president
Viktor Yushchenko for the Orange revolution.

In the event, Kiev has escaped humiliation and Moscow has been left in the
awkward position of explaining its actions to the world. Its reputation as a
reliable energy supplier has been called into question. Ukraine bears some
of the blame for extracting gas for its own use from supplies destined for
Gazprom’s European Union customers. But, to Mr Putin’s embarrassment,
international concern has rightly focused not on Kiev, but Moscow.

Russia has also failed in its long-term aim of securing a stake in Ukraine’s
export pipeline. In Georgia and Belarus it has recently struck deals
swapping cheap gas for a say in pipeline management. Not for the first time,
Kiev has escaped Moscow’s clutches.

However, Ukraine must now adapt to rising gas prices. Increased energy
efficiency will bring political as well as economic benefits. The sooner
Kiev acts, the quicker it will reduce the scope for Russian political
leverage.

The deal highlights the vital role of pipelines. Gazprom has, in effect,
protected its commercial interests, and satisfied Ukraine’s, by squeezing
Kazakhstan and Turkmenistan. No wonder the central Asian states are
considering new Gazprom-free export routes. It is unclear if they have
enough gas to justify the huge costs. But the US and the EU must monitor
these ideas. If they become commercially viable, they could merit political
support.

Finally, despite Gazprom’s recent efforts to improve transparency, the group
has granted a key role in this deal to Rosukrenergo, an obscure joint
venture which was investigated last year by the Ukrainian authorities for
alleged links to organised crime.

Rosukrenergo denies wrongdoing. But such a company, with undisclosed
ultimate owners, should have no place in a high-profile international deal.
——————————————————————————————–
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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5. SERIOUS QUESTIONS RAISED ABOUT RUSSIA/UKRAINE
GAS DEAL INTERMEDIARY ROSUKRENERGO
FPM Yuliya Tymoshenko calls RosUkrEnergo, a “criminal enterprise.”

ANALYSIS: By Roman Kupchinsky
Radio Free Europe/Radio Liberty (RFE/RL)
Prague, Czech Republic, Wednesday, January 4, 2006

The solution to the ongoing gas conflict reached between Gazprom and
Naftohaz Ukrayina, the Ukrainian state oil and gas company, announced
today raises more questions than it does answers.

Gazprom head Aleksei Miller announced that an offshore company,
RosUkrEnergo, will be the middleman for gas sales from Russia,
Turkmenistan, Uzbekistan, and Kazakhstan to Ukraine. The company will
sell a mixture of gas from these countries to Ukraine at a price of $95 per
1,000 cubic meters. Gazprom will sell RosUkrEnergo gas at $230 per
1,000 cubic meters.
EURAL TRANS GAS
RosUkrEnergo has previously acted as the intermediary for Turkmen gas
sales to Ukraine. It took over the role of another offshore company formed
in December 2001 in Hungary, Eural Trans Gas (ETG).

In December 2001, ETG signed contracts with Gazprom and Naftohaz
Ukrayina to act as the intermediary for gas shipments from Turkmenistan to
Ukraine. As the intermediary, they ensured payment of all transit costs and
duties. The Ukrainian side paid ETG with 13 billion cubic meters of gas for
its services. ETG then sold this gas on to Europe at substantially higher
prices.

ETG soon came under suspicion in the media of being involved with Russian
organized-crime figures. In July 2004, during a Ukrainian-Russian business
forum in Yalta, then Russian and Ukrainian presidents, Vladimir Putin and
Leonid Kuchma, respectively, announced that ETG would be replaced by a
new company, RosUkrEnergo.

RosUkrEnergo was touted as a transparent successor to ETG and was
registered in Zug, Switzerland on 22 July 2004. It consisted on the Russian
side of Arosgas Holdings AG, named in the founding documents as a
company “affiliated with GazpromBank” and GazpromBank itself, a wholly
owned Gazprom subsidiary.
JOINT VENTURE
On the Ukrainian side, RosUkrEnergo is represented by Raiffeisen Investment
AG, a member of the Raiffeisen central bank group
.

Raiffeisen Investment CEO Wolfgang Putschek stated that his company is not
a partner in RosUkrEnergo, but merely manages the portfolios of a “number of
private Ukrainian investors” in RosUkrEnergo, “The Moscow Times” reported
on 28 July. Putschek refused to name these investors citing Austrian
confidentiality laws.

When the new Ukrainian government of Viktor Yushchenko came to power in
January 2005, one of the first acts of Prime Minister Yuliya Tymoshenko was
to call for a criminal investigation into RosUkrEnergo, calling it a
“criminal enterprise.”

Shortly afterwards, Oleksandr Turchinov, the head of the Ukrainian security
service, the SBU, announced that a criminal case had been launched against
RosUkrEnergo.

The investigation abruptly ended in mid-August 2005. Soon after Turchynov’s
removal as head of the SBU, the Ukrainian daily website obozrevatel.com.ua
reported on 21 September 2005 that the SBU officer in charge of the
investigation of RosUkrEnergo, Andriy Kozhemyakin, was transferred from
the case to other duties.

Gazprom has not come under any official scrutiny in Moscow for its role in
the RosUkrEnergo or ETG gas schemes.

How the inclusion of RosUkrEnergo into the settlement of the
Ukrainian-Russian gas conflict will play out in the West is not yet known,
but it will raise many eyebrows in Europe and the United States. The U.S.
FBI has been investigating RosUkrEnergo for some time now and

European law-enforcement agencies are also aware of the allegations in
this case. -30-
————————————————————————————————
NOTE: Roman Kupchinsky is the organized crime and terrorism analyst
for RFE/RL Online and the editor of “RFE/RL Organized Crime and
Terrorism Watch.” He graduated from Long Island University in Brooklyn
with a degree in political science. He was the president of Prolog Research
and Publishing Corporation in New York prior to joining RFE/RL where
he was director of the Ukrainian Service for 10 years.
————————————————————————————————
http://www.rferl.org/featuresarticle/2006/1/A320B03B-185F-4733-B8DF-E9322D7CCF8F.html
———————————————————————————————————————-
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6. PACT WILL HELP SECRETIVE GROUP TIGHTEN GRIPOVER UKRAINE
Meteoric rise of RosUkrEnergo, created with help from Leonid Kuchma
Its dominance of Ukraine’s gas imports is likely to be an

embarrassment for Kiev’s pro-western President Viktor
Yushchenko, when he fights elections in March.

By Tom Warner in Kiev, Financial Times
London, United Kingdom, Thursday, January 5 2006

Yesterday’s deal on natural gas was a landmark in the meteoric rise of
RosUkrEnergo, the secretive Swiss-registered company formed in 2003

and which dominates the sale of gas from central Asia.

Six months ago RosUkrEnergo was threatened by a Ukrainian investigation
into suspected links between its management and organised crime. But
yesterday the company boasted a near monopoly of Ukraine’s gas imports
as well as exports from central Asia after emerging as the broker that could
give Russia and Ukraine an acceptable price for their gas.

Wolfgang Putschek, an Austrian investment banker who co-manages
RosUkrEnergo, said the company expected to increase its sales this year to
77bn cubic meters, nearly double last year’s sales of just over 40bn cubic
metres. That would put RosUkrEnergo among the biggest gas suppliers in
Europe, rivalling Norway’s Statoil, Algeria’s Sonatrach and Gasunie of the
Netherlands.

It planned to go public, most likely with dual listings in London and
Vienna, after the company adjusted to its new role, he said.

Asked if RosUkrEnergo was the main winner from yesterday’s agreement,
Mr Putschek said: “It looks like it. Definitely RosUkrEnergo’s role will be
much bigger than it was.”

Its dominance of Ukraine’s gas imports is likely to be an embarrassment
for Kiev’s pro-western President Viktor Yushchenko, when he fights
elections in March.

RosUkrEnergo was formed as a result of an agreement between Russia and
Ukraine’s former president, Leonid Kuchma. In 2004-2005 the company
acted as transit agent for Ukraine’s imports of gas from Turkmenistan.

Kiev had purchased gas at Turkmenistan’s northern border, then turned it
over to RosUkrEnergo which carried the gas to Ukraine’s border and paid all
the pipeline operators along the way, including Gazprom, Russia’s gas
company. Then it sold the gas back to Ukraine, with some also sold to
Hungary and Poland.

Half of RosUkrEnergo’s shares are controlled by Gazprom through its
daughter bank, Gazprombank. The other half are owned by Centragas, an
Austrian-registered company set up by Raiffeisen Zentralbank to represent
the interests of Russian and Ukrainian individuals who are the beneficial
owners. The identities of those individuals have not been disclosed.

Mr Putschek, an employee of Raiffeisen Investment, the Austrian group’s
investment banking arm, is Centragas’s chief executive.

However, RosUkrEnergo is controlled by two Russian directors, Konstantin
Chuychenko, appointed by Gazprom, and Oleg Palchikov, appointed by
Centragas’s beneficial owners.

Centragas and its owners came under investigation soon after the 2004
Orange Revolution brought a new government to power in Kiev.

Ukraine’s SBU security service last year investigated whether RosUkrEnergo’s
managers were acting under the influence of Semyon Mogilevich, a suspected
organised crime boss who is on the American FBI’s most wanted list.

Ukraine’s former prime minister, Yulia Tymoshenko, said she wanted to
exclude RosUkrEnergo from the gas business and deal with Gazprom directly
over the Russian gas price. However, after she was sacked in September the
new government said it was unable to get out of its contract with
RosUkrEnergo.

Mr Putschek said Raiffeisen thoroughly screened Centragas’s owners and that
they had “no ties whatsoever” to organised crime or to Mr Mogilevich. He
said no one from Centragas was ever contacted or questioned by the SBU.

Viktor Khristenko, Russia’s deputy prime minister for energy, said
RosUkrEnergo was “a reliable partner” that had “shown it is capable of
dealing with supplies from central Asia”. -30-
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========================================================
7. NEW JV OF NAFTOGAZ UKRAINY AND ROSUKRENERGO
TO SUPPLY NATURAL GAS TO MOLDOVA
[Controversial RosUkrEnergo involved with Ukraine in another new deal]

Interfax-Ukraine, Kyiv, Ukraine, Wednesday, January 4, 2006

The joint enterprise by Naftogaz Ukrainy and RosUkrEnergo A.G. will supply
natural gas to Moldova, Ukrainian Fuel and energy Minister Ivan Plachkov
told journalists in Kyiv on Wednesday, on his return from Moscow.

“The issue of supplies to Moldova was solved today. These will be performed
by the joint venture,” the minister said. The JV will be created on parity
principles and registered on the territory of Ukraine in January 2006. The
JV will be headed by a representative of the Ukrainian side, he said.

Commenting on the agreements signed between Naftogaz and Gazprom on January
4 in Moscow, the minister said that “the protocol determines the conditions
of gas supplies to Ukraine and gas transit. The gas supplies are provided in
full under conditions acceptable to Ukraine. All documents have been signed,
so we may continue to work together.” -30-
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8. UKRAINE’S GAS DEAL WITH RUSSIA DRAWS CRITICISM OVER
ROLE OF INTERMEDIARY TRADING COMPANY ROSUKRENERGO

By Aleksandar Vasovic and Yuras Karmanau
AP Worldstream, Kiev, Ukraine, Thursday, Jan 05, 2006

KIEV – The complicated payment plan underlying the Russian-Ukrainian
gas deal has drawn opposition criticism in Kiev over the involvement of a
trading company that had been under criminal investigation in Ukraine.

Oleksandr Turchinov, the former head of the Ukrainian State Security
agency, described the deal as a “betrayal of (Ukraine’s) national interests.”

Turchinov said in a statement Wednesday that the agreement
“demonstrates the complete and utter inability” of the leaderships of
Ukraine and its state-run gas provider Naftogaz “to protect the country’s
national interests, its economic sovereignty and independence.”

Oleksandr Zinchenko, an opposition politician and the former head of
President Viktor Yushchenko’s administration, described the deal as a
“murky and forced solution.” “Both Russia and Ukraine painted them-
selves into a corner and they needed some way out,” Zinchenko said.

Under the deal, Russia’s OAO Gazprom will sell gas to a Swiss-registered
trading company, RosUkrEnergo, for US$230 (A195) per 1,000 cubic
meters as of Jan. 1, while Ukraine’s Naftogaz will buy gas from
RosUkrEnergo for US$95 (A80).

Gazprom spokesman Sergei Kupriyanov said that in 2006, “RosUkrEnergo
will be the exclusive supplier of all imported gas in Ukraine.”

RosUkrEnergo was created in 2004 to replace another gas provider,
Euraltransgas, with the aim of acting as an intermediary between Gazprom
and Naftogaz to transit gas from the Central Asian country of Turkmenistan
through Russia into Ukraine. It can give Ukraine a lower price because it
factors in cheaper Turkmen gas it receives.

Gazprom, through its Swiss-registered Arosgas Holding AG, owns 50
percent of RosUkrEnergo. The remaining half is owned by Centragas
Holding, an Austrian-registered company 100 percent owned by
Raiffeisen Invest AG.

Wolfgang Putschek, a member of the executive board of Raiffeisen
Invest, said Centragas was acting as custodian for “a group of
international investors in the gas business.”

Last summer, Ukraine’s State Security agency was investigating links
between Naftogaz, RosUkrEnergo and groups allegedly affiliated with
Semyon Mogilevich, a Ukrainian-born Russian citizen and reputed
organized crime figure who is wanted by the FBI.

The probe was aimed at establishing links between Russian and Ukrainian
organized criminal groups, the two companies, and exports of Turkmen gas

to Ukraine, Turchinov said.

Putschek said “the whole criminal investigation is complete nonsense,” and
he said all claims of wrongdoing were “politically driven” by former Prime
Minister Yulia Tymoshenko, now a key opposition leader, and her ally
Turchinov.

“Not a single dollar has anything to do with illegal activity,” Putschek
said. Mogilevich “definitely has nothing to do with RosUkrEnergo, and
never has.”

In his earlier statements to Russian media, Mogilevich also denied his
involvement in gas dealings. He could not be reached for comment
Wednesday. Putschek said RosUkrEnergo was intending to go public
in 12-18 months. -30-
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9. FORMER SECURITY SERVICE HEAD AND YULIYA TYMOSHENKO
BLOC LEADER CONDEMNS UKRAINE-RUSSIA GAS DEAL
RusUkrEnergo suspected of global speculation and corruption

Interfax-Ukraine news agency, Kiev, in Russian 1336 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

KIEV – The former head of the Security Service of Ukraine [SBU] and a
Yuliya Tymoshenko bloc leader, Oleksandr Turchynov, has said that the
gas agreement signed in Moscow [on 4 January] betrays national interests.

“The accord signed between Naftohaz Ukrayiny [Ukraine’s national gas
company] and Gazprom on Russian gas supplies to Ukraine at 230 dollars
per 1,000 cu.m. is a clear betrayal of Ukraine’s national interests,” Turchynov
said in statement released by the Yuliya Tymoshenko bloc press service.

Turchynov said that Naftohaz and the cabinet showed “an absolute and
clear lack of ability to defend Ukraine’s national interests, its economic and
state sovereignty”. “The Ukrainian leadership has easily succumbed to
blackmail, intimidation and threats from a foreign commercial structure and
surrendered the interests of their own state,” Turchynov said.

The retention of the Rosukrenergo company, which is suspected of global
speculation and corruption, in the structure of Ukraine’s energy supplies
shows the state leadership is not prepared to resist corruption threats and
defend the national interests of Ukraine.

Moreover, keeping Rosukrenergo, which clearly uses shadow mechanisms,
as an intermediary shows that the authorities at the highest level are keen to
retain these mechanisms, the statement said.

Turchynov said that the price of 95 dollars per 1,000 cu.m. declared by
Naftohaz is “temporary camouflage and payment for the ruin of Ukraine’s
energy independence”.

He also said that the state of affairs with fuel supplies in Ukraine “is
clearly dangerous for Ukraine’s national interests and requires immediate
reaction from the president of Ukraine, investigation of high treason by the
Security Service of Ukraine and the Prosecutor-General’s Office, and the
setting up of a parliament investigating commission”. -30-
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10. ROSUKRENERGO PREPARING FOR IPO WITHIN 18 MONTHS
Reportedly half owned by unidentified Russian and Ukrainian shareholders
RosUkrEnergo chosen to facilitate gas deliveries to Ukraine

By Greg Walters, Dow Jones Newswires
Moscow, Russia, Wednesday, January 4, 2006

MOSCOW — Swiss-registered gas trader RosUkrEnergo, the company
chosen to facilitate gas deliveries to Ukraine in a deal with Russia, is
preparing for an initial public offering within 12 to 18 months, a custodian
for investors in the company said Wednesday.

Wolfgang Putschek, a member of Raiffeisen Investment AG’s executive
board, disclosed RosUkrEnergo’s IPO plans on the same day that Ukraine
and Russia agreed to bring the company into a supply deal that alleviated
concerns about Russian gas supplies to Europe.

Press reports in July quoted the Ukrainian security service, the SBU,
raising questions about whether an international organized crime group

might indirectly control RosUkrEnergo.

Putschek rejected the questions surrounding RosUkrEnergo investors,
whom he represents. “Not a single dollar has anything to do with illegal
activity,” Putschek said.

Russian state-owned gas company OAO Gazprom’s (GSPBEX.RS)
banking arm owns half of RosUkrEnergo.

Raiffeisen Investment AG, a subsidiary of Austria’s Raiffeisen Zentralbank
AG (RZO.YY), holds the remaining shares, through Austria-based Centragas
Holding. It acts as custodian for a group of international investors, who
are the beneficiaries, Putschek said. He declined to name the investors.

Gazprombank holds its shares in RosUkrEnergo through a company called
Arosgas Holding, Putschek said.

Asked Wednesday if he knew the identities of RosUkrEnergo’s beneficiary
owners, Russian Minister Of Industry and Energy Viktor Khristenko said,
“We know the Russian half.” As for the rest of the company, he said,
“That’s a question for the Ukrainian side.”

Minority investors in Gazprom have charged that RosUkrEnergo has been
able to get cheap central Asian gas through its contracts with Gazprom
and resell that gas at a considerable markup in Europe.

Gazprom spokesman Sergei Kupriyanov said RosUkrEnergo also sells
gas to other European countries but he declined to say to which, or
how much. Kupriyanov also said Gazprom has no plans to sell its 50%
share of RosUkrEnergo.

Under Wednesday’s supply deal between Gazprom and Ukrainian state-
owned gas company Naftogaz, RosUkrEnergo will sell an estimated 55
billion to 60 billion cubic meters of gas in 2006 to Ukraine at a price of
$95 per thousand cubic meters.

Of that gas, 17 billion cubic meters will be Russian gas, which
RosUkrEnergo will buy at $230 per thousand cubic meters from
Gazprom, Putschek said.

RosUkrEnergo will buy the remainder mainly from Turkmenistan but also
from Kazakhstan and Uzbekistan. The average price RosUkrEnergo will
pay for that gas will be less than $95 per thousand cubic meters, Putschek
said.

“RosUkrEnergo will make a profit in 2006,” Putschek said. “The role of
RosUkrEnergo has changed significantly in the past 24 hours.” -30-
——————————————————————————————–
-By Greg Walters, Dow Jones Newswires; (+7 095) 974 8055;
Greg.Walters@dowjones.com
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11. EXPERTS CANNOT UNDERSTAND THE AGREEMENT BETWEEN
RUSSIA AND UKRAINE. WHAT IS ‘ROSUKRENERGO FOR?

OSTROV, Research Center of Donbass Social Perspectives
Donetsk, Ukraine, Wednesday, January 4, 2006

DONETSK – Experts cannot understand the agreement between Russia
and Ukraine. What is ‘RosUkrEnergo’ for?

The scheme of gas conflict settlement of Russia and Ukraine is not clear
for investors-owners of big share holdings of Gazprom. The director on
corporate researches of the company Hermitage Capital Management,
Vadim Kleiner, said to the Agency on gas information, ‘I don’t understand
why RosUkrEnergo should participate in that situation and why Gazprom
does not do it itself’, according to ‘OBKOM’.

‘The same could just as well be done by Gazprom affiliate. It’s not clear
why 50% of its earnings should be given somewhere else,’ he said.

But on the whole V. Kleiner was positive concerning the deal between
Gazprom and Naftogaz of Ukraine, noting, ‘We regard this positively
based on the fact that the gas price has been increased for Gazprom’.

Director of Vostok Nafta Investment Ltd. Sergey Glazer noted that despite
the explanations of the Gazprom representatives, there are still questions
as to the gas price formation by RosUkrEnergo for selling to Naftogaz of
Ukraine. He reminded that in 2005, ‘Gazprom was selling gas at the cost of
$50 per 1 thousand of cub. m. and the Asian gas was $90-95 per 1 thousand
cub. m for Ukraine at the border with Russia.

‘Now we are raising price up to $230 and the average price turns out to be
$95 per 1 thousand cub. m. ‘It’s not clear what source is going to cover the
difference in the price if it is going to exist’, he noted.

At the same time, S. Galzer admitted, ‘Practice of Russian-Ukrainian
relations in the gas sphere during the last 10 years shows that with the
mediator, whoever he is and however we would criticize his presence, makes
it better. On the contrary, when Gazprom was starting direct supplies to
Ukraine, it brought to conflict situation. Everything works normally when
there is some buffer area between two parties and when it resolves all the
issues’.

In his turn, the representative of Vostok Nafta assumed that the agreement
executed by parties has demonstrated also the intention ‘to continue the
negotiations of critical points that used to be earlier, in particular, of
the gas transportation consortium’. -30-
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12. RUSSIA-UKRAINE GAS-PRICE DEAL MAY NOT END
PRESSURE FROM RUSSIA’S PUTIN
RosUkrEnergo at heart of accord, exclusive distributor

for gas imports to Ukraine

Andreas Cremer in Berlin and Reed V. Landberg in London
Bloomberg, Berlin & London, Thursday, January 5, 2006

Ukraine’s success in warding off demands from Russian President Vladimir
Putin for a quadrupling of the price it pays for gas may only win it a
temporary respite in pressure from its northern neighbor, analysts said.

Ukrainian President Viktor Yushchenko yesterday won a deal that means the
former Soviet republic will pay Moscow-based OAO Gazprom, Russia’s
state-owned natural-gas company, an average $95 per 1,000 cubic meters for
the fuel for five years, less than double the $50 it was previously charged.

“At first glance, Yushchenko looks like the winner, but Putin knows his
options and will keep up the pressure,” Wolfram Schrettl, an economics
professor at Berlin’s Free University, said in a telephone interview.

The gas-price dispute was just the latest rift in a confrontation between
Putin and Yushchenko that has simmered since the Russian leader backed
Yushchenko’s opponent in a disputed 2004 presidential election. The year-old
Ukrainian government is seeking closer links with the west, including NATO
and European Union membership, and a loosening of relations with Moscow.

Putin, who took over the chairmanship of the Group of Eight leading
industrialized countries Jan. 1, only gave way because he didn’t anticipate
“hostile pressure” from other European countries, said Schrettl.

Putin and Gazprom backed down from an earlier plan to bring gas fees to
Ukraine into line with prices of about $250 per 1,000 cubic meters charged
to Western European customers.

Gas deliveries to Central and Western Europe were disrupted Jan. 1-2 when
Russia stopped supplying the fuel to Ukraine and Moldova, the main corridors
for exports to Europe. Gazprom accused Ukraine of siphoning off gas, a
charge it denied.
EXTRA COSTS
Yesterday’s agreement will cost Ukraine about $1.5 billion extra a year,
said Paul McNamara, who helps invest $800 million in emerging-market debt
at Julius Baer Investment Management in London. Ukraine imports about 80
percent of its gas needs.

Yushchenko’s policy of closer integration with the west will mean that Putin
will continue to push for Ukraine to pay higher gas prices, said James
Nixey, manager of the Russia-Eurasia program at Chatham House, a
London-based consultant that counts the U.K. Foreign Office among its
clients.

“Russia is trying to test the waters and see what it can get away with in
the G-8,” said Nixey. “If Ukraine wants to be a part of the west Russia
will charge western prices. It’s just a question of timing.”
‘SYMPATHY FOR RUSSIA IN EUROPE’
Nixey said that while Yushchenko has engendered goodwill in the year he’s
been in power,” there is also “sympathy in Europe for the Russian
position.” “European nations are worried with the ease at which Russia
turned off the gas taps, and they’ll be trying to persuade Ukraine to speed
up the rate at which it increases what it pays for gas,” Nixey said.

More immediately, it’s unclear how the dispute will affect Yushchenko at
home as campaigning begins for Ukraine’s parliamentary elections in March.
In most opinion polls, Yushchenko’s Our Ukraine party is trailing the
opposition Regions Party headed by former Prime Minister Viktor
Yanukovych, whom he defeated in the re-run of the presidential vote.

Yanukovych, who was declared the winner of a first election that was later
annulled, campaigned for closer ties with Russia and proposed allowing
Ukrainians to hold dual Russian and Ukrainian citizenship. Yushchenko
may be able to gain support because he has spared Ukrainians an energy
crisis, Schrettl said.
ROSUKRENERGO NOW EXCLUSIVE DISTRIBUTOR FOR
GAS IMPORTS TO UKRAINE
Rainer Lindner, an analyst at the Berlin-based German Institute for
International Politics and Security, said that the terms of the deal,
involving a Swiss-based Gazprom joint venture, will ensure that yesterday’s
“accord is nothing but an intermediate solution.”

Under the agreement, Gazprom will sell gas to RosUkrEnergo AG, its joint
venture with Austria’s Raiffeisen Zentralbank Oesterreich AG, for $230 per
1,000 cubic meters. RosUkrEnergo will in turn sell the fuel to Ukraine for
an average $95 per 1,000 cubic meters, Gazprom said.

RosUkrEnergo will also supply gas to Ukraine from central Asian states,
including Turkmenistan, Kazakhstan and Uzbekistan, according to Gazprom.
The joint venture will become the “exclusive distributor” for gas imports
to Ukraine, Sergei Kupriyanov, a spokesman for Gazprom, said yesterday
in Moscow.

“RosUkrEnergo is at the heart of this accord,” said Lindner in a telephone
interview. The company will be seeking ways to bridge the gap between
the $95 and the $230.” -30-
———————————————————————————————
Contact: Andreas Cremer in Berlin at acremer@bloomberg.net;
Reed V. Landberg in London at landberg@bloomberg.net.
http://www.bloomberg.com/apps/news?pid=10000085&sid=am.lD5aM3WEY&refer=europe
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13. TANGLED RUSSIAN-UKRAINIAN GAS DEALS PROVIDE
OPPORTUNITIES FOR CORRUPTION, INFLUENCE
Corruption has been especially prevalent in two Russian-Ukrainian
consortiums (Eural TransGas and RosUkrEnergo) created to
facilitate the delivery of Turkmen gas to Ukraine and Europe.

ANALYSIS & COMMENTARY: By Taras Kuzio
Eurasia Daily Monitor (EDM), Vol. 2, No. 163
The Jamestown Foundation, Washington, D.C., Fri, August 19, 2005

Russia plans to triple gas prices ahead of Ukraine’s parliamentary election
and only months before winter begins (International Herald and Tribune,
August 1). A recent commentary in Ukrayinska pravda (August 8) accused
the regimes of former president Leonid Kuchma and Russia’s President
Vladimir Putin of being closely tied in energy corruption. “And the entire
criminal character of these ties is being fully used to apply pressure on
the Ukrainian state.” Russia tried the same tactics in Moldova’s 2005
parliamentary election.

The increase would raise the prices Russia charges Ukraine to world-market
levels. Currently Russia charges Ukraine $80 for 1,000 cubic meters of gas,
nearly three times what Moscow charges Belarus. If gas prices do rise this
dramatically, “Ukraine will suffer major economic disruptions” (IntelliNews,
July 4).

These planned gas price increases could have a negative impact on Ukraine’s
economic growth, which has already declined from 12% last year to 4% in
the first half of this year. Higher gas prices will increase inflation and
hurt metallurgical plants, which are the largest consumers of gas.

Russia’s stranglehold over the supply of gas to Ukraine is to some degree
counter-balanced by Ukraine’s control over export outlets for Russia. Some
90% of Russian gas is exported to Europe through Ukraine, and Kyiv has
threatened to compensate for any increase by raising transit charges.

High levels of corruption remain a major problem in the gas industry. The
presidential campaign of Viktor Yanukovych, Kuchma’s heir apparent,
tapped into hundreds of million of dollars through corruption in Russian-
Ukrainian energy consortiums.

Russia has ignored this problem by focusing on Ukraine’s alleged
“unreliability” as a gas transit country. The Yushchenko administration is
keen to renegotiate the terms of the Russian-Ukrainian-German agreement
of 2003-2004 that would have led to de facto Russian control over
Ukraine’s transit system (see EDM, July 9).

Corruption has been especially prevalent in two Russian-Ukrainian
consortiums (Eural TransGas and RosUkrEnergo) created to facilitate the
delivery of Turkmen gas to Ukraine and Europe. Ukraine annually obtains 36
billion cubic meters of gas from Turkmenistan and 24 billion from Russia.

The Financial Times (July 27) reported that the Ukrainian authorities were
concerned that these two consortiums were not only linked to Putin and
Kuchma, but also to organized crime.

Ukrainian Security Service (SBU) chairman Oleksandr Turchynov has openly
expressed his fear that international mafia boss Semyon Mogilevich had a
business stake in RosUkrEnergo or used it to launder money. Mogilevich is
wanted by the FBI and Interpol for money laundering. Like many former
Kuchma officials, he is living openly in Moscow and the Russian authorities
refuse to extradite him (Ukrayinska pravda, August 3).

Former Naftohaz Ukrainy CEO Ihor Bakay has also been hiding in Russia
since December 2004. He was given Russian internal and external passports
earlier this year when he took up Russian citizenship. Ukraine, unlike
Russia, does not recognize dual citizenship.

Bakay was released from Naftohaz Ukrainy in 2001 after corruption scandals
but was brought back in 2003-2004 by Kuchma to head the Directorate on
State Affairs. Bakay is charged with abuse of office leading to the loss of
$1 billion. The new Naftohaz Ukrainy CEO, Olexiy Ivchenko, a Yushchenko
loyalist, has nearly tripled revenues to the state.

Fearing criminal charges, outgoing Naftohaz Ukrainy CEO Yuriy Boyko
“purchased” the marginal Republican Party of Ukraine (RPU) as a protective
political roof. The RPU has no ratings and is not currently being courted as
an ally by any well-known political party for the 2006 election.

Outgoing Foreign Minister Konstyantin Hryshchenko agreed to become the
RPU’s foreign affairs spokesman, and on a recent visit to Washington he
unsuccessfully attempted to convince policymakers that the RPU is a
Ukrainian equivalent of the U.S. Republican Party (Washington Times, June
11).

RosUkrEnergo was created in summer 2004 to replace Eural TransGas. Its
aim is to act as an intermediary between Gazprom and Naftohaz Ukrainy to
transit Turkmen gas through Russia into Ukraine. Eual TransGas managers
moved over to RosUkrEnergo. Gazprom, through its Swiss-registered
ARosgas Holding A.G., owns 50% of RosUkrEnergo. The remaining half
is owned by Centragas Holding, an Austrian-registered company 100%
owned by Raiffeisen Investment A.G.

Centragas CEO Wolfgang Putschek has denied that RosUkrEnergo has
any links to Mogilevich (Financial Times, July 27). In a letter to President
Yushchenko, Raiffeisen director and Centragas CEO Putschek denied
categorically that Mogilevich or any other organized crime boss had ties
to RosUkrEnergo. Mogilevich has himself denied he has any links to
RosUkrEnergo or was using it to launder funds (Ukrayinska pravda,
August 1).

Accusations of high-level corruption by the Putin and Kuchma
administrations and links to organized crime have led to calls by Prime
Minister Yulia Tymoshenko to end the use of intermediaries to bring
Turkmen gas to Ukraine. “I am consistently working so that there will be
no intermediary between Ukraine and Turkmenistan,” she revealed
(Ukrayinska pravda, July 2).

Tymoshenko has also refused to countenance working with RosUkrEnergo,
because it was established, she believes, with numerous legal infringements.

Trade in Turkmen gas should be undertaken directly by Naftohaz Ukrainy
with Russia and Turkmenistan, she believes, but without the use of an
intermediary (Ukrayinska pravda, July 13).

This, however, may be easier said than done. -30-
———————————————————————————————-
NOTE: Dr. Taras Kuzio, is a Visiting Professor at the Institute for
European, Russian and Eurasian Studies, George Washington
University, Washington, DC, tkuzio@gwu.edu
———————————————————————————————-
LINK: http://jamestown.org/edm/article.php?article_id=2370177
——————————————————————————————-
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14. UKRAINE LOSES CREDIBILITY IN GAS ROW- RUSSIAN EXPERTS
Pres Yushchenko is a weak politician and running the country badly
This will leave a dark stain on the country’s reputation

RTR Russia TV, Moscow, in Russian 1700 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

MOSCOW – [Presenter] The news that the gas conflict is over produced an
unequivocally positive reaction in Europe. The EU leadership noted that the
settlement of the conflict would have a favourable impact on the development
of relations between Russia and Ukraine and indeed the European Union. Here
is Maksim Kiselev on how all the interested parties are commenting on
today’s events.

[Kiselev] The EU did not have to wage protracted battles for Russian gas. An
emergency session of the coordinating group in Brussels became a mere
formality even before it opened – there was nothing to discuss as Russia and
Ukraine had already done a deal. [Passage omitted]

The EU is reaching its own conclusions: the crisis that managed to hit
European consumers in the first days of the New Year must not be repeated.
That is why Europe vests its hopes in the gas pipeline that is currently
being laid along the bottom of the Baltic Sea. When it comes into operation,
the EU’s energy security won’t depend on anyone’s whims or unauthorized
siphoning of gas. [Passage omitted]

Russian political analysts have been discussing the origin of the crisis
today. In their view, the economic component of the affair is not so great.
There is more politics here.

[1] [Political analyst Sergey Markov] Yushchenko and his team decided to
drag Ukraine into NATO by deception and asked Gazprom to foot the bill.

Gazprom refused and proposed that the full price be paid for gas. On the
other hand, Yushchenko has also attempted to use the gas war to solve his
own problem of remaining in power. The point is that he is a very weak
politician. He is running the country badly.

At the same time, the team of Viktor Yushchenko expected that the Europeans
would rush to defend Ukraine from imperial pressure from Russia, as they
call it. It turned out that Europe was most of all concerned by how it will
get its own supplies.

Europe is most of all concerned that there shouldn’t be any rows and that
Russia shouldn’t quarrel with Ukraine. For good reason, the French foreign
minister stated bluntly: we must not under any circumstances incite Ukraine
against Russia.

[2] [Political scientist Andranik Migranyan] Without any doubt, this will
leave a dark stain on Ukraine’s reputation since Ukraine is seeking entry
into Europe. At least, that is what the authorities are saying. And Ukraine,
which is proceeding towards Europe and civilization – at least, that is how
they have positioned themselves – is beginning this move by stealing gas.

[Kiselev] Now, as the political analysts believe, it is up to the Ukrainian
voters to draw their own conclusions. If they assess the causes of the
conflict properly, the party of power will find it hard going in the
forthcoming parliamentary election
. -30-
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15. GAS AGREEMENT GREAT VICTORY FOR RUSSIA AND NOW
UKRAINE MUST CHOOSE BETWEEN THE WEST AND RUSSIA

RIA Novosti, Moscow, in Russian 1649 gmt 4 Jan 06
BBC Monitoring Service, UK, in English, Wed, Jan 04, 2006

MOSCOW – Russian experts view the gas agreements with Ukraine as
a great victory for Russia and for the path it has chosen.
[Passage omitted]

The director of the Institute for Political Research, Sergey Markov, believes
the citizens of Ukraine were Russia’s main ally in the gas dispute with Kiev.
[Passage omitted]

Director of the Institute for CIS Countries [MP] Konstantin Zatulin believes
that the price Ukraine is paying for gas would be much lower if talks with
Ukraine had been carried out in a more constructive way.

“Gazprom’s fundamental demand that there be a switch to objective market
prices in gas transactions with Ukraine was met during the talks. Ukraine
had to agree to the price for gas, which, at the final stage, Gazprom set at
230 dollars per 1,000 cu. m,” Zatulin said in an interview to RIA-Novosti.

“The result of the talks was that Ukraine’s Naftohaz had to agree to the
price proposed by Gazprom,” he said. The political analyst recalled that at
the beginning of the talks, which lasted several months, Ukraine had been
offered a different price – 160 dollars per 1,000 cu. m. At the time Turkmen
gas was being sold to Ukraine for 44 dollars per 1,000 cu. m.

“Thus, the average price would have been much lower than 95 dollars,”
Zatulin said. He believes “relations between Russia and Ukraine have
become more clear as a result of the gas dispute”.

Zatulin says that now Ukraine faces a choice – to strengthen relations with
the West or with Russia. “Serious debate has now started in Ukraine about
what choice the country should make. The people of Ukraine have constantly
been kept away from this question, and told that Ukraine would be in both
camps. Now the people of Ukraine face this choice,” the political analyst
said.
-30-
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Power Corrupts and Absolute Power Corrupts Absolutely.
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16. RUSSIAN LAWMAKERS, OFFICIALS SAY GAS CONFLICT
EXPOSES INTERNAL POLITICAL CRISIS IN UKRAINE

Itar-Tass, Moscow, Russia, Tuesday, January 3, 2006

MOSCOW – Members of Russian parliament, officials and experts
have come up with consonant opinions on the current Russian-Ukrainian
conflict over the price of natural gas, saying Kiev’s reluctance to accept
the new terms of gas supplies and siphoning of the fuel from Europe-
bound transit pipelines exposed internal political problems in Ukraine.

Ukrainian President Viktor Yushchenko is trying to gain more political
scores on the gas conflict with Russia just two months ahead of the
March parliamentary election, Vladimir Kulakov, the governor of Russia’s
Voronezh region said Monday.

He believes, however, Yushchenko’s course is highly unrewarding in that
sense. “By doing this, Yushchenko sacrifices Russian-Ukrainian friendship
and the interests of Ukrainian economy,” Kulakov said. “That’s totally
inadmissible in top-level politics.”

He recalled that all the republics of the former USSR have changed over
to market economy principles, and that is why they must pay for natural
gas at market prices.

“I was disgusted by reports that the Ukrainians stole 25 million U.S.
dollars worth of gas from transit pipelines in just a single day,” Kulakov
said. “This amount of gas would be enough for our region to keep itself
going for several years.”

Russia’s European partners have every right to file a lawsuit against
Ukraine with the International Court of Arbitration over undersupplies
of Russian natural gas, Dr Andranik Migranian, a well-known Russian
political scientist and professor of MGIMO diplomatic university said
Monday.

“Ukraine is a country closely related to us, but it must be held
accountable for its actions as a subject of international law,” he said in
a comment on reports that the Ukrainians were siphoning gas from
transit pipelines on their territory.

You either pay for gas and consume it, or you don’t pay and don’t
consume it,” he indicated. “Ukraine must adopt this elementary principle
of market economy if it wants to be part of Europe,” Migranian said.

“The critical situation in Russian-Ukrainian relations in the gas sector
stems from President Yushchenko’s willingness to bring victory in the
forthcoming parliamentary election to his allies and to show Russia off as
an external enemy, aligning his supporters around himself this way,” says
Igor Igoshin, the deputy chairman of the Duma’s committee for the budget.

Incumbent Ukrainian government has not scored any successes in politics
or the economy and it is now faced with the task of getting victory in the
election by any means, he said.

“Ukraine believes it’ll take Russia and the European Union by the throat
thanks to the pipeline, but this position may push it into further foreign
debts and the risk of a default,” Igoshin said.

Sergei Baburin, the leader of Rodina (Fatherland) faction in the Duma,
says Ukraine’s actions may spoil its relations with Russia and European
countries likewise.

He said he was bewildered by the Ukrainian government’s conviction that
Russia must continue giving credits to their economy by selling cheap gas.
“They forget somehow that Russia owes nothing to them,” Baburin said.
“If they don’t want to buy gas here, let them buy it elsewhere.”

He believes a part of the problem is that decisions in Kiev are taken by
the people, whom President Yushchenko is obliged to for victory in the
2004 presidential election, and not by the President himself. Dmitry
Mezentsev, the deputy speaker of the Federation Council, the upper
house of parliament, said all blame for that crisis goes beyond doubt
to Ukrainian leaders.

“It looks like an escalation of the conflict and its rise to a political
dimension was part of their initial plan,” he said. “The slogans of the
‘orange revolution’ and the faith of hundreds of thousands of people in a
better future are waning today and giving way to a shortage of confidence
and disillusionment with the new authorities.”

“As the parliamentary election is getting closer, the authorities would
like to organize a command performance of defense of the Ukrainian
people’s interests, although no one is hurting the latter, in fact,”
Mezentsev said. Vadim Gustov, the chairman of the Federation
Council’s committee for CIS affairs, sounded much on the same lines.

“President Yushchenko has become a hostage of his own political game
and of the forces that brought him to power,” he said. “But the majority
of members of Ukrainian parliament and government are ready to discuss
things at negotiations,” Gustov said.

“Kiev’s stance in this gas dispute testifies to a political crisis in
Ukraine and to the complete fall of Yushchenko’s influence,” said

Vladimir Zhirinovsky, Deputy Speaker of the lower house, the State
Duma.

“To save his post, Yushchenko resorts to any tools at hand and tries to
apportion blame for his country’s problems to Russia,” he said.

“Siphoning of Russian natural gas from transit pipelines in Ukraine is
outrageous, the Deputy Speaker of Russia’s State Duma, Secretary
General of the United Russia party Vyacheslav Volodin said.

“Ukraine has opted for inadmissible methods of action that complicate
Russian-Ukrainian relations,” he said referring to Monday’s reports by
OAO Gazprom, the exporter of Russian gas, that 95 million cubic meters
of the fuel had been taken away from transit pipelines during one day.
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17. PUTIN’S GAS LOGIC IS IN SHORT SUPPLY
Perhaps he let himself be carried away by the special situation of Ukraine.

COMMENT & ANALYSIS: By Columnist Quentin Peel
International Affairs Editor of the Financial Times
Financial Times, London, United Kingdom, Wed, Jan 4, 2006

Whatever one may think of Vladimir Putin as a Russian leader, stupid
and short-sighted are not the sort of adjectives that spring to mind. He
impresses all his interlocutors as someone who is interested in ideas and
sees the big picture. Although a bureaucrat at heart, with a tendency to
weigh up every consequence of a decision before coming to any
conclusion, he is not someone to be distracted by short-term
considerations from a long-term goal.

His success in reimposing order on the political and economic chaos left
behind by his predecessor, Boris Yeltsin, has been remarkable. He has done
so at the expense of genuine democracy, to be sure, by reasserting the
authority of the Kremlin and its security services. His reimposition of
state control over the commanding heights of the Russian economy – the
energy sector, in particular – has coincided with a boom in oil and gas
prices, bringing a double bonus to the Russian treasury.

It is not the blooming democracy and flourishing market economy that
traditional western observers might have liked to see. The rule of law is
arbitrary and property rights uncertain. But the Putin system makes sense to
many Russians who regret the demise of the Soviet Union and hanker for
Russia to recover its pride and global influence.

So how can one explain the apparent clumsiness and incompetence of Mr
Putin and his closest allies in the Kremlin and in Gazprom, the gas giant
that is the real source of their economic power, in their latest
confrontation with neighbouring Ukraine over the price and supply of

Russian gas? It was all so predictable and yet stunningly counter-
productive.

For a start, by turning off the gas taps on the Ukrainian pipeline that
carries 80 per cent of Russian supplies to the central and west European
market – even if only briefly and simply intended to cut off Ukraine’s own
supplies – Mr Putin has sent tremors across the Continent.

It has brought home dramatically to members of the European Union,
especially Germany, the dangers of relying excessively on Russia as the
primary source of energy supply. It has provided a salutary warning to the
EU to diversify its sources of gas, to build up alternative energy supplies
and to integrate its energy market so that it is much easier to manage
potential shortages.

The EU ought to be thoroughly grateful to Mr Putin for the lesson in energy
insecurity. It might galvanise action to create a properly functioning
internal energy market. But was it in Moscow’s interest? The former Soviet
Union was scrupulous in abiding by its gas supply contracts, even when
political relations with the west were in disarray. The latest action
against Ukraine, and the similar episode two years ago when supplies to
Belarus were reduced in a fit of Kremlin pique, have undermined Moscow’s
reputation for reliability.

Mr Putin would normally have been sophisticated enough to understand that
the key to successful energy diplomacy is predictability. It is a policy you
can treat as a carrot, not a stick. Like a nuclear deterrent, it should
never be used to punish.

Perhaps he let himself be carried away by the special situation of Ukraine.
There are certainly many hawks in his entourage who cannot forgive Viktor
Yushchenko and his allies in Kiev for their Orange revolution last year.

They have been talking for months of “punishing” the Ukrainian regime for
its impertinence in seeking closer relations with Brussels than Moscow.
Gazprom gave them the opportunity.

Yet here again, the action seems to have been counter-productive. Perhaps Mr
Putin’s advisers thought they would win votes for pro-Russian candidates in
the upcoming March parliamentary elections, on the grounds that they would
win a better gas deal from Moscow. All the evidence points to the opposite:
that Russia’s hard line seems to have revived the popularity of Mr
Yushchenko, who is seen as standing up for Ukraine against the big bully.

It is only on the home front that Mr Putin seems to have won any political
kudos from his action and then only thanks to the one-sided presentation of
the case on Russian television. There the deal agreed yesterday is seen as a
triumph for Gazprom in getting the “market” price it wanted for its gas,
even if it meant ceding most of the market to alternative central Asian
suppliers at a cheaper price.

If Mr Putin thought EU members would blame Ukraine for the whole muddle,
he was ill advised. Although there is real nervousness in Brussels about Mr
Yushchenko’s desire to join the union, there is great sympathy for Kiev’s
determination to be more independent of Moscow.

There are two possible explanations for Mr Putin’s actions. One is that he
has allowed his broad strategic vision to be blurred by irritation at the
rebelliousness of a former Soviet republic. That has been the case before
with Latvia, Lithuania, Estonia, Georgia and Ukraine at the time of its
regime change 12 months ago. The Kremlin finds it very hard to shed its
old imperial attitudes about the “near abroad”.

The other explanation is that Mr Putin knew precisely what he was doing and
wanted to send a very clear warning to western Europe about its dependence
on Russian energy supplies. He knows the alternatives are relatively few and
unattractive. Perhaps he does not care about the negative reaction. Is the
EU capable of proving him wrong? -30-
——————————————————————————————–
NOTE: Quentin Peel is international affairs editor of the Financial Times.
He is also an associate editor, responsible for leader and feature writing,
and has a foreign affairs column, which appears every Tuesday.
E-mail Quentin Peel: quentin.peel@ft.com
——————————————————————————————-
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18. POTEMKIN COMPROMISE
Four-day skirmish leaves Russia’s image badly bruised
In standing up to the Russians, Ukraine’s inexperienced democrats
passed a major test. The rest of Europe got a useful wake-up call.

REVIEW AND OUTLOOK: The Wall Street Journal
New York, New York, Thursday, January 5, 2006

Russia and Ukraine yesterday ended their gas price war with a confusing deal
that all sides, not least freezing Western Europeans, rushed to declare a
win-win. But this four-day skirmish leaves Russia’s image badly bruised
while clarifying the rich world’s difficulty in securing its future energy
needs.

The Kremlin, or its proxies at gas monopolist Gazprom, can’t much like the
cost/benefit analysis. In the plus column, Gazprom secured nearly double the
current rate from the Ukrainians. Although the Russians initially demanded
quintuple the agreed price — $50 per 1,000 cubic meters — the new contract
at least moves the Ukrainians slightly closer to West European levels
(around $250).

Gazprom has moved to raise rates, less aggressively than in this case, for
other countries too. But about a third of the new revenue for Russia is
offset by higher fees owed Ukraine for the use of its gas pipelines to
Western Europe. Gazprom also failed to gain any control over Ukraine’s
pipeline network, its great dream.

At the end of the day, Russia will get about $1 billion more a year from the
Ukrainians. In return, Gazprom and the Kremlin will pay a high cost to
reputation that’s hard to measure in rubles and cents. Gazprom, which
controls 16% of the world’s known natural gas reserves, aspires to join the
energy big leagues, alongside the likes of Exxon or BP.

In a step in that direction, Russia last month lifted limits on the foreign
ownership of its shares, only to see Vladimir Putin brazenly use Gazprom to
serve his political ends. Both investors and customers are spooked. Who can
blame them?

Gazprom’s once impeccable reputation for reliability, arguably its most
valuable asset, was destroyed in a few hours. By turning off the spigots to
Ukraine on New Year’s Day, President Vladimir Putin cut off clients down the
pipeline in Europe, which gets a quarter of its gas from Russia and is
suffering a particularly cold winter. Poland, Hungary, Austria, Germany and
Italy reported reduced supplies, touching off a near panic.

Ukraine siphoned off some gas for its needs but the reduced pressure in the
lines also played a role. Not even in the darkest days of the Cold War did
the Soviet Union resort to energy blackmail. Mr. Putin, once again, broke
the mold by unilaterally abrogating Gazprom’s standing contract with
Ukraine. If this can happen in Ukraine, who says Germany or France won’t be
treated the same one day.

Unlike a car-maker or even an oil producer, Gazprom can’t deliver its goods
to market easily. The company depends on pipelines, which in turn makes it
dependent on Ukraine. In the 1990s, when Ukraine fell behind on payments,
Gazprom executives used every stick and carrot imaginable but never
seriously considered shutting off supply.

Mr. Putin made this mistake for them. After this brief episode, the
company’s prospects for future growth in Europe suddenly look dimmer.
And as long as Mr. Putin’s two closest friends run Gazprom, no outside
investor will believe that the company will ever act in the interests of
shareholders as opposed to the Kremlin.

Mr. Putin tried to bully Ukraine and comes away hurt himself, not for the
first time. As in the winter of 2004, when the Kremlin wanted its own man
installed in the presidency in Kiev, the Russian leader figured that
smaller, weaker Ukraine would bend to his will. The gambit was transparently
intended to undermine President Viktor Yushchenko and Ukraine’s young
democracy that was born in the 2004 Orange Revolution.

Instead, Mr. Putin provoked a nationalist backlash in Ukraine that ended up
strengthening Mr. Yushchenko and brought international rebuke. As Russia
takes over the helm of the G-8, Mr. Putin reminded everyone that his country
doesn’t really deserve to belong in this Western club.

In standing up to the Russians, Ukraine’s inexperienced democrats passed a
major test. The new gas deal also offers them an opportunity to kick-start
economic reforms, which have been a disappointment since the Orange
Revolution. Artificially low energy prices are one reason.

The Gazprom contract can in fact strengthen Ukraine’s economic
independence by forcing its inefficient, energy-guzzling industry to
modernize. The country’s oligarchs, not the babushkas in their well-heated
apartments, benefit most from cheap gas. Russia was heavy-handed with
its unilateral push for a steep hike, but energy prices need to go up for
Ukraine to prosper.

The rest of Europe got a useful wake-up call. The Continent relies too
heavily on Russia for its energy needs. If the crisis lasted a few weeks
longer, much of Europe may have found itself short of heat or electricity. A
serious discussion of energy security is overdue.

The obvious but so far ignored solution is to diversify supply sources and
routes. Europe needs new pipelines to tap into North African and Middle
Eastern gas. Strong environmental lobbies discourage moves toward liquefied
natural gas, coal and nuclear, all of which would be plausible alternatives
as well.

Last year, Mr. Putin made “energy security” the theme of his G-8 presidency.
How ironically prescient that now seems. The West can take him up on his
offer. After this week, it enters this dialogue with eyes wide open. “The
conflict has shown that Russia’s energy trade is politically motivated,”
said Andrei Illarionov, who quit as President Putin’s top economic advisor
to protest his authoritarian policies. “This can make Russia anything but a
‘reliable global energy supplier.'” Or, one might wonder, a reliable partner
in any other venture? -30-
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19. GAS PRESSURE: WHY PUTIN IS SQUANDERING WORLD
PRESTIGE IN HIS SQUABBLE WITH KIEV

By Neil Buckley and Thomas Catan, Financial Times
London, United Kingdom, Wednesday, January 4, 2006

Just before Christmas, Russian president Vladimir Putin set out more
explicitly than ever before his vision of how his country would regain the
international clout it enjoyed as part of the Soviet Union.

Noting proudly that Russia was the world’s biggest exporter of natural gas
and second-biggest exporter of crude oil, he told a gathering of his most
trusted ministers and advisers that the country should aim to be the global
leader in energy. This, rather than the military-industrial complex that
dominated the Soviet era, would be the engine of Russia’s renaissance.

“Our welfare at present and, to a great degree, in the future directly
depends on the place we will take in the global energy context,” Mr Putin
told the televised meeting. He also issued an assurance – likely to be much
repeated during Russia’s current presidency of the Group of Eight
industrialised nations – that “energy security” would be a key theme.

“Russia treasures its much-deserved reputation of a reliable and
responsible partner in the market for energy resources,” he said.

Moscow sees its spell at the helm of the G8 as a chance decisively to shift
its relationship from supplicant – its status when it was invited to join
in 1998 as a reward for pursuing liberal reforms and accepting Nato’s
eastward expansion – to equal player. But on New Year’s Day, as its
presidency began, the Kremlin’s first action called any such “reliable and
responsible” image into question. Russia cut off natural gas exports to
Ukraine after Kiev refused to agree to a more than quadrupling of the price
it pays.

The decision to turn off supplies was almost certainly made by Mr Putin
himself. It was he who had issued the final offer to Ukraine, just hours
before the year-end deadline, and Ukraine’s president Viktor Yushchenko
gave Kiev’s negative response. The move prompted a sharp fall in midwinter
supplies to Europe through a transit pipeline that runs across Ukraine.

Ignominiously, Russia in effect turned the gas back on little over a day
later, after a barrage of international criticism. Even if Mr Putin secures
a deal with Ukraine – and the two sides were returning to the negotiating
table yesterday – he may have inflicted broader damage on his energy
ambitions. Russia has shown it is prepared to use drastic measures to force
a customer to pay higher prices. It has simultaneously drawn uncomfortable
attention to the full extent of Europe’s reliance on its energy – Germany,
for instance, depends on Russia for about one-third of its natural gas
supplies.

That in turn may provoke hard questions from Russia’s G8 partners about
its plans to make political use of its energy wealth – perhaps amplifying
existing concerns over its commitment to democracy and human rights.
Michael Glos, economy minister of Germany, said his country would like
to boost the amount of gas it took from Russia but added: “It can only be
increased if we know that deliveries from the east are dependable.” Mr
Glos went on: “Russia has the G8 presidency and . . . should naturally
act responsibly.”

European Union energy ministers will hold an emergency meeting in
Brussels today to discuss the crisis, which could trigger a broader debate
about Europe’s energy security and its reliance on Russia. Nor are concerns
limited to Europe. The US State department has also expressed concern
about Russia using energy as a political tool. It is scarcely the backdrop
Mr Putin wanted as he rolls out a strategy – several years in the gestation –
to build Russia’s future around energy.

It is a vision he has cherished since long before acceding to the
presidency. As a city official in St Petersburg in the 1990s, he studied
part-time at the city’s State Mining Institute and wrote a dissertation
entitled “Mineral Raw Materials in the Strategy for Development of the
Russian Economy”. In it he argued Russia’s rich natural resource base would
secure not only its economic future but also its international position. He
laid out a scenario of state-controlled, but in part privately financed,
“large financial-industrial corporations” in Russia that were able to
compete with western multinationals.

In the past two years, he has set about creating those groups. Using
occasionally questionable methods, he has restored to state control energy
assets that were privatised cheaply a decade ago. Rosneft, the state-owned
oil company, in late 2004 bought the main production arm of Yukos, the oil
company built up by Mikhail Khodorkovsky – now serving a nine-year
sentence in a Siberian prison for fraud and widely seen as the victim of a
politically motivated campaign.

Last autumn, the Russian state increased its stake in Gazprom, the gas
giant that controls about 20 per cent of the world’s natural gas reserves,
from 38 per cent to 51 per cent, moving from de facto to de jure control.
Gazprom then bought Sibneft, the oil group controlled by Roman
Abramovich, the Chelsea Football Club owner, for $13.1bn in Russia’s
biggest merger.

Finally, Mr Putin has just signed into law measures to lift long-standing
restrictions on foreigners owning Gazprom’s remaining 49 per cent free
float. Some analysts believe the influx of international investors could
double Gazprom’s market capitalisation to as much as $300bn (£172bn,
?250bn), putting it among the world’s top companies. Rosneft, meanwhile, is
being prepared for an initial public offering on the London Stock Exchange
this year that Russian officials have suggested could value it as high as
$72bn.

Instituting a new phase, Russia last month started wooing high-profile
foreigners to take important positions in its energy industry, in an
apparent effort to boost its international credibility and clout. Gerhard
Schröder, the former German chancellor, agreed to head a project controlled
by Gazprom to build a $5bn export pipeline under the Baltic Sea to western
Europe. Donald Evans, former US commerce secretary and a close friend of
President George W. Bush, politely declined a personal offer from Mr Putin
to chair Rosneft, but the Russian president has hinted Russia will continue
to search for high-profile foreign executives to join the Rosneft board.

All this leaves Russia with two state-owned energy giants with substantial
foreign investment – plus several privately owned groups that in the past
decade have been brought up to international standards. On top of the
world’s biggest hydrocarbon reserves, a location spanning the Eurasian land
mass, and a state-owned pipeline network enabling it to supply both east
and west, it makes a powerful package.

The G8 presidency is Russia’s chance to sell that package to the club of
the world’s most powerful industrialised nations. Igor Shuvalov, Russia’s
G8 “sherpa” and a close adviser to Mr Putin, has made clear Russia sees its
energy clout as its G8 admission ticket – one which, since it is not
technically among the world’s eighth largest economies, is not automatic.

“We can guarantee the global economy will not lack energy resources,” Mr
Shuvalov said last year. “We will create a mechanism whereby Russia . . .
will supply [energy] to the global market on such terms as will allow the
global economy to develop positively and predictably.” His remarks implied
Russia could provide a stable alternative to the conflict-ridden Middle
East as energy supplier.

After cutting off supplies to Ukraine – with whom Russia has the biggest
natural gas trading relationship in the world after that between Canada and
the US – the claim looks harder to support. “Russia has stained its
previously unblemished reputation,” says Graham Weale, director of the
European energy service for Global Insight, a consultancy. “If it doesn’t
do it again, it may get away with it. But if it does so even one more time,
it’s going to be hard for it to increase its sales.”

An energy consultant who asked not to be identified because he has Russian
clients went further yesterday. “They’ve basically shot themselves in the
foot,” he said. “They think they can cut off Ukraine but they can’t – not
without cutting off their other customers. And of course it’s damaging
Russia’s reputation as a reliable supplier.”

Cliff Kupchan, an analyst at the Eurasia Group consultancy and former state
department official in the Clinton administration, says Russia succumbed to
the temptation to use its energy power as a stick rather than a carrot.
“Petro-power is about diplomacy,” he says. “Petro-coercion, using energy
as a weapon of foreign policy, is something totally different again.”

He warns that the row with Ukraine could also mar Russia’s efforts to
attract investors to Gazprom, by demonstrating once again that it is an
arm of the Russian state.

Moscow, however, can hardly have been surprised at the international
reaction. It briefly cut gas to Belarus two years ago, when Russia’s
usually loyal neighbour balked at a demand to double the price it paid.
That brought protests from Europe and an intervention from Germany’s
Mr Schröder.

So why is Russia endangering its broader energy ambitions through a messy
spat with its neighbour? Analysts suggest Russia wants to use the demand
that Ukraine shifts to market prices for gas as a lever to gain another
prize – joint control with Ukraine of the export pipeline across that
country.

The tactics have worked elsewhere. Russia kept gas prices low to Belarus
in return for an agreement to take joint control of the export pipeline
across its territory to Europe. Gazprom also raised prices to Georgia but
is freezing them for 10 years in return for forming a joint venture to
develop the country’s domestic gas distribution network.

A bigger goal may be to try to bully the west-leaning Mr Yushchenko, who
swept to power in Ukraine’s Orange revolution, into rebuilding ties with
Moscow – and to influence Ukrainian parliamentary elections in March in
the hope they will return a more pro-Russian legislature. One political
consultant who knows Mr Putin suggests he “hates” Mr Yushchenko and
is happy to try to undermine him.

The Russian president may also have an eye on the domestic audience,
seeking to show that Russia can still wield influence over its former
Soviet neighbours after the setback of Ukraine’s 2004 presidential
election, in which Mr Putin backed the losing candidate. Whatever the real
motive, Chris Weafer, chief strategist at the Russian-owned Alfa Bank,
says Russia’s action will force the EU to consider alternative gas
suppliers, such as Egypt. And if Russia’s biggest foreign customers do that,
smaller customers or potential ones such as the US and Asian countries
would also be cautious.

“People in Europe woke up on Monday and were surprised just how
vulnerable their energy supplies are,” says Mr Weafer. “Russia may have
brought forward by 10 years a big debate in the EU about its own energy
security.” -30-
——————————————————————————————–
Additional reporting by Thomas Catan
——————————————————————————————-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
20. OBNOXIOUS, BUT GAS WAR IS NOT PUTIN’S WORST CRIME
It was stupid of President Putin to turn off the gas to Ukraine

FOREIGN EDITOR’S BRIEFING: By Bronwen Maddox
The Times, London, United Kingdom, Wednesday, January 4, 2006

SHOULD Russia be thrown out of the G8 for firing up the “gas war”
with Ukraine?

Yes, if you think the test for membership of the group of leading
industrialised countries should be economic influence. Russia has shown
itself in the past week to be a fragile power, unworthy of the G8 badge.
Oil, gas and nuclear weapons; that’s about the sum of its assets.

But no, there are no grounds for expulsion if the complaint is simply that
Russia has been “bullying” Ukraine. In these gas wars, Russia has been
weak, inept, obnoxious ­ and in the right.

It was stupid of President Putin to turn off the gas to Ukraine but you
can see why the drama proved irresistible. The threat of turning off the
lights of another capital must have seemed a uniquely visible
demonstration of power.

He was wrong to do it, though, because it advertised Russia’s weakness,
not its strength. One glance at those maps of pipelines spreading over
Europe should have told him why. Russia needs Ukraine and several
others to help to deliver its gas. And it needs them all as customers.

It calls itself an “energy superpower”, but that is a contradiction in
terms; look at Saudi Arabia. If the ability to turn gas taps on and off is
one of its strongest cards then it holds very few.

True, the oil price surge has brought Russia unexpected wealth and
lifted the threat of crippling deficits.

But in the years since the end of the Soviet Union it has failed to use the
flood of foreign investment to diversify its industry beyond energy. When
fashion fades and the wilfully optimistic circulars from brokers finally
acknowledge the implications of Putin’s authoritarian unpredictability for
investors, Russia’s ability to attract foreign capital will wither. This
week’s brutal action has only brought that day closer. Putin’s plan to make
“energy security ” the theme of Russia’s year-long presidency of the G8
now looks comic.

He may well have done so (Russia assumed the rotating presidency on
Sunday), but others will have heard only one lesson: that supplies from
Russia are not secure. Putin has given nuclear power in Europe a boost
beyond its dreams. He may not quite get Germany to go nuclear, but he
has got the Italian Cabinet talking hard, as Claudio Scajola, its Industry
Minister, said this week.

Russia never qualified for the G8 because of the undeveloped state of its
economy. By rights it should never have been let in. But the decision to
admit it nonetheless was an expression of romantic hope, back in those
brief days when Russia seemed to be embracing democracy. If arbitrary
clubs like the G8 are good for anything, it might as well be for such
quixotic gestures, which may act as encouragement to those who
desperately want to be members.

As it has turned out, the incentive failed. But that does not mean that
Russia should now be thrown out for overbearing and undemocratic
behaviour.

True, many of Putin’s actions in the past two years come under that
heading. He has tightened his grip on the media, on supposedly democratic
institutions and elections. Europe and the US cannot regard that with
comfort. But almost all comment this week has portrayed Russia as the
villain, the giant punishing brave Ukraine for the insult of wanting
democracy.

No question, Russia’s behaviour has been obnoxious. It is designed,
presumably, to threaten Ukrainians into voting in March for a Russia-
loving parliament.

It is, too, almost impossible to overstate the insult that Russia perceived
in Ukraine’s 2004 “Orange Revolution”. For many Russians, Ukraine is the
key to Russia becoming great again. If it is “lost”, that dream becomes
impossible. But to label Russia the bully and Ukraine the victim is a
caricature. It ignores the role of Ukraine, down many years, in skimming
off gas profits.

It ignores the many levers that Ukraine has over Russia, through the huge
web of other trade that links them. And it ignores Russia’s right to charge
the market price for its gas. It had given some notice, through price rises
to other countries, that it was thinking of this, even if the abruptness of
the demand was a surprise.

No one much doubts that, in the end, Ukraine will pay the price for gas
that Russia is asking, and that Russia has a right to ask it. Of all the
unpleasant things that Putin has done, this is not the worst. -30-
——————————————————————————————-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
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========================================================
21. EU RELIEF AS KIEV AND MOSCOW REACH GAS DEAL
Russia appeared stung by criticism that it had tarnished its
reputation as a reliable energy supplier at a time when it has
assumed the presidency of the Group of Eight industrialised nations.

Reporting by Thomas Catan in London, Tom Warner in Kiev, Neil Buckley
in Moscow, Sarah Laitner in Brussels and Bertrand Benoit in Berlin
FINANCIAL TIMES, London, United Kingdom, Thursday, Jan 5 2006

Russia and Ukraine yesterday agreed to a compromise allowing both sides to
save face in a bitter dispute that had threatened Europe’s gas supplies and
cast doubt on Russia’s reliability as an energy supplier.

The complex five-year deal came after heavy pressure was applied by European
states that had seen gas supplies fall by up to a third after Russia cut off
supplies of its gas to Ukraine on Sunday. Russia said the agreement showed
it could be trusted to supply gas reliably to Europe in the decades ahead.

Vladimir Putin, Russia’s president, said the deal made its relations with
Ukraine more “market-driven and transparent”. “This agreement creates
absolutely stable conditions for supplies to our European partners for many
years ahead,” he said.

European nations gave a sigh of relief following news of the deal and
international oil prices slipped from two-month highs. But there was
lingering concern in many quarters that the region’s gas supply had been
shown to be so fragile.

Many in western Europe were taken aback that the supply in countries like
France, Germany and Italy could have been hostage to a spat between Russia
and its neighbour. The EU welcomed the agreement but said it would need to
learn from the crisis.

“We have got to plan and think about how we are going to deal with these
things in the future,” said Martin Bartenstein, economics minister of the
Austrian EU presidency.

Under the deal, Russia will be paid $230 per 1,000 cubic metres for the gas
it exports to Ukraine – up from the $50 it was paid until now. But, after
mixing in gas supplies from the central Asian states of Turkmenistan and
Kazakhstan, Kiev will pay a gas import price of only $95 per 1,000 cubic
metres.

Deliveries of both Russian and central Asian gas will now go through an
intermediary, RosUkrEnergo, a joint venture between the banking arm of
Gazprom, Russia’s natural gas giant, and Raiffeisenbank of Austria.
Raiffeisenbank holds the stake on behalf of unidentified ultimate owners.

Russia appeared stung by criticism that it had tarnished its reputation as a
reliable energy supplier at a time when it has assumed the presidency of the
Group of Eight industrialised nations.

A meeting of European energy officials was held in Brussels to discuss the
gas scare yesterday. Many European officials said that, while Russia would
remain an important supplier, the region should also develop alternative
sources of gas.

“The meeting . . . in Brussels provided a useful forum to start discussing
the lessons that might be learned,” said Malcolm Wicks, Britain’s energy
minister. “There will be further opportunities at the European level to
consider diversity of sources and routes.” Britain is viewed as a key future
market by Russia.

Michael Glos, the German economics minister, said the gas dispute would lead
Germany to review its reliance on Russian oil and gas. “This should be an
opportunity for a fundamental rethinking about how we may, in the future,
rely more heavily on energy sources available domestically to cover our
needs,” he said. -30-

——————————————————————————————–
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
22. ACTING ACCORDING TO TYPE IN PUTIN’S OIL PLOY

COMMENTARY: By Jim Hoagland, The Washington Post
The Wall Street Journal, NY, NY, Thursday, January 5, 2006

WASHINGTON — National character remains a force in world politics despite
the prophets of globalization and one-size-fits-all economic integration.
Humans still see themselves and act as products of shared experiences and
common territory.

At least their leaders do. Vote-seeking politicians and decree-issuing
dictators have to find the political center of gravity in their nations.

When they make big decisions, George W. Bush, Hu Jintao, Hugo Chavez
et al. rely on national stereotypes of their average citizen. Leaders cannot for
very long be other than their understanding of their followers.

So it was not genetics that compelled leaders in Russia, Ukraine, Germany,
France and the rest of Europe to respond to a new tempest this week with
familiar behavior. In starting a small “cold war” in his own neighborhood —
by cutting natural gas supplies to Ukraine at the height of winter —
Vladimir Putin was doing what comes naturally.

That is, he was being overbearing and clumsy in dictating to people he still
considers Russia’s vassals. Like the commissars and czars before him, Mr.
Putin is more comfortable with force than with persuasion.

Russia’s natural gas and oil reserves have replaced the Soviet Union’s
nuclear weapons as instruments of intimidation or, if Mr. Putin likes you,
accommodation. This is not just a spat between Russia and a former Soviet
republic trying to move out of Moscow’s sphere of influence.

Mr. Putin chose to cut gas supplies to enforce draconian price increases on
Ukraine (despite an existing contract) on the day that Russia became chair
of the G-8, the self-selected committee of leading nations linking North
America, Europe, Japan and Russia.

Inviting Putin’s Russia to host the G-8 summit next July was always a
controversial step. Within the Bush administration it was argued that this
would help the Russians learn about statecraft: They would experience the
responsibilities of building consensus and setting agendas with democratic
partners. The squeezing of Ukraine suggests how steep the learning curve
remains.

The Ukrainians — reflexively portraying themselves as victims reacting to
the depredations of their powerful neighbor — appear to have siphoned off
their normal share of the gas flowing through the pipelines that cross their
territory into Central and Western Europe.

The siphoning inflicted the Russian cuts primarily on European Union
consumers, who get about 25% of their natural gas supplies from Russia.
Their howls of pain and outrage on Monday forced Mr. Putin to reconsider
what he seems not to have considered at all — the likelihood that
inflicting economic punishment could backfire on him. He has promised to
restore full supply.

But old reflexes were already at work. German politicians muttered about the
threat from the east to their stability and the need to do something before
the country exhausts its 75-day gas reserve. Austrians were equally
concerned, but asked others to do something. In Brussels, EU officials held
nonstop telephone conversations and meetings, emphasizing they would not
take sides between Kiev and Moscow.

In Paris, Le Monde editorialized that “the first war of the 21st century has
been declared” by Mr. Putin, but joined to that Gallic cry of alarm official
reassurances that France would not suffer in any event: It has already
struck separate emergency deals with Norway, Algeria and other suppliers.
——————————————————————————————–
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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