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Trial billed as most significant in Ukraine’s post-Soviet history.

Mr. E. Morgan Williams, The Bleyzer Foundation, Publisher
Washington, D.C., TUESDAY, JANUARY 10, 2006

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Myroslava Gongadze accused former Interior Ministry Oleksiy Pukach
of being one of the main organizers behind her husband’s killing.
Radio Free Europe/Radio Liberty (RFE/RL)
Prague, Czech Republic, Monday, January 9, 2005

Trial billed as most significant in Ukraine’s post-Soviet history
Case postponed until January 23
By Andrew Osborn in Moscow, The Independent Online
London, United Kingdom, Tuesday, 10 January 2006

‘Killers’ are scapegoats, claims journalist’s wife
Secret tapes point to top government officials
Tom Parfitt in Moscow, The Guardian Unlimited
London, United Kingdom, Tuesday January 10, 2006

Russia wants to rock the gas boat to influence the outcome of the
very important March 26 parliamentary elections in Ukraine.
: By Volodymyr Hrytsutenko, Lviv, Ukraine
The Action Ukraine Report (AUR), #638, Article 4
Washington, D.C., Tuesday, January 10, 2006

A pro-Moscow party leads in polls ahead of parliamentary elections as
Viktor Yushchenko and his former ally Yulia Tymoshenko spar.
By Kim Murphy, Times Staff Writer, Los Angeles Times
Los Angeles, California, Monday, January 9, 2006

OP-ED: By Mikheil Saakashvili, The Washington Post
Washington, D.C., Monday, January 9, 2006; Page A19

By Margaret Orgill, Reuters, London, UK, Monday 9 January 2006

TV 5 Kanal, Kiev, in Ukrainian 1200 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, January 9, 2006

TV 5 Kanal, Kiev, in Ukrainian 1920 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, Mon, Jan 09, 2006

RosUkrEnergo is a joint venture operated by Raiffeisen
Investment AG and Russia’s Gazprom.
For Immediate Release: The Willard Group Public Relations
Kyiv, Ukraine, Wednesday, January 4, 2006

Analysts and investors suspect that using Rosukrenergo is diverting
profits away from Gazprom to unknown beneficiaries.
By Catherine Belton, Staff Writer, The Moscow Times
Moscow, Russia, Tuesday, January 10, 2006. Issue 3327. Page 1.

Turkmen leader has offered the same gas to several buyers already
By Ethan Wilensky-Lanford, The New York Times
International Herald Tribune (IHT), Paris, France, Mon, Jan 9, 2006

Ukraine’s Party of Regions Leader criticizes Russia
UNIAN news agency, Kiev, in Ukrainian 1229 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, Mon, January 9, 2006

Celestine Bohlen in Paris & Marta Srnic in London
Bloomberg, New York, New York, Tuesday, January 10, 2006

By Raphael Minder in Brussels, Financial Times
London, United Kingdom, Monday, January 9 2006


Central and East European Correspondent
Published in Johnson’s Russia List, 2006 – #9, Article 15
Silver Spring, Maryland, Monday, 9 January 2006

Putin again uses raw power, and again the result is a major failure.
: by Transitions Online (TOL)
Prague, Czech Republic, Tuesday, 10 January 2006
Myroslava Gongadze accused former Interior Ministry Oleksiy Pukach
of being one of the main organizers behind her husband’s killing.

Radio Free Europe/Radio Liberty (RFE/RL)
Prague, Czech Republic, Monday, January 9, 2005

KYIV – The trial of three former Interior Ministry officers for their
alleged roles in the 2000 killing of journalist Heorhiy Gongadze opened
briefly in a packed courtroom in the Ukrainian capital today before the
presiding judge adjourned the proceedings until 23 January.

Relatives of the slain journalist and their lawyers said they were
“surprised” by Kyiv Appeals Court Judge Iryna Grygoryeva’s decision to
adjourn the trial for so long — a move she announced after one of the
defendants, former Interior Ministry officer Mykola Protasov, reportedly
felt faint in the courtroom.

KYIV – 9 January 2006 (RFE/RL) — Reports from Kyiv say dozens of
relatives, lawyers, and prosecutors were packing the tiny courtroom,
which was too small to hold the crowd of reporters covering the event.

Journalists tried to force their way into the room during the recess,
arguing that the hearings were open to the public and that all media should
be allowed to attend the trial. But guards drove them back.
Among those who attended the trial was Gongadze’s widow, Myroslava,
who arrived on 8 January from the United States.

Addressing reporters outside the courtroom, she said those truly
responsible for her husband’s killing have not yet been arrested.

“I don’t think this [trial] is enough, because these [three] people
[defendants Valeriy Kostenko, Protasov, and Oleksandr Popovych] had
no personal motives for killing Heorhiy,” Gongadze said.

“They were carrying out a criminal order. They had the option of not
carrying it out. They could have saved their honor and they could have
refused to follow the order, but they killed Heorhiy and they must be
punished. The next step will be when the organizers of this crime are
brought to justice. Their identities are known and they must be punished
along with the people sitting in the dock today.”

Gongadze wrote about high-level corruption, and many suspect former
President Leonid Kuchma and other top officials of orchestrating his

In comments made later to RFE/RL’s Ukrainian Service, Myroslava
Gongadze accused former Interior Ministry Oleksiy Pukach of being one
of the main organizers behind her husband’s killing.

“Pukach directly issued orders,” she said. “Pukach took a direct part in
this assassination. So far, nothing has been said [in court] about those who
ordered the killing, and we intend to invite many witnesses who will be able
to shed a lot of light on this case, even in this court session.”

Pukach is wanted in Ukraine, but remains at large. His whereabouts are
Many in Ukraine suspect former President Leonid Kuchma and other top
state officials of orchestrating the murder of Gongadze, who wrote about
high-level corruption. Kuchma denies the accusations.

Current President Viktor Yushchenko, who took over from Kuchma
following the 2004-2005 Orange Revolution, has publicly vowed to resolve
the Gongadze case, calling it a priority.

Gongadze’s mother Lesya has refused to the attend today’s court hearings,
saying she no longer has faith in the Ukrainian justice system. In comments
made on 8 January, she said she was disappointed with a 19 December
preliminary hearing at which the judge reportedly turned down her request
for an additional probe to help find those responsible for organizing the

Addressing reporters before today’s session opened, however, Lesya
Gongadze’s lawyer, Andriy Fedur, said he attached great importance to the

“For me, it will be very important to see what kind of statements will be
made and what kind of questions will be asked, whether the trial will be the
same as it was on the 19th, when the prosecutor acted as the main defender
of the accused, or whether it will finally consider the real subject,” Fedur
said. “So, for me personally, this will be a key court hearing.”

The 31-year-old Gongadze was abducted in 2000. His beheaded body was
discovered in a forest near Kyiv. Gongadze’s murder is believed to have
played a key role in eroding public support for Kuchma and his
government. -30-
Heorhiy Gongadze was neither the first nor the last journalist to be killed
in Ukraine, but it is his death that has become synonymous with the
pressure exerted on journalists by the administration of former President
Leonid Kuchma.

Within weeks of his death, secretly recorded tapes emerged that implicated
Kuchma in Gongadze’s death. Kuchma has always denied any involvement,
but the twists and turns of the protracted investigation — and its failure
to produce results — merely fueled the speculation. The demonstrations
triggered by Gongadze’s death galvanized opposition to the Kuchma

President Viktor Yushchenko, prime minister at the time of Gongadze’s
death and leader of the Orange Revolution, has said that resolving the
Gongadze case is a “matter of honor.” The journalist’s alleged killers are
now on trial in Kyiv. But a trail of deaths, including one since the Orange
Revolution, raise doubts about whether it will ever be certain who ordered
Gongadze’s murder.
The son of a Georgian politician and a Ukrainian mother, Heorhiy
Gongadze studied in Lviv before starting in journalism in Georgia.

APRIL 2000: In April 2000 Heorhiy Gongadze co-founded the newspaper
Ukrayinska Pravda (“Ukrainian Truth”), (,
publishing it online in an effort to avoid pressure from the government and
The newspaper soon produced a range of investigative articles about
Ukraine’s oligarchs and commentaries critical of the administration.
JUNE 2000: Gongadze complains of harassment by the secret police.
SEPTEMBER 2000: Gongadze disappears on 16 September. Kuchma
orders an inquiry on 21 September. The Ukrainian parliament sets up a
special commission.
NOVEMBER 2000: Gongadze’s headless body is found on 2 November
on the side of a forest road some 70 km from Kiev.
The prosecutor suggests the body may not be Gongadze’s. It is eventually
officially identified in March 2003.
On 28 November, the Socialist Party leader Oleksandr Moroz publicizes
tapes secretly recorded by a former presidential bodyguard (later identified
as Major Mykola Melnychenko) that capture Kuchma saying: “Drive him
[Gongadze] out! Throw him out! Give him to the Chechens!”
Kuchma threatens legal charges. He later admits the voice is his, but says
the tapes have been doctored. The tape excerpts relating to Gongadze are
later authenticated by a U.S. expert.
DECEMBER 2000 – FEBRUARY 2001: Demonstrations in Kyiv attract
crowds of up to 100,000 people. Despite the cold, some sleep in tents.
In February, Kuchma sacks the head of the secret services and the head
of his team of bodyguards. Police eventually break up the demonstrations.
APRIL 2001: Government led by Viktor Yushchenko falls after losing a
vote of confidence.
MAY 2001: Interior Minister Yuri Smirnov says Gongadze was killed by
two “hooligans” with gangster links. Both are already dead. The
prosecutor-general refutes Smirnov’s claims.
SEPTEMBER 2002: Police break up street protests to mark the
anniversary of Gongadze’s death.
MAY 2003: Local prosecutor convicted of abuse of office and falsification
of evidence in the Gongadze case. Senior Interior Ministry official
but released two weeks later.
AUGUST 2003: A prime suspect, Ihor Honcharov, dies in police custody.
His body is cremated before the cause of death is announced.
JUNE 2004: Government says a gangster identified only as “K” had
confessed to killing Gongadze.
MARCH 2005: President Yushchenko announces on 1 March that the
suspected killers are in custody. Prosecutor-General Svyatoslav Piskun
says two Interior Ministry policemen strangled Gongadze.
A key witness in the Gongadze case, former Interior Minister Kravchenko, is
found dead on 4 March. Authorities say he committed suicide. He had two
gunshot wounds, to the chin and temple. A suicide note blames Kuchma for
Gongadze’s death.
OCTOBER 2005: The Parliamentary Assembly of the Council of Europe
raises reservations about the handling of the case.
Yuschenko fires Piskun.
NOVEMBER 2005: The European Court of Human Rights awards
Gongadze’s wife 100,000 euros in damages, ruling that the Ukrainian
authorities had done too little to protect Gongadze, or to investigate his
death. [Ukraine has not yet paid these damages.]
JANUARY 2006: Trial of three former policemen charged with killing
Gongadze begins. -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Trial billed as most significant in Ukraine’s post-Soviet history
Case postponed until January 23

By Andrew Osborn in Moscow, The Independent Online
London, United Kingdom, Tuesday, 10 January 2006

Three policemen have gone on trial in Kiev charged with murdering one
of Ukraine’s best-known investigative journalists.

The trial, billed as the most significant in Ukraine’s post-Soviet history,
has been eagerly awaited as political fallout from the unsolved murder of
Georgiy Gongadze in 2000 played a key role in ending the 10-year
autocratic rule of Leonid Kuchma.

In death, Gongadze became an icon of the then Ukrainian opposition
movement. Outrage over his murder and the authorities’ inability to solve it
set the stage for the orange revolution of 2004, during which protesters
brandished placards demanding to know the truth about what happened
to Gongadze.

Although the three policemen standing trial for his murder are minor
figures, Mr Kuchma, Volodomyr Lytvyn, the speaker of the Ukrainian
parliament, and other senior officials have all been implicated in the case.

A parliamentary commission last year concluded that Mr Kuchma and other
senior state officials had masterminded his abduction, pointing to the fact
that they had been secretly taped by a disgruntled bodyguard discussing how
best “to take care of” Gongadze before his death. However, Mr Kuchma, Mr
Lytvyn and the others flatly deny the allegations, arguing that the
recording was doctored.

Gongadze, 31, was investigating corruption in the Kuchma regime at the time
of his murder and had made a name for himself as an anti-government reporter
at the internet newspaper Ukrainskaya Pravda. He was abducted in September
2000 and his body was found in a forest outside Kiev two months later. He
had been beaten, strangled, burnt and then decapitated.

The three policemen – Mykola Protasov, Valeriy Kostenko and Oleksandr
Popovych – appeared in court yesterday. They are charged with premeditated
murder and of exceeding their authority. It is not known how they will
plead, although there have been unconfirmed reports that they have already
confessed their guilt. A fourth police officer wanted in connection with the
journalist’s murder, Oleksiy Pukach, is thought to have fled the country.

However, the opening day in court was interrupted when Mr Protasov was
taken ill, forcing judges to postpone the case until 23 January. A lawyer
acting for Mr Gongadze’s mother, Lesia, said the episode appeared
suspicious, while his widow, Myroslava, wondered why the trial needed
to be interrupted for so long.

What prosecutors really want to know are the names of the people who
ordered the “hit”. Yuriy Kravchenko, the Interior Minister at the time of
Gongadze’s murder, who had been implicated in it, killed himself the day
before he was due to give testimony to the inquiry. The case was reopened
after The Independent published leaked documents that showed police
had probably been involved in Gongadze’s abduction.

Outside the court Myroslava welcomed the fact that the trial was taking
place but said that those who ordered the murder of her husband should not
be allowed to escape justice. “They are known and they should be punished
just the same as those who will be sitting in the dock today,” she said.

“They [the defendants] had no reasons of their own for killing … they were
carrying out an order.” -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Send in names and e-mail addresses for the AUR distribution list.
‘Killers’ are scapegoats, claims journalist’s wife
Secret tapes point to top government officials

Tom Parfitt in Moscow, The Guardian Unlimited
London, United Kingdom, Tuesday January 10, 2006

Three policemen accused of killing a high-profile investigative journalist
went on trial in Ukraine yesterday as the wife of the dead man claimed the
defendants were being used as scapegoats.

The murder of Georgy Gongadze, who was decapitated and buried in a
shallow grave, was one of the flashpoints that provoked the orange
revolution that brought President Viktor Yushchenko to power last winter.
Ukraine’s handling of the case is being seen as a test of the country’s
democratic credentials as it grooms itself for European integration.

Mr Yushchenko has said that solving the case is a priority, but he and other
public figures have been forced to deny hindering the investigation to
protect allies who knew about the murder plot.

Secretly recorded tapes that appeared after the journalist’s death seemed to
suggest that the former president Leonid Kuchma had ordered the killing
because of the 31-year-old reporter’s reports about corruption. Mr Kuchma
denies such suggestions.

Gongadze’s corpse was found soaked with acid in a forest outside Kiev in
November 2000, several weeks after he was abducted. The police officers
Mykola Protasov, Valery Kostenko and Alexander Popovych were formally
charged yesterday with killing the reporter, who worked for the Ukrayinskaya
Pravda website. They were arrested last February. Another ex-officer,
Oleksiy Pukach, is being sought.

Speaking outside court in Kiev, Gongadze’s widow, Myroslava, said his
mother was not attending the hearing because “she is certain that the men
who sit in the court today are scapegoats, and not the real people who
ordered this crime”.

She added: “These people had no personal motives for killing Georgy. The
next step will be when the organisers of this crime are brought to justice.
Their identities are known and they must be punished along with the people
sitting in the dock today.”

Last March the former interior minister Yuri Kravchenko was found dead
on the day he was to be interrogated about the murder. He had apparently
committed suicide, but sceptics suggest he was forced to kill himself to
protect politicians who are now allies of Mr Yushchenko.

In September a commission of MPs concluded that the parliamentary
Speaker, Volodymyr Lytvyn, had “instigated the abduction” of Gongadze,
but no criminal charges were brought. He denies the allegation. A month
later the general prosecutor, Svyatoslav Piskun, was sacked, in part for
his allegedly poor handling of the case.

The return to Ukraine in November of the bodyguard who made secret
recordings of Mr Kuchma raised hopes of a breakthrough, but no senior
official has yet been charged, and the validity of the tapes has always been
disputed. Yesterday’s hearing was adjourned until January 23. -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Send in names and e-mail addresses for the AUR distribution list.
Russia wants to rock the gas boat to influence the outcome of the
very important March 26 parliamentary elections in Ukraine.

COMMENTARY: By Volodymyr Hrytsutenko, Lviv, Ukraine
The Action Ukraine Report (AUR), #638, Article 4
Washington, D.C., Tuesday, January 10, 2006

In the wake of the soothing declarations from Russia’s Gazprom and
Ukraine’s Naftohaz many have been misled into believing that the gas spat
has been sorted out and it’s business as usual in Ukraine’s relations with
Mother Russia.

This is hardly the case. After watching Russia’s Channel 1 on Sunday, Jan.
8, the following conclusions can be made:

1. The smearing of President Viktor Yushchenko has not subsided. On the
contrary, it has even picked up. Our President is portrayed as an
ineffective leader, distancing himself from the country’s real needs and
interests as well as showing an ill-conceived craving to integrate Ukraine
into NATO and the EU.

2. The present biased coverage by Russia’s media of Ukraine is basically
the same as it has been recently. The earlier accusations of gas siphoning
[theft] are hammered home to Russians – with no alternative coverage from
Putin’s pocket media.

3. Russia’s Channel 1, for instance, kept absolutely mum about the breaching
by Russia of its long-term gas contract with Ukraine OR the use of fuel
deliveries for political leverage over Ukraine OR the damage done to Russia’s
reputation as Europe’s reliable partner by the blatant shut-off of gas to

4. In so doing, Vladimir Putin and his entourage have once again shown that
history lessons are not for them to be learned. They continue to treat
Ukraine with their age-old imperial contempt. Most importantly, they openly
disregard their own people by feeding them lies and brainwashing them into
an openly anti-Ukrainian stance.

5. In the light of what has been said above, the final conclusion is that
Russia does not view the gas spat as settled. On the contrary, the empire is
continuing to blow up the stand-off with Ukraine – to rock the gas boat to
influence the outcome of the very important March 26 parliamentary
elections in Ukraine. -30-
Volodymyr Hrytsutenko is an Associate Professor of English at
Lviv Franko University, Lviv, Ukraine. E-mail: vhryts@lviv.farlep.
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
A pro-Moscow party leads in polls ahead of parliamentary elections as
Viktor Yushchenko and his former ally Yulia Tymoshenko spar.

By Kim Murphy, Times Staff Writer, Los Angeles Times
Los Angeles, California, Monday, January 9, 2006

KIEV, Ukraine – After last week’s signing of a five-year natural gas
agreement with Russia, President Viktor Yushchenko was basking in
self-congratulation. “I would call it a brilliant achievement,” he told
Ukraine’s NTN television.

But former ally Yulia Tymoshenko thought otherwise. “Only a person with
a huge New Year’s hangover can call this a success,” declared Tymoshenko,
who was a partner in the 2004 Orange Revolution that brought Yushchenko
to power and was his prime minister until last fall. “It’s clear that the
government has systematically and consciously betrayed the national
interests of Ukraine.”

Just a little more than a year ago, the duo were a “dream team” that stood,
hands clenched triumphantly together in the air, in Kiev’s Independence
Square. For much of the world, they came to symbolize democratic
aspirations throughout the former Soviet republics.

But just two months before parliamentary elections that could make or break
Yushchenko’s efforts to steer Ukraine toward Europe, the showdown with
Russia over gas has left the two reformists more divided than ever.

In an alarming sign for Ukrainian liberals, Yushchenko’s Our Ukraine party
got just 13.7% in a poll taken before the gas deal, putting it in third
place, trailing Tymoshenko’s bloc.

Leading the pack is the party of former Prime Minister Viktor Yanukovich,
the Russian-backed candidate who faced Yushchenko in 2004 and was
defeated only after hundreds of thousands of Ukrainians occupied the
streets and demanded new elections. His party now commands 26.6% in
the polls.

Many here felt Russia’s move to quadruple natural gas prices was an attempt
to punish Ukraine for its drift to the West. It presented the Yushchenko
administration with its most serious crisis yet – the prospect of billions
of dollars in higher gas costs.

Yushchenko successfully called on a broad range of Ukrainians to rally
against the Russian enemy and emerged with a pact that he said guaranteed
the nation “true independence” where it counts. “We have guaranteed
ourselves a stable gas supply in the next five years, and this is the most
important thing, believe me,” he said. But Tymoshenko has charged that
Russia shrewdly outmaneuvered Ukraine and took home a deal that gave it
almost everything it wanted.

Last week, cellphone text messages spread through Ukraine, recalling the
history of famine, secret police arrests, and other low points in Ukraine’s
history with Russia: “Remember gasoline? Tuzla? Famine? NKVD terror? .
Don’t buy Russian gas. If you are a Ukrainian, send this to your friends.”

Of course, most Ukrainians are only too well aware that when it’s 5 degrees
and snowing outside, boycotting Russian gas is hardly an option.

“Russia is our closest neighbor, and he should be supporting our closest
neighbor,” said Larissa Svyetenko, 56, a Kiev homemaker who, like many
Ukrainians, had misgivings over Yushchenko’s handling of the conflict.

“Russia just wants to strangle Ukraine. It doesn’t want to lose its
influence, especially if it’s a very tasty piece of pie,” Larissa
Sokolovskaya, a retired publisher, countered.

The difference in perceptions defined the presidential election a year ago,
when Yanukovich and Yushchenko split the tally during two rounds of

The rift has scarcely healed since then. Now, the split with Tymoshenko
is fragmenting the pro-Western camp, amid growing disillusion with events
of the last year.

Although tax revenue has skyrocketed with a clampdown on corruption,
overall economic growth is down and prices are up. Foreign investment is a
fraction of what the new government hoped it would be.

Yushchenko’s supporters blamed much of the difficulty on the populist
economic policies of Tymoshenko, who threw investors into retreat when she
threatened to nationalize about 3,500 businesses and imposed controls to
check skyrocketing gasoline prices.

Since the pair split ways in September, they have traded insinuations of
corruption in each other’s camp, producing more dismay than outrage
among their supporters.

“We hoped that the responsibilities assumed by Yushchenko and Tymoshenko
would prevail over their personal ambitions. We hoped that cravings for
power would not trump efforts to meet the people’s needs,” the weekly
Zerkalo Nedeli wrote in the fall. “What we did not expect was that so soon
and bitter would be the disappointment.”

When former world heavyweight boxing champion Vitaly Klitschko returned
to Ukraine to run for parliament, he joined neither Yushchenko’s nor
Tymoshenko’s party – though he had been an enthusiastic supporter of the
Orange Revolution and had worn an orange flag on his boxing trunks during
his last title fight.

Instead, Klitschko is running under a new alliance formed in part by the
youth group Pora, whose supporters flocked to Independence Square a year
ago but have been critical of the government’s progress since.

“I decided to support what can be called the ‘third force’ in the orange
camp,” he said. “In terms of their goals, these are people that are not
involved in the corruption scandals, they don’t have anything to do with
the oligarch groups.”

But Klitschko was also careful not to pass judgment. “The expectations are
always greater than the real things,” he said.

Opponents say Yushchenko’s rich supporters who helped the president
come to power used the opportunity to transfer wealth from the old guard
to themselves.

“They took advantage of their new positions to get back what they invested
in the orange events,” said Nestor Shufrych, an opposition leader who is
running in a new alliance whose name, Ne Tak! plays off the orange team’s
campaign theme, Tak! (Yes! or So!).

“The fact that Yushchenko is now stating that he’s eager to ally with
Yanukovich in the parliament after the election can mean only two things,”
Shufrych said.

“Either Yushchenko has become so weak that he’s eager to cooperate with
‘bandits,’ or that he lied a year ago when he called Yanukovich and his
team ‘bandits.’ The way he lied about everything else.”

Senior presidential advisor Volodymyr Horbulin acknowledged that the split
with Tymoshenko and the economic setbacks had helped Yanukovich.

“On the other hand, taking into account the great changes in such a short
time, it wouldn’t be smart to think that we would be able to avoid making
mistakes,” he said.

Yushchenko’s biggest challenge now is to work with a new parliament in
which his Our Ukraine party almost certainly won’t have a majority. Under
new political reforms, the parliament has the power to hire and fire the
prime minister and his Cabinet.

It seems unlikely that even together, Yushchenko and Tymoshenko would
win a majority big enough to form a government, analysts say, and they
probably will have to accommodate Yanukovich’s Party of Regions.
Yanukovich could even become prime minister.

“It seems to me that this parliament election will be similar to the German
situation. None of the parties will receive the majority that would enable
them to form the government, and a coalition will have to be created,”
Horbulin said. “But there is no way that there will be a return of the
political forces that were in power before the Orange Revolution.”

“The policy will be less anti-Russian and less pro-Western,” said Mikhail
Pogrebinsky, director of the Center for Political and Conflict Studies in
Kiev. “It will be a multi-vectored one and a pragmatic one. It means that
if there’s something the U.S. wants and can offer something in exchange,
then OK, we have a deal.

“But I think both the U.S. and Europe should be interested in this kind of
coalition,” he said. “Because it will guarantee stability in Ukraine.” -30-

[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Send in a letter-to-the-editor today. Let us hear from you.

OP-ED: By Mikheil Saakashvili, The Washington Post
Washington, D.C., Monday, January 9, 2006; Page A19

TBILISI, Georgia — Last week Russia announced that it would halt and
then — not long after — that it was restarting natural gas shipments to
Ukraine. It was a momentary crisis that should have wide-ranging
ramifications for the economic security of Europe and raise questions
about any notion of a role for Russia as a reliable energy supplier.
Russia’s arbitrary cutoff sent a clear message to the European Union:
There can be no energy security when an undependable neighbor is
willing and able to use its energy resources as a weapon in political

We in Georgia watched these events with great interest for two major
reasons. Last August, Georgia and Ukraine initiated the creation of the
Community of Democratic Choice. The CDC held its first meeting in Kiev
last month and began to mobilize democracies to work toward our common

In the course of the Rose and Orange revolutions in Georgia and Ukraine,
respectively, our peoples chose to develop open, democratic societies and
set out to reorient our economic and political ties to the West.

We believe it is critical to our future safety and economic security that we
integrate ourselves with Euro-Atlantic structures, which is why we are
working to gain membership in NATO and the European Union. We are
constantly striving for good relations with our giant neighbor, but the
Russian government’s recent actions are yet another example of that
country’s attempts to influence nearby countries. Because of our democratic
solidarity with Ukraine, our Black Sea neighbor, we shared the outrage
expressed in Europe at Russia’s heavy-handed action.

We also expressed support for Ukraine because of our own experience. While
this was the European Union’s first experience with a politically motivated
cutoff of natural gas, Russia has attempted to pressure Georgia this way on
many occasions. That is why we seek diverse sources of energy. In the wake
of these dramatic events, it is critical that the E.U. move to diversify its
energy sources and develop new transportation routes for its supplies. The
fig leaf of “market rates” that Russia traditionally uses as cover to jack
up prices or to cut off energy supplies is disingenuous at best.

There is nothing “free market” or “market rate” behind Russian energy
prices. Manipulation of energy prices and supplies is a critical tool of
those in Russia who believe that hydrocarbons are the best means of
political influence. In Georgia, both Abkhazia and South Ossetia, two areas
that are outside of our control and whose separatist authorities are
directly controlled by Russia, receive natural gas free — hardly a practice
free-marketeers would applaud.

Russia uses not only its energy supplies but also the vast energy
transportation network that former Soviet states inherited — and depend
on — to exercise energy control. For example, when Russia demanded steep
price increases in natural gas from my country, we approached Kazakhstan and
reached a preliminary agreement to purchase gas from it at a genuine market
rate. But Russia’s Gazprom refused to allow shipment through Russian
territory, thereby scuttling the deal.

It gets worse. The E.U. should take note that in December 1999 Georgian
natural gas from Russia — our sole supplier — was cut off for no reason in
the dead of winter and was restored only through U.S. intervention.

For Georgians, our path is clear: We are moving aggressively to diversify
our energy sources and transportation networks. The recently completed
Baku-Tbilisi-Ceyhan pipeline, which brings natural gas from Azerbaijan to
Turkey and crosses Georgia is a critical piece of this effort.

For Europe, the Black Sea states hold the key for new routes to bring in
energy supplies from the Middle East and Central Asia. We are willing to
work closely both with our European partners and with Russia to make the
whole system transparent, predictable and immune to — or insulated from —
political shocks. -30-
NOTE: The writer is president of the Republic of Georgia.
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]

By Margaret Orgill, Reuters, London, UK, Monday 9 January 2006

LONDON -Gas prices in last week’s deal to resolve a dispute between

Russia and Ukraine have only been agreed for the next six months, which
raises the possibility of more price rows and supply cuts to Europe this year.
The agreement between the ex-Soviet neighbours aimed to avert a repeat of
a New Year supply halt that shook Europe.

It was hailed as a five-year deal, but according to a version of the
contract on Ukraine ex-premier Yulia Tymoshenko’s website, sales prices

have been set for a much shorter period.

Under the deal, the price Russia pays for transporting gas across Ukraine,
the route for 80 percent of its exports to Europe, has been fixed for five
years until 2011.

According to Tymoshenko’s website, Ukraine agreed to pay $95 per 1,000

cubic metres for Russian and Central Asian gas but this price has only been
set for the first six months of 2006.

Neither Russian gas giant Gazprom (GAZPPE.RTS: Quote, Profile,

Research) nor Ukrainian state gas company Naftogaz were available for

Tymoshenko, dubbed the “gas princess” for her involvement in the energy
sector in the 1990s, has launched a legal challenge to stop the deal which
means higher prices for Ukraine.

Under the deal, Gazprom will pay Ukraine transit fees of $1.6 per 1,000
cubic metres per 100 kilometres in cash for the next five years until 1
January 2011.

When the deal was announced, officials said Ukraine would buy Russian gas
from Gazprom for $230 per 1,000 cubic metres and a mix of Russian and
Central Asian gas for $95.

Russian gas expert Jonathan Stern said in reality the $95 price covers just
Central Asian gas as Russian gas is too expensive for Kiev.

“No Russian gas will be delivered to Ukraine this year. If Ukraine wants
Russian gas then it will have to pay $230 which it can’t afford,” Stern, of
the Oxford Institute for Energy Studies said. “The only gas it will get is
Central Asian gas for $95. Gazprom has washed its hands of sales to

The accord uses a little-known middleman called RosUkrEnergo, owned

equally by Gazprom and an Austrian bank Raiffeisen representing mainly
Ukrainian investors, to deliver the gas to Ukraine.

Under the deal, RosUkrEnergo will buy this year 41 billion cubic metres
(bcm) of Turkmen gas, up to seven bcm of Uzbek gas, up to eight bcm of
Kazakh gas and up to 17 bcm of Russian gas.

RosUkrEnergo will sell Ukraine 34 bcm of gas in 2006 at a price $95 for the
first half of the year. This gas is only for Ukraine’s domestic use and not
export. In 2007, the company could supply up to 58 bcm for domestic

Ukraine use and 15 bcm which could be exported jointly with Gazprom.

Ukraine is expected to consume 73 bcm of gas this year, with 20 bcm from

its own production and the rest from Central Asia and Russia, Stern said.
For Yulia Timoshenko’s website double click on:

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TV 5 Kanal, Kiev, in Ukrainian 1200 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, January 9, 2006

KIEV -[Presenter] Parliament speaker Volodymyr Lytvyn does not rule out
the dismissal of some members of the government over the gas issue. He
said this after a meeting with US Ambassador John Herbst.

Lytvyn expects the Cabinet of Minister’s report on gas supplies to Ukraine
[which is scheduled for 10 January] to take place in a rowdy atmosphere.
Only very convincing arguments from the Prime Minister [Yuriy Yekhanurov]
can save the government from dismissal.

The prime minister should guarantee that the price of 95 dollars per 1,000
cu.m. of gas will not change for five years. Lytvyn also pointed out that it
will be necessary to amend the state budget due to the increase in the price
of gas.

[Lytvyn] Everything will depend on the arguments, on how frankly
parliament – and thereby Ukrainian society – is informed about the
agreements that were reached. That’s first. Secondly, what are we going to
do with the budget. It is clear that the budget should be recalculated and
reviewed. When are we going to do this? Who will be responsible? I think
this is the joint responsibility of the government and parliament.

[According to the agreement reached by the heads of Ukrainian state oil and
gas company Naftohaz Ukrayiny and Russia’s Gazprom in Moscow on 4
January, Ukraine will buy a mixture of Russian and Central Asian gas from
intermediary company Rosukrenergo for a price of 95 dollars per 1,000
cu.m. Previously Ukraine received Russian gas as a barter payment for
transit services at a notional price of 50 dollars per 1,000 cu.m.] -30-
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TV 5 Kanal, Kiev, in Ukrainian 1920 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, Mon, Jan 09, 2006

The former Ukrainian prime minister and leader of the Yuliya Tymoshenko
Bloc, Yuliya Tymoshenko, and the head of the Naftohaz Ukrayiny state oil and
gas company, Oleksiy Ivchenko, have accused each other of promoting the
interests of different gas intermediaries, Rosukrenergo and Itera.

Speaking in the studio of the 5 Kanal TV channel, Tymoshenko said the best
way out of the crisis would have been to stick to the existing agreement and
go to the Stockholm court if Russia had switched off gas. Ivchenko defended
the gas deal with Russia’s Rosukrenergo and Gazprom, which was signed on 4

The following is an excerpt from a programme broadcast by Ukrainian
television TV 5 Kanal on 9 January. Subheadings have been inserted

[Presenter] My first question is to all three participants. It is a question
on gas, the agreement that was signed and everything that is happening in
Ukraine at present. Does this agreement, now that it has been signed, harm
or assist in improving Ukraine’s image in the world and with its partners,
the EU and Russia?
[Tymoshenko] Can I say a few words. You know, I am happy that people can
now hear an grounded and clear answer. And I will begin with this: there was no
need for us to sign any sort of agreements. I have in my hands an existing
document, which is called Appendix No 4. It is singed and has all the
necessary signatures.
It is written here that Gazprom will, on an annual basis in 2005-09, will
provide for guaranteeing the Ukrainian gas balance, I am reading in the
language of the original, as payment for the transit services to Gazprom,
Russian gas through shall be transported through the territory of Ukraine at
the price of 50 dollars per 1,000 cubic metres, which is not subject to
change by the sides.
This document is legalized in the proper manner and it is valid. And that is
why there was no need to sign anything. The document that was signed on the
night of 3-4 January 2006 absolutely ruins the strategy for ensuring gas
supplies to Ukraine.
First of all, a totally dubious company, Rosukrenergo, has now been made the
monopolist responsible for guaranteeing natural gas supplies to Ukraine, and
without any guarantees it has been given the right to ensure Ukraine has gas
The deal that was signed envisages that Ukraine fixes the price for transit
of gas through Ukraine for five years, while Rosukrenergo gives Ukraine the
price of 95 dollars for only half a year without any guarantees. [Passage
omitted: more in the same vein]

[Presenter] Mrs Yuliya, my question was completely different. Does what is
happening now, after the signing of the deal, contribute to Ukraine’s image?
I have not heard a reply.
[Tymoshenko] Yes. I will tell you [being interrupted]

[Presenter] Does it contribute, or is it merely a handy place to have a go
now at Naftohaz Ukrayiny, the president and the cabinet?
[Passage omitted: Tymoshenko provides examples of what world press had to
say about the deal, most of which she says state the deal is a sell-out,
correspondent repeats the question.]
[Tymoshenko] Look, I did not sign a life-long political marriage contract.
I, and the political bloc I head, we supported honest politics, we supported
love of our country and we supported a sincere approach towards Ukrainian
national interests. And I am indifferent as to the surname if such things
are taking place in the country. And that is why there is no need here to
look for some sort of political sense.

[Presenter] So there is no need to look for it, as it is here.
[Tymoshenko] The sense is absolutely clear here. Ukraine has lost its
national interests here.

[Presenter] We have heard your view. Let’s stick to hearing a reply to the
question and not hear prepared answers, as the essence of the contract
between Naftohaz and Gazprom and comments on whether contracts have been
carried out, is the subject of coming questions in this programme.
Mr Ivchenko, what is your view? Is the deal you signed, rather the deal
signed between Naftohaz and Gazprom, a handy way of striking a blow to
political opponents? Does it cause harm to Ukraine’s image?
[Oleksiy Ivchenko, by phone] You know, I will begin with the interactive
question that you put today in the studio for viewers. I saw that 80 per
cent believe that what is happening in the 5 Kanal studio today is nothing
more than election campaigning by Yuliya Tymoshenko. [Passage omitted:
Ivchenko and the presenter argue about interactive questioning]
[Ivchenko] I will say that without doubt certain politicians are trying to
use the gas issue in their electioneering. This can also be seen in the
answers and arguments aired by Yuliya Tymoshenko as I am really surprised
that she is referring to Appendix No 4 and it really does exist. I want to
ask: when was Yuliya Tymoshenko being honest, now in the studio or when she
was prime minister?
Because when she was prime minister, she personally demanded from me, in
written form, through cabinet directives to annul Appendix No 4. And,
including through a series of written orders and cabinet resolutions and the
cancellation of a resolution adopted by the Cabinet of Ministers on the
basis of which Appendix No 4 was signed.
I did not carry out her orders and that is why Appendix No 4 was not
annulled and it really was an argument to defend the terms which are
extraordinarily necessary for Ukraine in gas matters and evidence of this is
the agreement we signed recently with Russia’s Gazprom. And that is why I
say, once again, that Yuliya Tymoshenko refers to Appendix No 4 that she
wanted annulled.
[Tymoshenko] Can I reply?

[Correspondent] Very briefly please.
[Tymoshenko] I demanded one thing from Mr Ivchenko and all those responsible
for this sector. I demanded that ties with Rosukrenergo be severed, because
it has led to a situation that in 2005 Ukraine failed to receive 20bn cu. m.
of gas. Appendix No 4 has several aspects.
It, like the said cabinet resolution provided for a reduction in payment of
Ukraine’s debt obligations to Russia from 10 years to five and for payment
in gas. And in this section, which contravenes the ratified agreement,
without doubt Appendix No 4 had to be either annulled or amended in certain
parts, which contravene the ratified agreement.
Because the interests of Ukraine in the gas sector were surrendered
sufficiently on a consistent basis by the previous authorities and the
current authorities. And I want to say that it was difficult to find a
bigger supporter of Rosukrenergo than Oleksiy Ivchenko. But I want to say
that he is fulfilling certain instructions and orders and that is why I want
Ukraine to simply stop this shame.

[Correspondent] Did this serve as grounds for Gazprom to talk about a
complete review of the contract? About its annulment?
[Tymoshenko] No. Appendix No 4 in the part on gas prices corresponds fully
with international agreements which were signed and ratified by Ukraine and
Russia. And, now, to be honest, all of these sad justifications, which I
hear at the present time.

[Correspondent, interrupting] Is that your assessment of what you heard from
Mr Ivchenko? And nothing less.
[Tymoshenko] Absolutely. Absolutely. Because every person who draws up two
agreements, which is what we had in Ukraine, and what we have now, these are
incomparable things. [Passage omitted: correspondent this is her emotional
assessment of her opponents, MP Kseniya Lyapina says the deal showed Ukraine
is a reliable partner for Europe]
[Ivchenko] As regards intermediaries, I wonder when Yuliya Volodymyrivna was
sincere – when she signed an intergovernmental agreement between Ukraine and
Turkmenistan in June, or to be more precise, tried to sign this contract and
tried to make us sign this contract. We refused to do so.
I think the prime minister included the following provisions
intergovernmental contract – that the Itera international company,
registered in the USA, should be an intermediary, an operator of Turkmen gas
transit through Turkmenistan, Kazakhstan and Russia to Ukraine, and Ukraine
should guarantee the transit of Turkmen gas through Turkmenistan, Kazakhstan
and Russia for Itera.
I want to say that this was nothing else than framing Ukraine and a betrayal
of Ukraine’s national interests, because Ukraine does not have a gas transit
contract with Turkmenistan, Kazakhstan or Russia. So, Ukraine could not
undertake commitments to guarantee gas transit for Itera. Let Yuliya
Volodymyrivna answer what intermediaries she wanted to include in an
intergovernmental agreement. I am greatly interested now. [Passage omitted:
Kseniya Lyapina says the new deal is transparent on Ukraine’s side.]

[Tymoshenko] The contract on a settlement of relations in the gas sphere has
three points. First, the gas price is absolutely unpredictable in several
months time. Second, an absolutely monopolistic supplier of gas to Ukraine,
Rosukrenergo, has been brought in without any guarantees. Third, the
agreements says that Haftohaz Ukrayiny will contribute some assets to
Rosukrenergo. God forbid it is the gas pipeline.

[Presenter] This is a question to Mr Ivchenko.
[Tymoshenko] Wait a minute. Let me finish. Ukraine gave Russia the right to
transport its gas through Ukraine for five years at a price below the market
rate. This is the value of this agreement. [Passage omitted: Tymoshenko
gives the presenter a copy of the contract]
[Tymoshenko] I want to say that there is a way out of the situation. We
should get rid of a trough, the corrupt scheme called Rosukrenergo, to annul
the agreement I gave you, because it is absolutely worthless in legal terms,
to return to the contracts Ukraine had and still has, and not to observe the
nonsense that was signed and what you are holding in your hands.
If we annul the agreement then Ukraine will have complete stability, just
like Bulgaria, until 2010. So, there is a way.
Our political bloc has put forward a draft parliamentary resolution for
tomorrow, which we think should be supported by parliament. It estimates the
agreement, assesses the officials who signed the accord and gives clear
arguments why this deal is absolutely unacceptable for Ukraine. [Passage
omitted: Tymoshenko argues with the presenter over the possibility of gas
price changes.]
[Tymoshenko] We should have answered to Russia bravely, just like Bulgaria,
that we should observe contracts. If Russia would have changed something
unilaterally then Ukraine should have gone to the Stockholm court and prove
that Ukraine is right on the basis of the existing agreement.
As regards world prices, yes they exist. But not when Ukraine is under
pressure from a monopoly. On the other hand, world prices also include
futures contracts. These are contracts for the future.
They always envisage lower prices than world prices on spot contracts,
signed today for today. so what we signed for the future absolutely
corresponded to world prices, and this agreement should be observed until
In addition, when we signed the price until 2010 great concessions were made
to Russia in many other areas. So, all this can be considered only together.
[Passage omitted: Russian sources said Ukraine stole gas.]
[Ivchenko] I am surprised that Yuliya Volodymyrivna refers to Bulgaria’s
resistance. Bulgaria is buying gas from Russia at 160 dollars [per 1,000
cu.m.]. It is our example of resistance in the stand-off and the terms of
gas supplies we managed to achieve for Ukraine gave Bulgaria an opportunity
to refuse from a further increase of the gas price to 230 dollars.
As regards statements that Ukraine had better terms under previous
agreements, I want to say that we did the right thing and broke the evil
barter scheme, which enslaved Ukraine and made it dependant on gas from
other countries.
We have the best price now, 95 dollars [per 1,000 cu.m.], which is the best
price among our neighbours.
We will earn about 2.5bn dollars on gas transit, which will give us an
opportunity to buy gas for Ukraine at 95 dollars and invest in the
modernization of the Ukrainian gas transportation system.

[Presenter] But this is for half a year only, Mr Ivchenko.
[Tymoshenko] And without any guarantees.
[Ivchenko] The agreement says very clearly that the price of gas and the
transit rate can be changed only with the consent of the two parties. So, if
we don’t agree to change the price to anything other than 95, the price
cannot be changed unilaterally. The same applies to transit.
If the other party does not agree to change the transit price we will not be
able to do this unilaterally. So, Yuliya Volodymyrivna’s reservations are
nothing else than election campaigning, because both for Yuliya
Volodymyrivna and Viktor Yanukovych [leader of the Party of Regions] it is
beneficial if the settlement laid down in the agreement is broken.
For them the worse the better. There is hysteria in Ukrainian politics.
Instead of consolidating to support Ukraine’s position they are doing

[Presenter] Why Rosukrenergo, Mr Ivchenko? Was there any other company?
Why couldn’t you get rid of mediators?
[Ivchenko] There was a question whom we should sign an agreement with from
Russia. We should sign an agreement with those who offer the best terms for
Ukraine – the best gas price and the best transit price. So we agreed.
Rosukrenergo was offered by the Russian party. Kseniya Lyapina is absolutely
right that if there are any relations between Rosukrenergo and Gazprom, this
is their problem.
Let them settle these relations themselves. We have chosen the best terms
for Ukraine and we cleaned Ukraine of any schemes in the gas sector.
[Passage omitted: Tymoshenko again accuses Ivchenko of betraying national
interests] -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]

RosUkrEnergo is a joint venture operated by Raiffeisen
Investment AG and Russia’s Gazprom.
For Immediate Release: The Willard Group Public Relations
Kyiv, Ukraine, Wednesday, January 4, 2006

VIENNA, Austria – Wolfgang Putschek, managing director of Raiffeisen
Investment AG has hailed a compromise agreement that ensures natural gas
deliveries sufficient to meet Ukraine’s energy needs while enabling Russia
to transport its gas through Ukraine to markets in Western Europe.

“We are really very pleased that an agreement was reached that was
acceptable to all parties,” Putschek said. “This conflict has now been

A solution to Ukraine’s gas crisis emerged after RosUkrEnergo offered to
supply Ukraine with natural gas for $95 per 1000 cubic meters.

RosUkrEnergo is a joint venture operated by Raiffeisen Investment AG
and Russia’s Gazprom. Earlier, Russia had raised the price to $230 per
1000 cubic meters, a more-than-fourfold increase over what Ukraine had
been paying.

He said that RosUkrEnergo’s offer had been accepted in part because
Raiffeisen Investments enjoys a neutral image in Eastern Europe.

“In this instance, our neutrality equates to trust,” Putschek said. “Trust
is essential to any successful business transaction, and certainly to one as
important as this.”

He said that the agreement meant that RosUkrEnergo’s role “has been
greatly enhanced, as the company will now manage the entire import
volume of natural gas to Ukraine over the next five years.”

Putschek said that RosUkrEnergo was able to offer the lower $95 rate by
purchasing large volumes of low-priced natural gas from the Central Asian
republics of Turkmenistan, Uzbekistan and Azerbaijan, and combining it
with quantities of more expensive Russian gas.

In addition, the tariff charged to transport 1,000 cubic meters of gas 100
kilometers was raised from $1.09 to $1.60, Putschek said. This means that
Ukraine will earn significantly more from gas transited through its

Earlier, Naftogaz Ukrainy head Oleksiy Ivchenko said that Ukraine would
pay for gas deliveries in cash, and Russia would likewise pay cash for the
transit of its gas destined for markets in Western Europe.

Gazprom Chief Executive Alexei Miller said that “the agreements will provide
additional security guarantees to gas exports to Europe and act as a sound
foundation for further cooperation between Russia and Ukraine in the gas
sector based on market principles.”

Raiffeisen Investment AG is a subsidiary of Raiffeisen Centrobank, the
investment banking arm of Raiffeisen Zentralbank (RZB).

Putschek said that the company’s role in the joint venture with Gazprom is
to ensure that RosUkrEnergo operates in a manner consistent with Western
European standards and to oversee the company’s financial affairs.

He said that the partners hope to prepare RosUkrEnergo for an eventual
initial public offering of the company’s stock on a Western securities
exchange. -30-
For information contact: The Willard Group Public Relations,
Scott Lewis (English) or Maxim Rylsky (Russian, Ukrainian)
Kyiv, Ukraine, T: 380 (44) 230-2080
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Be A Vice-President In Charge Of The Continuing Orange Revolution
Analysts and investors suspect that using Rosukrenergo is diverting
profits away from Gazprom to unknown beneficiaries.

By Catherine Belton, Staff Writer, The Moscow Times
Moscow, Russia, Tuesday, January 10, 2006. Issue 3327. Page 1.

MOSCOW – The secretive Swiss-registered gas trading company
Rosukrenergo has emerged a clear winner in the unprecedented price dispute
between Russia and Ukraine that rocked both countries and the rest of
Europe for the first three days of the new year.

As a jittery European Union prepared to hold a crisis meeting over the
standoff, which led to cutbacks of vital Russian gas supplies to Europe for
the first time, officials at Gazprom, Naftogaz Ukrainy and Rosukrenergo were
urgently hammering out the final details of an agreement that would allow
all sides to save face, according to a co-manager of Rosukrenergo, Wolfgang

Under a deal reached in the wee hours of Wednesday, Ukraine agreed to buy
all its gas imports from Rosukrenergo under a complex scheme in which the
trader would mix more expensive gas from Gazprom with cheaper gas from
Central Asia for sale to Ukraine for an average price of $95 per 1,000 cubic

Ukraine appears to have agreed to buy some of its gas via Rosukrenergo from
Gazprom at $230 per 1,000 cubic meters, the more than fourfold increase on
last year’s price of $50 that the company was demanding. To lower the
average price, Ukraine will then buy the rest of its gas at a much lower
price, also via Rosukrenergo, from Central Asia.

The deal appears to have ended a dispute that unnerved Europe, which is
dependent on Russia for 25 percent of its gas needs. The conflict underlined
the growing state interference in Russia’s economy, as the Kremlin appeared
to lead Gazprom’s drive for a price hike in Ukraine as punishment for the
country’s political shift toward the West.

But the deal has come under fire over its opacity and the use of
Rosukrenergo, which just six months ago was under investigation by Ukrainian
prosecutors for alleged ties to organized crime.

On Monday, meanwhile, the deal was disclosed to be a stopgap measure, valid
for only six months, according to a leaked version of the agreement posted
on the web site of former Ukrainian Prime Minister Yulia Tymoshenko, who
has vowed to sue the government over the deal, and that of online newspaper
Ukrainskaya Pravda.

A source at Gazprom confirmed that the pricing agreement between Naftogaz
Ukrainy, Ukraine’s state-owned gas company, and Rosukrenergo had only
been reached for the first half of the year. He said, however, that
Gazprom’s agreement with Rosukrenergo was valid for five years.

Whatever the eventual outcome, for now the deal appears to be a boost for
Rosukrenergo from relative obscurity as a gas trader established little more
than a year ago to handle sales of gas between Turkmenistan and Ukraine.

Fifty percent-owned by Gazprom, it was intended to be a more respectable
replacement for its scandal-tainted predecessor, Eural Trans Gas, or ETG.
But Rosukrenergo too has been dogged by concerns over its ownership:
Austria’s Raiffeisen Zentralbank holds the remaining 50 percent in a trust
for beneficiaries it refuses to name.

In July, the then-chief of Ukraine’s security service, Oleksandr Turchinov,
said that he was investigating Rosukrenergo and ETG for alleged ties to
Ukrainian mafia don Semyon Mogilevich. Rosukrenergo, Putschek and ETG
have denied any link to Mogilevich, while Mogilevich via his lawyer has
denied any link to the companies.

Turchinov’s investigation was halted in September following a purge of
Tymoshenko’s Cabinet, in which she was fired and Turchinov stepped

Rosukrenergo now gets to play an even bigger role in the region’s energy

Not only has it won a monopoly on gas sales to Ukraine, but it now has the
opportunity to triple its exports from the current 5 billion cubic meters it
exports to Europe per year. In fact, under the deal, it needs to sell little
of the expensive gas it buys from Gazprom at $230 per 1,000 cubic meters
to Ukraine. Instead, it can export this amount to Europe at $280 per 1,000
cubic meters and make an immediate profit.

Before Monday, investors were scratching their heads over how the gas from
Russia and Central Asia was mixed to give Ukraine an end price of $95 per
1,000 cubic meters.

But the leaked document explains much about the deal. The Gazprom source
confirmed the details in the document.

According to the contract, Rosukrenergo is to buy 41 billion cubic meters
from Turkmenistan and up to 15 bcm from Kazakhstan and Uzbekistan. Only
17 bcm is to be bought from Gazprom at $230 per 1,000 per cubic meters. In
total, Rosukrenergo will have 73 bcm.

While Ukraine consumes about 80 bcm annually, the country produces 18 bcm
to 20 bcm, so it needs to import only 60 bcm, according to Rosukrenergo’s
Putschek, who is also an executive at Raiffeisen.

Under the current deal, Rosukrenergo will have 10 bcm to 15 bcm to play
with, he said. “Rosukrenergo will have some gas left,” he said by telephone
on Monday. “If there is any gas left, it can do whatever it wants with it.
… We will be able to export.”

The details left some analysts predicting that virtually none of the more
expensive gas from Russia would be used in Ukraine, but would simply be
sold at a markup to Europe, leaving Rosukrenergo with the profit.

“They won’t supply Ukraine with Russian gas at all,” said Stanislav
Belkovsky, head of the Council for National Strategy, a think tank.
“Rosukrenergo will just sell it to Europe and keep the profit.”

The expansion of Rosukrenergo’s role as a middleman has riled investors,
even as Gazprom prepares the long-awaited liberalization of its share
structure — a step that is expected to turn Gazprom into the world’s
biggest emerging-market stock.

Analysts and investors suspect that using Rosukrenergo is diverting profits
away from Gazprom to unknown beneficiaries. “We don’t understand why
Gazprom gave out this business when it naturally belonged to itself,” said
Vadim Kleiner, director of research at Hermitage Capital Management, which
holds more than $2 billion in Russian stocks, including Gazprom.

Other investors said such arrangements were to be expected as being par for
the course. “The organization of the gas market in Ukraine was like this
before [President Viktor] Yushchenko, and after Yushchenko. Now it looks
like it is going to be like this for a while longer,” said Ian Hague, fund
manager at Firebird Management, which holds $1 billion in Russian stocks.
Some observers have suggested that Russian officials may be involved in

In an interview published on Radio Free Europe’s web site in September,
Turchinov said that Yushchenko had personally intervened in his
investigation of Rosukrenergo and told him to stop “persecuting my men.”

The investigation of Rosukrenergo was “creating a conflict” with President
Vladimir Putin, Turchinov said. Turchinov would not elaborate on why Putin
was so upset by the investigation, the RFE web site reported Sept. 26.

Some analysts and investors said the murkiness surrounding Rosukrenergo’s
involvement could mean the arrangement was only short-term. The bungled
handling of the dispute by Gazprom and the Kremlin meant that even though a
solution had been found, it had come at the cost of inflicting serious
damage to Russia’s reputation as a reliable energy supplier, they said.

The standoff also had the effect of prompting politicians across Europe to
review their energy policies and step up the search for alternative energy
supplies. Before the gas cutoff on Jan. 1, Russia had never taken any action
that could have led to reduced supplies to Europe, even in the darkest days
of the Cold War.

The spat was also a sharp reminder for investors that Gazprom is often
wielded as an instrument of Kremlin foreign policy.

“There are times when the close identification of Gazprom with the Kremlin
has been positive, and there are times when it’s a negative factor. This is
a moment when it is perceived as a negative factor,” Hague said. “The
governments that are the main consumers of Gazprom’s gas are embarrassed
by Russia’s behavior, especially Germany. I would say that all the efforts
of [former German Chancellor Gerhard] Schr?der to try and rebrand the
Russian gas colossus are now in tatters.”

Hague said it seemed clear that the Kremlin was using Gazprom to exert
political pressure on Ukraine. “They feel extremely threatened by
Western-leaning former Soviet republics,” he said. “The Kremlin was directly
in charge of Gazprom’s strategy, and Putin was personally responsible.”

Analysts said the Kremlin and Putin appeared to have miscalculated the
impact their tough stance would have on world opinion, and how the dispute
would affect Russia’s energy reputation.

Before the gas supply was turned down, Gazprom launched a PR campaign,
stating that any shortfalls in supplies to Europe would be caused by
Ukraine’s siphoning off gas. But most in the West dismissed the argument,
and newspapers ran scathing commentaries blaming the shortfall on Russia’s
political pressure on Ukraine.

Russian state television presented the compromise deal, meanwhile, as a
triumph. On Wednesday, Putin hailed the deal as a breakthrough for
transparency and for ensuring stable supplies during a televised meeting
with Gazprom CEO Alexei Miller and Industry and Energy Minister Viktor
Khristenko. Commentators on Channel One crowed that the outcome was a
sign that “no one could blackmail” Russia.

But in the West, worries remained. “It’s a humiliating way to start what was
supposed to be a year of prominence and good press for Russia and Putin
internationally,” Hague said. “It makes Russia look like it is being run by
a bunch of billionaire high-school kids.”

Russia took over the presidency of the Group of Eight nations, during which
it intended to focus on energy security, the day it turned off the gas to
Ukraine. By Jan. 2, Europe was reporting reduced supplies.

“This gives a new definition to what Russia refers to as energy security,”
Hague said. “It means steps involving energy that make Russia more secure
at everyone else’s expense.”

Others, however, claimed the way the standoff ended had proved Russia’s
strength. “Gazprom is the mightiest player, and the mightiest player can fix
the rules,” Rosukrenergo’s Putschek said. -30-
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Turkmen leader has offered the same gas to several buyers already

By Ethan Wilensky-Lanford, The New York Times
International Herald Tribune (IHT), Paris, France, Mon, Jan 9, 2006

BISHKEK, Kyrgyzstan – The resolution of the dispute over natural gas
between Russia and Ukraine last week increased Kiev’s reliance on fuel from
Central Asia, a deal that will now entangle Ukraine in the complex oil and
gas politics of Central Asia.

How complex that is is becoming clearer. Not mentioned in the announcements
over the compromise deal were conflicting statements by the secretive ruler
of Turkmenistan, an isolated and closed country whose cheap fuel was central
to the agreement.

In fact, the country’s leader, who likes to be called Turkmenbashi, or “mind
of the Turkmens,” has offered the same gas to several buyers already.

The problem grows out of agreements Turkmenistan reached with both Russia
and Ukraine. In the final days of the year, Naftogaz of Ukraine contracted
to buy 40 billion cubic meters, or 1.4 trillion cubic feet, of natural gas
from Turkmenistan, and Gazprom, the Russian monopoly, agreed to buy 30
billion meters, half of that to be delivered in the first quarter of this

Turkmenistan exported 45 billion cubic meters of natural gas in the year
that just ended, according to the Interfax news agency. It produced 63
billion cubic meters.

So the obvious question is whether Turkmenistan can increase its exports by
such a large amount to supply both Russia and Ukraine, industry analysts
say. The apparent contradiction may be due to secretive aspects of the
agreements and the prospect of corruption, according to Western industry
analysts, and there is also the fact that Russia controls delivery and

Compounding things, the agreement last week to settle the supply crisis was
premised on different price levels for the Russian and Turkmen gas.

Russia shut off gas supplies to Ukraine and much of Western Europe on Jan.
1, after Ukraine refused to pay Russia’s asking price of $230 per thousand
cubic meters, a fourfold increase over last year’s price.

In the complex deal that was finally reached, Russia will sell gas to
RosUkrEnergo, at $230 per thousand cubic meters. That company in turn
will sell gas to Ukraine for $95 per thousand cubic meters. RosUkrEnergo
is a Swiss-based intermediary half-owned by Gazprom.

The compromise depends on cheap Central Asian gas, mostly from
Turkmenistan, which is not only in demand in Russia and Ukraine but is
attracting nibbles from China. Ukraine evidently approached Turkmenistan
as a way to sidestep Gazprom and deal directly with the supplier.

It found a receptive seller. The president, Saparmurat Niyazov, agreed to
sell 40 billion cubic meters of gas to Ukraine in a Dec. 29 meeting with
Vladimir Petruk, deputy chairman of the board of Naftogaz, according to
Turkmen television.

The Ukrainians confirmed the purchase, with President Viktor Yushchenko
saying the next day that Ukraine would be buying Turkmen gas at a rate of
$50, starting in January.

Even if Turkmenistan has enough gas to meet its commitments, there is a
question of how it can transport the gas through Uzbekistan, Kazakhstan,
and Russia to Ukraine.

Gazprom controls the only pipeline between Turkmenistan and Ukraine,
which is operating nearly at capacity. The gas it is selling now does not
literally reach Ukraine but is used in Russia and replaced.

The Russian minister of industry and energy, Viktor Khristenko, said that
Gazprom owned all the gas carried by the pipeline. “The gas that is coming
to Russian territory is the gas that Gazprom actually has on its balance and
which it delivers to Europe,” he said Tuesday, according to Interfax.

The price of gas is much higher in Western Europe than in the former Soviet
republics, where people expect subsidized utilities. Each year, Russia ships
120 billion cubic meters of gas through Ukraine to Europe, where it is sold
for around $220 per thousand cubic meters.

It is unclear whether Ukraine still expects to receive Turkmen gas
independent of RosUkrEnergo, although the Ukrainian prime minister, Yuri
Yekhanurov, said Thursday that the company would deliver 34 billion cubic
meters of the 76 billion cubic meters of gas Ukraine will import in 2006,
according to Interfax. -30-
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Ukraine’s Party of Regions Leader criticizes Russia

UNIAN news agency, Kiev, in Ukrainian 1229 gmt 9 Jan 06
BBC Monitoring Service, UK, in English, Mon, January 9, 2006

DONETSK – The leader of the Party of Regions, Viktor Yanukovych, has
criticized Russia’s approaches to the settlement of the gas issue.
Yanukovych was meeting voters in Dymytrov today. “Of course, we are
dissatisfied with Russia’s approaches,” Yanukovych said.

He also said that parliamentarians from Ukraine “have failed to perform
their task”, and that tomorrow the Party of Regions intends to raise the
issue “of the government’s responsibility to the Ukrainian people” in the
Supreme Council [parliament].

On 4 January the [Ukrainian] national oil and gas company Naftohaz Ukrayiny
and the joint-stock company Gazprom [Russian gas monopoly] signed an
agreement on Russian gas supplies to Ukraine, according to which Ukraine
will buy Russian gas from the Rosukrenergo company at a price of 95 dollars
per 1,000 cu.m.

For its part, Rosukrenergo will buy Russian gas from Gazprom at a price of
230 dollars per 1,000 cu.m. The high price of Russian gas for Rosukrenergo
will be compensated by the lower price of gas from Central Asia, while the
rate of transit of Russian gas to Europe will be raised from 1.09 to 1.6
dollars [per 1,000 cu.m. per 100 km]. -30-

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Celestine Bohlen in Paris & Marta Srnic in London
Bloomberg, New York, New York, Tuesday, January 10, 2006

PARIS/LONDON- Relations between Russian President Vladamir Putin and
his Ukrainian counterpart, Viktor Yushchenko, may be about to go from bad
to worse.

Following this month’s showdown between Russia and Ukraine over natural-
gas prices, Putin is likely to step up pressure in the weeks leading up to
Ukraine’s March 26 elections in an effort to keep the former Soviet republic
under Russian influence.

“The relationship couldn’t be worse,” Rainer Lindner, head of the Eastern
Europe department at the Berlin-based Foundation for Science and Politics,
said in an interview. “The very dirty part of the game is still ahead.”

The March 26 elections will be Yushchenko’s first voter test since he was
swept to power in the Orange Revolution of 2004, when he overcame a
candidate backed by Putin. Analysts say Russia may now be trying to tilt the
vote in favor of candidates who favor closer ties with Moscow rather than
the West.

“Russia will try to indicate its displeasure with the Yushchenko team and
will try to get its people elected,” said Ariel Cohen, senior fellow at the
Heritage Foundation in Washington. He says Putin may even engineer a
“last-minute” confrontation with Yushchenko to emphasize to Ukrainian
voters the risks of straying too far from Russia.

Russia restored natural gas supplies to Ukraine on Jan. 4, following three
days of international brinksmanship rarely seen since the Cold War ended 15
years ago.
Ukraine, located along Russia’s southwestern border, agreed to pay an
average $95 per 1,000 cubic meters for fuel coming from Russia and Central
Asia. While the price is almost double the $50 Ukraine was previously
charged, it is far less than the $230 that OAO Gazprom, Russia’s
state-controlled gas monopoly, had been demanding before cutting the gas
on Jan. 1.

“Western perception is that Ukraine has won; that is bad for Putin,”
Lindner said. “Putin himself was damaged by Yushchenko.”
Putin, 53, took over the year-long presidency of the Group of Eight leading
industrialized democracies on Jan. 1, just as the natural-gas dispute was
raising questions about Russia’s reliability as an international partner.

Yushchenko, 51, has pursued pro-Western policies, aimed at getting Ukraine
into both the European Union and the North Atlantic Treaty Organization, and
away from Russia’s sphere of influence.
Ukraine’s possible membership in NATO is a particularly sensitive question
for Russia, which has leased facilities at the Ukrainian port of Sevastapol
for its Black Sea fleet since the breakup of the Soviet Union in 1991. The
day Ukraine and Russia agreed to end the gas crisis, Ukraine’s Economy
Minister Arseniy Yatseniuk called for a review of the Russian fleet’s $98
million leasing agreement.

Ukrainian and Russian analysts say the March 26 elections will be pivotal
for Ukraine’s orientation between East and West. The Russian government
will support any party or politician ready to pursue a “strategic partnership”
with Russia, said Andriy Ermolaev, director of the Sophia Center of Social
Research in Kiev.

A strategic partnership would involve giving priority to economic and trade
ties with Russia, as well as cooperating on a common energy policy, Ermolaev
Some analysts say Putin’s next step may be to take further advantage of
Ukraine’s energy dependence to exert pressure. “It can be oil” next time,
Cohen said. Ukraine imports 80 percent of the oil it consumes, mostly from
Russia, and Russia-based companies OAO Lukoil, TNK-BP and NK Alliance
Group control three of Ukraine’s four largest refineries.

Sonal Desai, an economist at Dresdner Kleinwort Wasserstein in Milan, said,
“I don’t think oil would be the route for them to go.” She said Russian
efforts to influence the vote may be more subtle. “Russia would not commit
the same errors that they did the last time round,” she said. “I wouldn’t
expect overt influence on the Ukrainian election as we saw for presidential
elections. On the other hand, the timing of the flare-up of the gas issue is
probably not a coincidence either.”

Desai said Russia may seek to exert pressure through “small irritants,”
citing as an example its Jan. 1 ban on imports of uncooked meat from
Ukraine. The Interfax news agency reported yesterday that Russian
authorities said the meat was barred because its origins were unknown.
“This time, the Kremlin’s policy is to cast its net wide, and support those
who support closer ties to Russia, ” Ermolaev said in an interview. “In
2004, the Kremlin didn’t hide its sympathy. This time it is taking a more
flexible, subtle line.”

The heightened tensions with Russia come at a time when Yushchenko’s
popularity has sunk since September, when a split opened up in the ranks of
the Orange Revolution. A Dec. 10-18 poll of 2,000 people conducted by the
Sophia Center showed the “Party of the Regions” led by Viktor Yanukovych,
the Putin favorite Yuschenko defeated in 2004, with the support of 31.1
percent; 17.9 percent backed Yushchenko’s “Our Ukraine” party and 17
percent supported a party led by former Prime Minister Yulia Timoshenko.

Another survey by the Kyiv International Institute of Sociology, conducted
between Dec. 9 and Dec. 20, showed Yanukovych’s party with 34.5 percent to
21 percent for Timoshenko’s party and 18.4 percent for Yushchenko’s. Under
the new Ukrainian constitution, power in the new government will shift from
the president to a prime minister.
Timoshenko, who was fired in September, has gone further into opposition
against her former ally Yushchenko, saying she would bring a legal challenge
to the agreement signed by Ukraine and Russia ending the gas crisis. At a
press conference on Jan. 5, she said the deal was harmful to Ukraine’s

Ukrainian efforts to straddle between Russia and the West won’t work in the
end, Konstantin Zatulin, director of the Moscow-based Institute of CIS
Studies, which focuses on relations among the former Soviet states, said on
Russia’s state-owned RTR channel on Jan. 4.

“The people of Ukraine have constantly been kept away from this question,
and told that Ukraine would be in both camps,” he said. “Now the people of
Ukraine face this choice.” -30-
Celestine Bohlen in Paris at
Or Marta Srnic in London at
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]

By Raphael Minder in Brussels, Financial Times
London, United Kingdom, Monday, January 9 2006

The recent gas dispute between Russia and Ukraine, which has come as
both countries are stepping up their efforts to join the World Trade
Organisation, is reviving the debate about Russia’s commitment to free

Ukraine is likely to join the WTO in coming months, with Russia probably
following suit before the year-end, according to trade officials. The
Russian government has been lobbying fiercely for WTO membership,
which it had initially hoped to secure last year.

President Vladimir Putin of Russia raised the issue during a Christmas
telephone call with George W. Bush and the US president was reported to
have assured him that Washington would sign off “as soon as possible”.

However, Moscow’s handling of its gas conflict with Kiev – when supplies to
Ukraine were temporarily cut after Kiev refused to accept substantial price
rises – has done little to boost its case, according to trade negotiators,
with one of them describing it as “a clear breach of the spirit if not the
letter of the WTO”.

John Audley, a senior transatlantic fellow at the German Marshall Fund who
advised on trade in the Clinton administration, said: “Half of the problem
with the negotiations with the Russians is that we have never really been
sure that Russia wanted to endorse the kind of disciplines that WTO
membership requires. The gas problem is evidence of that.”

Trade officials note that WTO members have traditionally used accession
talks as an opportunity to push candidate countries to open their markets on
several fronts, most notably China, which was granted WTO membership
in 2001 after 15 years of arduous negotiations.

One Geneva-based trade official said: “This gas issue, and the politics
behind it, will certainly have implications for the negotiations. We must
make sure that pricing rules in Russia and Ukraine really conform to market
rules.” That view was recently underlined by Pascal Lamy, the WTO’s

Still, the extent to which Russian gas policy will affect the remainder of
the accession negotiations is unclear. In its bilateral talks with Russia,
the US does not share European concerns about reliance on Russian gas and
is instead focusing on securing concessions in areas such as Russian
intellectual property and banking legislation.

The European Union, meanwhile, completed its own bilateral talks with Russia
in May 2004, making it “politically almost unfeasible” for Brussels to now
present new demands over gas.

The solidity of that bilateral agreement, reached by Mr Lamy as the EU’s
then trade commissioner, is already under the spotlight because of Moscow’s
apparent reluctance to stick to a pledge to phase out euro350m ($425m,
£240m) of levies that Russia imposes on airlines flying over Siberia to
travel between Europe and Asia.

Still, the EU and others have much to gain from bringing Russia into the
world trade order soon.

Russia is the largest economy still outside the 149-member WTO and, should
there be a repeat of an international conflict like that over gas, Ruprecht
Polenz, chairman of the foreign affairs committee in the German Bundestag,
suggested “it would certainly ensure that there is less politics and more
economics driving the issue”.

On the other hand, if the WTO’s leading members raised the pressure in the
accession talks by demanding additional concessions from Russia over issues
such as gas, that would enhance concerns within Russia about the benefits of
membership, according to Konstantinos Adamantopoulos, head of the Brussels
office of Hammonds, a law firm that advises Russia in the WTO
negotiations. -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Power Corrupts and Absolute Power Corrupts Absolutely.

Central and East European Correspondent
Published in Johnson’s Russia List, 2006 – #9, Article 15
Silver Spring, Maryland, Monday, 9 January 2006

NOTE FROM EDWARD LUCAS: This long piece on Putin was not
written for the Economist and is likely to stay unpublished. I am
posting it here for people with a detailed interest in Russia. Comments
are welcome, ( but I should stress that
I am not the Economist’s Moscow correspondent and this is not an
official Economist article in any way shape or form. [Edward Lucas
is central and east European correspondent of The Economist.
AUR Editor]

Personal Commentary by Edward Lucas

I saw a lot of President Vladimir Putin when he became my neighbour.
At least I saw him most days; I doubt he saw me, fuming at the side of
the road as his presidential convoy swept past at 80mph all the way to
the Kremlin from his newly built presidential palace in our village of
Kalchuga, 10 miles outside Moscow.

Mr Putin’s country pad and its effect on our village highlighted for
me his regime’s authoritarian, bullying style. The past week’s rows
over gas have now brought that home for the rest of the world. Russia
is not just aggressive towards its neighbours, but contemptuous of
world opinion. Under Mr Putin, it is no longer a basket case: it is
rich, powerful, unpredictable and malicious.

The first thing I noticed about my neighbour was that he had to build
a new house: he hadn’t inherited the sumptuous country retreat of his
predecessor, Boris Yeltsin. That was because the deal between Russia’s
crooks and spooks that brought Mr Putin, then an unknown and
undistinguished bureaucrat, to power in 2000 included an iron-clad
agreement that the outgoing Yeltsin clan would not just be immune from
prosecution, but also keep the spoils of office ­cash, cars and country

Secondly, the Putin “dacha” or “cottage” (it was about the size of
Sandringham) was built at amazing speed and great secrecy on a disused
airfield at the edge of our village. That infuriated my sons, who were
learning to ride bicycles there. It also illustrated an important
point about the way the Russian state works. It may be corrupt,
lethargic, and stunningly incompetent in general. But when the man at
the top wants something done, it happens fast and ruthlessly.

Our Russian neighbours in the village were unhappy at the rush of
development that followed Mr Putin’s arrival. One new rich neighbour
with close Kremlin connections concreted over the village green to
make a driveway for his mansion, beating up an elderly neighbour who
objected. Then a property company, also with Kremlin links started
bulldozing a nearby forest for a housing development. That taught us
two lessons about Mr Putin’s Russia. It was startlingly encouraging to
see the effects of ten years of democracy: the villagers reacted not
with traditional Russian apathy, but with lawsuits, petitions, and
when all else failed, direct action: they blocked Mr Putin’s road to

The sad lesson was that the legal system brushed them aside;
that their petitions were ignored, and that their modest demonstration
met with a tough Soviet-style response from the authorities. The
developers and their mates in officialdom offered cash and­ bizarrely
and for reasons I never understood­ fridges to those locals willing to
join a rival outfit set up to campaign for the new housing development
and denounce the protestors as anarchists, greens and communists.

Setting up fake front organisations was a classic Soviet-era tactic.
So was bullying opponents. The villagers received blunt threats: “we
will turn up with a bit of paper saying your house is built on our
land, and then we will bulldoze it” a shadowy official told my
next-door neighbour.

Such are the paradoxes of Putin’s Russia. There is prosperity amid
lawlessness. The outward trappings of democracy decorate an
increasingly authoritarian system. Imperial pomp and ceremony surround
a modest-seeming man from a humble background. But the biggest
puzzle is that what the all-powerful Mr Putin really wants, believes and
can do is still a mystery to Russians, as it is to the former captive
nations of eastern Europe, and to the rest of the world.

Sometimes it seems a mystery to Mr Putin too. Certainly when he was
first nominated by Mr Yeltsin as designated successor, he seemed as
baffled as everyone else. “I am obeying orders,” he told journalists
wryly in the summer of 1999 when he first emerged, blinking and
tongue-tied, into the world’s view. Mr Yeltsin, the bear like destroyer
of Soviet communism, was by then so confused and erratic in his rule
that few people thought his choice of successor would mean much.

Mr Putin, a dull, publicity-shy bureaucrat with not an ounce of charisma,
and the fifth prime minister in 18 months, would surely be swept aside
by some bouncier character, such as the rumbustious wheeler-dealer
mayor of Moscow, Yuri Luzhkov. Yet the provincial Mr Putin, a
second-rate spy turned local-government official, moved seamlessly
into the top job, and now presides over the world’s largest country,
over its second-biggest nuclear arsenal, and over its most
strategically important gas reserves.

To everyone’s surprise, he rapidly became very popular. For the
public, he was sober, young and athletic­ everything that Mr Yeltsin
wasn’t. And for the Russian elite, he was the ideal compromise.

The spooks, longing to restore Russia’s great-power status, liked him
because of his intelligence background: not quite the top drawer,
perhaps, but certainly part of the charmed circle that had studied at
the Red Banner Institute, the top Soviet spy-school.

And he was palatable for the crooks. These were the sharpwitted
shysters who had run black-market businesses during the late Soviet
era, and had gone on to grab amazingly lucrative stakes in the
free-for-all that followed over who would control Russia’s natural
wealth, and exploit the huge opportunities that capitalism created in
banking, transport and property. Having served as a trusted official
in the Kremlin, Mr Putin knew the way that wealth and power in Russia

Mr Yeltsin’s highly influential daughter, Tatyana Dyachenko, and her
husband Valentin Yumashev, the two figures in the Kremlin that
epitomised the reckless greed of 1990s Russia in their blurred roles
as high officials and highly successful businesspeople, were solidly
behind the new man.

So at the beginning, many people hoped that Mr Putin would be a
magician-president who would kick-start reforms and drag Russia into
the modern world. Even democratic-minded Russians who loathed the
KGB and everything it stood for wanted to give the new man a chance.
And for a time it looked good: he cracked down on the “oligarchs”­the
arrogant, lawless tycoons who had looted Russia in the 1990s.

True, that meant closing down their once-flourishing media empires, all of
which are now run by tame businessmen close to the Kremlin. But that
seemed defensible. Independent television is one thing; pocket
stations that blatantly serve the commercial interests of their owners
are hardly an ornament to democracy. Mr Putin might have a steely
manner, but he spoke nice words. He praised democracy and civil society.

Many outsiders were prepared to give Mr Putin the benefit of the doubt
too. George Bush said that he had looked into the Russian president’s
eyes and “seen his soul”. Tony Blair enjoyed lavish nights at the
opera during visits to Russia. Gerhard Schroeder got on so well with
the German-speaking Putins that they spent a family Christmas
together; Mr Putin intervened personally to help Mr Schroeder bend the
rules and adopt a Russian orphan.

The first doubts appeared over Mr Putin’s effectiveness. It was
increasingly clear that he wasn’t a magician: The growth in the
Russian economy owed everything to high prices for oil and gas, and
almost nothing to the half-hearted, half-baked reforms coming out of
the Kremlin. Many began to think Russian president was a mouse, an
over-promoted minor spook who spent his days obsessively reading
intelligence reports, but was ignorant of the big picture, and lacking
the drive and vision needed to run a country as huge and troubled as

Mr Putin might be good at appearing on television, in elaborately
choreographed stunts­ flying a fighter plane, whizzing down
ski slopes, hurling opponents across a judo mat. He certainly seemed
to enjoy them­ what a contrast to his humble origins as a scrawny,
bullied youngster from a hard-up family living in a rundown communal
apartment in Soviet Leningrad. But many felt that real power surely
lay elsewhere, with the sleazy, wily old-timers inherited from the
Yeltsin era.

Certainly Mr Putin’s public utterances, or the lack of them, were
often mystifying in their quality and quantity. At times of crisis,
such as terrorist attacks by Chechen rebels ­the direct result, many
say, of his regime’s brutal policy of reprisals in that breakaway
republic ­he simply vanishes from public view. When he does speak in
public, his remarks have seemed at times astonishingly callous and
ill-judged. Asked on live television about the Kursk tragedy, in which
118 Russian submariners perished, Mr Putin shrugged and smirked:
“it sank”.

Speaking about Chechen rebels, he resorted to slang normally
heard only in the mouths of gangsters, which could be loosely
translated as “if we find them in the shit-house, we’ll whack’em in
the shit-house”. Criticised at a press conference in Brussels for his
harsh policies in Chechnya, he suggested that the offending journalist
should undergo ritual castration at the hands of Muslim extremists.

At a joint press conference with Mr Blair, he could not resist the
temptation to humiliate the British Prime Minister about the absence
of weapons of mass destruction in Iraq. “Maybe they’re here, under
this desk” he sneered. Mr Blair has never trusted him again.

What is really scary about Mr Putin is that despite his undistinguished
record in office, his limited intellectual and cultural horizons, and his
bullying manner, he has still been able to turn the tables on the people
who put him in power. Russia may still be shambolic, but it is a shambles
over which he and his team of Kremlin loyalists, mostly from the old
KGB, is in undisputed charge.

Everyone who has dared challenge or resist Mr Putin’s rule has been
sidelined, neutralised or humiliated. The Yeltsin advisers are gone.

The tycoons are in jail, in exile, or in political purdah. The media
is cowed. The opposition parties are shams, run to give the appearance
of pluralism to the Russian public and the outside world, but with no
chance of taking real power.

The once-mighty regional chieftains like Mintimir Shaimiyev of Tatarstan
and Yuri Luzhkov of Moscow, who used to run Russia’s cities and
regions as private fiefs are now, like the central government itself,
merely nervous servants who carry out the presidential administration’s
commands as their predecessors once obeyed the Communist Party
of the Soviet Union.

That is thanks to the way the Russian state works. There is huge power
for the man at the top, regardless of whether he is impressive or not.
Lenin, Brezhnev, Andropov and Yeltsin all ruled for years as sick men.

Mr Putin is the first Russian leader since Peter the Great to have the
simple advantages of being punctual, efficient, fit, sober and concise.

Mr Putin’s KGB background adds both useful skills, and an aura of
intimidating mystery. Even Russians who hated and feared the Soviet
secret police have grudging respect for it. It was an organisation
that recruited the brightest and toughest people in the country, and
gave them excellent training. All KGB officers are trained in target
acquisition: gaining a target’s cooperation through bribes, flattery
or threats­ and then bending them to your will. Some joke that Mr
Putin’s relationship with Mr Schroder is a public example of this.

Privately, Mr Putin seems to enjoy showing off the fruits of his spy
networks and their dungeons packed with information. A western
newspaper editor who met him was amazed when the Russian leader
murmured at the start of the interview, in English, “I hope your
wife’s mother recovers soon.” Not even the editor’s closest
colleagues knew that his mother-in-law was gravely ill.

Mr Putin also understands the way that corruption both fuels Russia
and makes it manageable. When the rules are impossible to observe,
everyone is vulnerable. It requires only a phone call from the top and
the tax police, special anti-corruption police, anti-racketeering
squad and all manner of other menacing, implacable monsters descend
on an uncooperative individual, company and organisations. Even the
honest cannot hope to escape the government inspectors: they will
always find something. Such arbitrary rule is inefficient ­but Russia’s
oil and gas wealth makes it affordable.
[He increasingly looks like a monster]
In short: Mr Putin is neither a magician, nor a mouse. But he
increasingly looks like a monster. He has unleashed the two most
sinister forces of the Soviet past: the totalitarian habits of the
security services, and the imperialist urge that lies deep in the
Russian psyche. Put politely, he wants the Russian state to be strong
at home and abroad. Put crudely, he is trying to recreate an empire
reminiscent of the Soviet Union: feared by its own people and its
neighbours in equal measure.

The big question now for Russia and the world is what happens next.
The bullying of the former captive nations seems set to continue: the
latest spat about gas has illustrated that rich Europe is unwilling or
unable to protect the east European countries that are captives of the
Russian gas monopoly. The slide away from democracy is continuing

Here 2008 will be decisive, when, according to the Russian
constitution, Mr Putin should step down as his second term in office
ends. Few believe that he, like his predecessor Boris Yeltsin, will
step gracefully away from power in return for immunity against
prosecution for him and his family. Some smart money bets that he will
leave a puppet figure in the Kremlin, and move over to Gazprom, the
hugely powerful Russian gas monopoly. Others think he will change the
constitution. Or he may create a new country, a union of Russia and
Belarus, and become president of that.

But one thing is clear and scary. The world may still know very little
about the prickly little ex-spy who now runs Russia. But it is going
to be hearing about him for a long time to come. -30-
Edward Lucas is central and east European correspondent of
The Economist. As Mr. Lucas said at the beginning of this article,
“this is not an official Economist article in any way shape or form.”
E-mail:, EDITOR
Johnson’s Russia List (JRL), David Johnson;
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
Putin again uses raw power, and again the result is a major failure.

COMMENTARY: by Transitions Online (TOL)
Prague, Czech Republic, Tuesday, 10 January 2006

Back in the foothills of the gas crisis, we looked at the mounting dispute
between Ukraine and Russia in the context of the Kremlin’s consolidation of
the energy industry. Russia’s strategy seemed clear: it wanted to normalize
energy relations by forcing its international customers to pay market
prices, but it would give special rates to allies.

Some of this strategy seems desirable. A normalization of energy relations
in the former Soviet Union is long overdue. Even some who benefited in the
past saw enough downsides to want to change the relationship: Viktor
Yushchenko called for such a normalization and monetization of energy
relations soon after he became Ukraine’s president.

The other element – the notion that allies would get preferential
treatment – is perfectly defensible. East or west, politics are always mixed
in with oil and gas. The old Russian variant of this universal game is to
give special deals to friends, to get special deals from them, and to keep
captive markets; the new addition was to get real cash and to maximize

And yet, despite these desirable or defensible intentions, the Kremlin’s
energy policy has just produced another foreign-policy failure. How did it
manage that? And how big a failure is it?
How big a failure the crisis is largely depends on how great Russia’s
ambitions were.

The Kremlin’s thinking seems to be something like this: Shaken by the
“colored revolutions” and the pro-Western policies of countries like Ukraine
and Georgia, Moscow decided that its policy of subsidizing allies made
little sense if those countries were no longer allies. Trying to buy loyalty
was, in many cases, an anachronism (the very cheap rates given to Bulgaria,
a soon-to-be member of the EU, demonstrates how much of a 1990s
anachronism it was). But how to replace the policy?

It could rationalize the relationship between its gas (and oil) giant
Gazprom and its customers and transit countries by introducing market
prices. Moreover, that eminently rational policy could be expected to be a
hit on the financial markets, boosting the price of Gazprom shares when –
soon – the Kremlin opens up the company to foreign investors.

With the consolidation of the energy sector nearly complete, with a new
pipeline to Germany assured, and with Gazprom set to become one of the
world’s largest publicly tradable companies, this seemed like a good time
to start negotiating new, cash-based, market-based deals.

A ‘good time’ is not, however, the same as the ideal time. That will be when
the Baltic pipeline is in place, since that will provide Russia with its
best, large-capacity alternative to Ukraine as a transit route. Without
that, the Kremlin’s negotiating position is weakened by Russia’s own need
for Ukraine. It is that basic reality that makes it so odd that Russia
adopted such high-pressure, megaphone tactics. And it is that oddity that
lends credence to the possibility that there were two political dimensions
to the battle with Ukraine, not one.

One dimension would be entirely in keeping with Russia’s overall strategy of
normalizing energy relations: Ukraine is no longer an ally, so it should pay
market prices. But the second possible dimension is that Russia does not
believe that Ukraine has irrevocably left its sphere of influence, and that
the Kremlin believed it could help pull Ukraine back towards Russia by
engineering an energy crisis that would weaken Yushchenko and discredit
Ukraine in the EU’s eyes.

Viewed from that perspective, this could be seen as a good time for some
arm-twisting. Ukraine’s parliamentary elections are three months away, many
claim the Orange Revolution is in trouble, and – certainly – the
revolutionary front has fractured. A push now, in the depths of winter and
before the Orthodox Christmas, could swing votes towards the pro-Moscow

Since only a few percent separated the pro-Moscow presidential candidate
Viktor Yanukovych from genuine victory in 2004, a relatively small swing
could have a big impact. Moreover, the pre-election months gave Russia a
window of opportunity to revise the overly sweet deal struck with Ukraine in
the last months of Yanukovych’s premiership.

Reopening the deal and forcing President Viktor Yushchenko to accept a
massive price hike now would weaken the pro-Western president; and, if
pro-Moscow Ukrainians did indeed win the elections, Moscow could provide
a new, friendly Ukrainian government with a great, early success by offering
cheap gas. Moreover, Yushchenko’s bargaining position appeared weak.

Under electoral pressure, he would want a quick deal. Under pressure from
the EU, he wouldn’t be able to siphon off gas meant for Europe. And, while
Yushchenko could ask Turkmenistan for extra energy, Russia has appeared in
recent months to have a better chance than Ukraine of winning the battle for
Turkmen gas.
That is an ambitious scheme and, if it reflects Russian thinking, the
conclusion has to be that, though Russia has scored some successes, it has
failed badly. So what went wrong?

[1] The first problem was the underlying principle – to introduce a
near-universal system based on market prices – was entirely eclipsed by the
politics and manner of the dispute. Gazprom may be renegotiating prices with
many countries, but its talks with Armenia, with Bulgaria, with Moldova
barely get a mention in the press.

[2] Second, while it effectively narrowed the field of battle to its dispute
with Ukraine, Russia chose negotiating tactics that maximized the fallout.
Brinkmanship, strong-arm tactics, maximalist demands, and public wars of
words may be normal on the post-Soviet political stage, where politics is a
highly choreographed and mannered drama – but such theater plays badly
elsewhere in Europe.

[3] Third, Russia seems to have overplayed its hand with Ukraine and raised
expectations too high, ensuring that Putin’s claim of “success” rang hollow.
From the start, the notion that Russia could get anywhere close to its
asking price seemed like a negotiating impossibility. The market price is,
obviously, set both by the buyer and the seller.

How could Moscow force Kyiv to pay close to $230 since Russia lacks
adequately large alternative transit routes to Europe, since Ukraine could
take Russia to court for breaching the 2004 contract, since Ukraine had an
alternative supplier (in the form of Turkmenistan, which actually supplied
more gas to Ukraine than Russia in 2005), and since hurting Ukraine’s
economy badly would also hurt Russia’s?

Russia can point to some economic successes. Kyiv was clearly in a hurry to
reach a deal; time will show how much that pressure affected the deal, but
it seems clear that Russia has achieved some significant gains thanks to

Yushchenko initially thought he had secured an alternative contract with
Turkmenistan, but instead President Saparmurat Niazov on 29 December
promised most of his gas to Russia and agreed that gas to Ukraine should go
only through RosUkrEnergo, a joint venture through whose hands Russia’s gas
to Ukraine will flow. RosUkrEnergo also gains some of the gas-marketing
rights that Ukraine’s state-controlled gas company Naftohaz previously had.

Russia may even have scored a political success in Ukraine, since Yushchenko
appointed a pro-Moscow energy minister in the midst of the crisis (though
perhaps Yushchenko was merely offering a poisoned chalice). It could even
claim some political points on the international front, by saying with some
justice – albeit questionable – that Ukraine has siphoned off gas meant for
Europe (questionable because Kyiv says it only took gas sent by

Nonetheless, it is hard for Russia to convincingly claim success. What
people will notice are not the details of the RosUkrEnergo deal but the
headline figures. Yes, the price Ukraine will pay will be $95 rather than
the $46 or so that Belarus pays, but Russia will also pay 47 percent more in
transit fees. Yes, $95 is a big increase but it is far closer to
Yushchenko’s initial offer ($80) than to Russia’s asking price ($230).
Even the notion that the Kremlin itself thinks $95 is an impressive result
is belied by its insistence that it will actually get the $230 that it was

Will the crisis have helped Moscow-friendly Ukrainian politicians? The
parliamentary elections will show, but the presidential vote in 2004
indicated Moscow’s heavy hands had played into the opposition’s hands.

Did Ukraine’s tapping of “Russian” gas sour Kyiv’s relations with the EU?
It was barely noticed. Instead, almost every headline was about the
poison-gassing of Europe’s relationship with Russia. (Washington too has
been unusually forthright in its criticism.)

Did the dispute promote the declared aim of Russia’s presidency of the G8,
to show that Russia is a reliable energy supplier? Transparently not.

[4] The fourth problem for Russia is that the opacity of the deal itself –
and of its arithmetic, which somehow transforms the $95 paid by Ukraine
into $230 received by Russia – undermines the idea that this is a “fully
market-based” deal. Instead, it looks as if Russia’s strategy of normalizing
its energy relationships has merely resulted in another strange hybrid
political-economic scheme – and guaranteed speculation that the opacity
hides corruption.

Instead of appearing a more normal business, Gazprom looks even more a
political vehicle than it did. And, while this political risk will not stop
investors putting money into Gazprom, it will reduce their valuations of the
company’s shares.

And, of course, politicians dislike political risk even more than investors.
From Poland to Romania, governments are now looking for alternative
sources of gas. From the west to the east of Europe, there is extra energy
in discussions about alternatives to gas, such as nuclear energy.

[5] That is the fifth and biggest problem for Russia. Cutting supplies is
the energy sector’s equivalent of defaulting on debt, a trust- and
credit-destroying step. Russia chose a ‘nuclear option’ and gained little
obvious in return.
Part of the fallout is the revival of old, fearful stereotypes of Moscow. If
Russia is simply playing to stereotypes, perhaps its failure does not matter
too much. But it does matter, because since 1991 Europe’s attitude towards
Russia has largely been guided by the “willing suspension of disbelief.”

Integrate Russia, do business with Russia, give it a seat in the G7, don’t
judge its political failings too harshly, keep quiet about Chechnya, and
perhaps Russia will inch forward: this is roughly the attitude that has
guided most countries’ policies to Russia. That hope has contributed to
Russia’s post-1991 transformation into a vital source of energy for Europe.

The crisis will certainly add a chill to Europe’s already cooling
relationship with Russia but, energy politics (normally) being a slow-moving
affair, the full impact will take a long time to emerge.

Still, it should already demonstrate to the Kremlin that it may not regain
its great-power status by showing off how great an energy power it is. And
Putin should ask himself why he and his advisors have recently made so
many major misjudgments when they use raw power.

Russia has failed with strong-arm policies in tiny Abkhazia in late 2004 and
early 2005, in Ukraine in late 2004, and now in both Ukraine and Europe.
Russia’s most famous judo black-belt is again proving unnervingly ham-
fisted and leaden-footed. -30-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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