AUR#695 May 9 Better Way To Heat A City; Price Of Freedom; Chaotic World Of Energy Policy;Caspian Sea Pipeline; CIS: Ukraine Out?

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Says Dmytro Firtash is an old friend and good businessman

[article four]

Mr. E. Morgan Williams, Publisher and Editor

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Spurred by Price Jolt On Gas From Russia, Aims For Broad Efficiency Gains
A Better Way to Heat a City
By Marc Champion, The Wall Street Journal
New York, New York, Monday, May 8, 2006; Front Page, A1

They are learning to accept the cold realities of an independent existence.
By Julian Evans in Kyiv
British freelance journalist based in Moscow, Moscow, Russia, Saturday, May 6, 2006

By Andrea Felsted and David Victor
Financial Times, London, UK, Tuesday, May 9 2006

Says Dmytro Firtash is an old friend and good businessman
Ukrayinska Pravda website, Kiev, Ukraine, in Ukrainian 28 Apr 06
BBC Monitoring Service, UK, in English, Saturday, May 06, 2006

Ukrainian state energy company riddled with unsecured debt
: By Halyna Akimova
Kiyevskiy Telegraf, Kiev, Ukraine, in Russian 28 Apr 06
BBC Monitoring Service, UK, in English, Friday, May 05, 2006

Ukraine’s Supreme Court dismissed Regal’s latest appeal vs a state company
By Rebecca Breamand Sarah Spikes, Financial Times
London, United Kingdom, Tuesday, May 9 2006

Limited theatrical release in New York City, May 11-17th
REPORT: from Amy Grappell, Producer, Ukraine Documentary
Action Ukraine Report (AUR) #695, Article 7
Washington, D.C., Tuesday, May 9, 2006

Natalie Kononenko, Kule Chair of Ukrainian Ethnography
University of Alberta, Modern Languages and Cultural Studies
Edmonton, Alberta, Canada, Friday, May 5, 2006

Founded a publishing company in Ukraine last summer with local partner
Handelsblatt (English abstracts), Germany, Friday, May 05, 2006

PZU insurance company invested ZL75.2 million in Ukraine
Polish News Bulletin, Warsaw, Poland, Wed, May 03, 2006

Polish News Bulletin, Warsaw, Poland, Sunday, May 07, 2006

Investment of $1.4 B Marks Largest Foreign Investment In Bulgaria
Business Wire, Monday, May 08, 2006

ANALYSIS: By Catherine Belton, Staff Writer
Moscow Times, Moscow, Russia, Friday, May 5, 2006

Brussels backs an old “American” gas project
: By Alexei Grivach
Vremya Novostei, Moscow, Russia, Friday, May 5, 2006

Associated Press (AP), Kiev, Ukraine, Friday, May 5, 2006

Commonwealth of Incompliant States
COMMENTARY: By Vladimir Solovyev, Sergey Sidorenko, Kiev
Kommersant, Moscow, Russia, Saturday, May 6, 2006

Interfax, Tbilisi, Georgia, Sunday, May 7, 2006

RIA Novosti, Moscow, Russia, Sunday, May 7, 2006

Interfax, Moscow, Russia, Friday, May 5, 2006

Morgan Williams, Publisher and Editor
Action Ukraine Report (AUR) #695, Article 20
Washington, D.C., Tuesday, May 9, 2006
Spurred by Price Jolt On Gas From Russia, Aims For Broad Efficiency Gains
A Better Way to Heat a City

By Marc Champion, The Wall Street Journal
New York, New York, Monday, May 8, 2006; Front Page, A1

DNEPROPETROVSK, Ukraine – In a cavernous warehouse along the Dnieper
River, four giant open-hearth furnaces rage at 1,500 degrees Celsius day and
night, making steel the same way they have since they were installed in

Furnaces like these haven’t been used in the U.S. for 20 years. They guzzle
more than twice as much energy as their modern replacements. But until this
year, Ukraine paid just one-fifth of the average world price for natural gas
from Russia, so there was little urgency to replace these museum pieces.

That has changed. In January, the Russian gas monopoly OAO Gazprom
doubled prices to Ukraine overnight, and warned of more rises to come.
Alexander Kirichko, who runs the steel plant, saw the move coming and
fast-tracked plans to replace the old furnaces. “We have no choice,” he

Russia’s price shock — which included a brief interruption of gas to
Ukraine — sent shudders of concern across Europe about access to Russian
gas, much of which arrives in a pipeline through Ukraine. But the price jolt
is also having an unexpected benefit: It’s starting to force fundamental
change on some of the most energy-wasteful economies in the world, those
of former Soviet republics.

Ukraine, with its obsolete industrial plants and leaky urban heating
systems, last year consumed almost as much natural gas as Germany, a country
with a gross domestic product 10 times as large. Now, Ukrainian companies
that relied on cheap gas to export low-cost metals and chemical products are
scrambling to cut back or find other energy sources.

Rising oil and gas prices are forcing governments around the world to
rethink energy policies, including looking for ways to curb demand growth.
President Bush has warned Americans about their oil addiction, and Congress
is drafting a flurry of legislation aimed at limiting energy consumption and
oil imports. The European Union has endorsed a goal of cutting energy
consumption 20% by 2020.

Over the same period, fast-growing China has a plan to reduce by 40% the
energy used to produce a unit of gross domestic product, an attempt to slow
the Chinese demand increases that are a big contributor to rising global
energy prices.

Former Soviet republics were built on cheap energy pumped out of the ground
in Russia and Central Asia. Now they are home both to great waste and to
great opportunity for savings — plus, thanks to Gazprom, great urgency.

Gazprom’s price move was seen here as Moscow’s revenge for Ukraine’s
so-called Orange Revolution, which led to the election of a Western-friendly
government in 2004. Gazprom, in which the Russian government holds a
controlling stake, denies any political motivation.

But the effect has been that Ukraine, which has a population of 50 million,
has quickly produced a program to reduce gas consumption. It has set up a
new energy-efficiency agency to direct the plan and is pouring government
money into efforts to carry it out.

“My inbox is filled with letters from metals and chemicals companies asking
for help in cutting their energy use,” says Yevgen Sukhin, the new agency’s
chief. Netherlands-based Mittal Steel Co., which bought a massive steel
plant in Ukraine last year, has substituted coking coal for some of the gas
used to fire the furnaces, reducing gas use by half. That one plant
accounted for 1.5% of Ukraine’s gas consumption last year.

Georgia, hit with a similar rise in gas prices, has mothballed plans to
build new gas-fired power stations. It is going to build a hydroelectric
plant instead. Armenia also has ordered up a plan targeting gas consumption.

Russia itself saw gas prices rise 30% last year. A spokesman for Gazprom
said it will seek at least the same size increase again this year, although
the Russian government will make the decision. Pressure to conserve is
building even in resource-rich Russia as domestic gas use rises faster than
production, limiting what is available for lucrative exports.

The savings potential is large. If all former Communist-bloc nations in
Eastern Europe and Central Asia could reach West European levels of energy
use per GDP unit, world energy consumption could fall 7.2%, says the
European Bank for Reconstruction and Development.

In addition, a fall in consumption of gas from Russia by Ukraine and its
neighbors might make supplies more secure for countries such as Germany and
Italy. Eighty per cent of gas Russia sells to the European Union passes by
pipeline through Ukraine and the rest through Belarus. When Russia cut off
gas supplies during a price showdown with Ukraine early this year, the
Ukrainians tapped the pipelines for gas meant for elsewhere in Europe.

There are big obstacles to carrying out all of Ukraine’s plans. Financing
can be hard to get where companies and local authorities are poorly audited,
often unprofitable and often corrupt. Ukraine’s political instability has
consistently undermined government plans. “We’ve had a lot of broken
promises,” says Stanislav Potapenko, program coordinator in Ukraine for a
nonprofit organization called Alliance to Save Energy, though he says
attitudes are changing.

Dnepropetrovsk, a city of 1.2 million people, neon-fronted casinos and
crumbling infrastructure, is a prime example of Ukraine’s need to tame its
energy thirst. The entire city is heated centrally by municipal boilers.
They pump hot water under the streets through a one-meter-wide, 60-mile
pipe. Smaller pipes fan out to offices, stores and apartment blocks. The
system is common in the former Soviet Union.

In Ukraine, heating cities this way accounts for about half of the nation’s
gas use. In theory, it should be more efficient than having separate boilers
in each home. But minimal maintenance, subsidized prices and a lack of
metering and thermostatic controls have made the system hugely wasteful.

“Look at the way we control the temperature — we open a window,” said
Aleksey Mikulin, director of an energy institute called
DenprVNIPIenergoprom. His office window was wide open in wintry weather.

Maxim Burtovy, director of an energy savings company called Energy Alliance,
is trying to put together a project to capture more waste heat from an
electricity-generating station and pump it into the city’s heating system.
He estimates that doing so could cut gas consumption by 500 million cubic
meters a year, worth about $47.5 million at the price Ukraine currently pays
for gas from Gazprom, and twice that on world gas markets.

If all former Soviet-bloc nations used such heat-and-power “cogeneration” to
the extent that Western Europe does, says the International Energy Agency,
80 billion cubic meters of gas a year could be saved. That would be equal to
the entire annual gas usage of Germany, the world’s third-largest economy.

Soviet authorities actually had the same plan for this city — in 1986. The
coal-fired power plant bought two turbines, and authorities designed a new
Dnieper River bridge with built-in pipes that would carry hot water from the
power plant to the city center. But before it could be built, the Soviet
Union fell.

Then there was no money for the pipes, and the bridge was built without
them. So now, while one turbine does pump hot water from the power plant to
250,000 people on the plant side of the river, the other turbine sits in

Mr. Burtovy wants to raise money to install the second turbine, a boiler and
hot-water pipes along the bridge, at a cost of $20 million to $50 million,
depending on the scope of the project. Up to 500,000 more people then would
get their heat from the electricity plant, allowing some gas-fired boilers
to be switched off. Energy Alliance would be paid with part of the energy
savings. The firm is looking for more such projects in Ukraine.

The power plant’s managers are enthusiastic, as are local authorities. An
energy-conservation plan they drew up endorses tapping the power station for
more heat as one of its major projects. “Since the gas crisis, they got
serious,” says the plant’s director, Andrei Krepak.

Across the river, a Swedish engineering company, Alfa Laval AB, is working
on another part of the city heating system. The firm is close to finishing
installation of about 250 heating substations to regulate the temperature
and flow of hot water moving to apartment blocks.

Doing so could cut the city’s gas consumption for heating by 10% to 15%,
according to Alfa Laval’s Ukraine director, Gennadiy Rudenko. There were
plans for energy efficiency before, he says, “but the time for investment
recovery was so long they didn’t make sense. That’s changing.”

A new energy program produced by Ukraine’s government in response to the
price shock aims to cut gas consumption by more than a third by 2030, even
as the plan foresees a tripling in the size of the country’s economy. Such a
saving, of 27 billion cubic meters of gas, would equal two-thirds of the gas
consumption of France last year.

The government has told every city to come up with an energy-saving plan,
has budgeted $100 million for energy conservation this year and is proposing
to end subsidies that provide below-cost heat to the entire nation.
Subsidies should be focused on those too poor to pay their bills, says
President Viktor Yushchenko.

He also has called for new nuclear power plants — a controversial idea in
the land where the Chernobyl disaster occurred 20 years ago. Despite
Chernobyl, Ukraine still has four operating nuclear plants, providing 48% of
its electricity.

Natural gas accounts for 41% of Ukraine’s energy consumption, twice the
world average. Ukraine produces some gas itself, but two-thirds of what it
consumes comes from Russia, making the country unusually dependent on a
single supplier for its dominant energy source. It also gets 100% of the
fuel for its nuclear plants from Russia.

In all, this dependency is “a very dangerous situation,” says the
energy-efficiency agency’s Mr. Sukhin. President Yushchenko has proposed
that Ukraine develop the ability to enrich uranium for the plants — the
kind of project that Western powers vehemently oppose in Iran.

Mr. Kirichko, the managing director of the steel plant with open-hearth
furnaces, decided a year ago he would eventually replace the 75-year-old
contraptions. “I knew that gas prices would rise, but I also knew that
Ukraine had a contract with Gazprom until 2013. So I forecast a 10% annual
increase” in the gas price, says the 41-year-old head of the complex,
Nizhnedneprovsky Tube Rolling Plant, which produces steel pipe and wheels
for railroad cars.

Late last year he realized his price forecast was wrong. Gazprom intended to
tear up its contract with Ukraine and push for world market prices, a
potential leap of almost 500%. Mr. Kirichko swiftly cut in half his
five-year timetable for the $400 million plan to replace furnaces.

Two companies are bidding for the project, SMS Demag AG of Germany and
Danieli & C. SpA of Italy. Mr. Kirichko expects a contract to be signed this
month. The steel company says it will pay 20% of the cost itself and finance
the rest through a group of banks.

When refitted, the plant will make steel with electric arc furnaces that
push electrodes down into baths of scrap metal and melt them. In the current
system, burning gas and heating oil are injected into the furnace chamber,
superheating the air above the metal. The process is less direct and thus
less efficient.

While the new furnaces will use far more electricity, they should reduce
metal waste 20% and cut overall energy use by 55% per ton of steel made,
says Peter Leyzerovich, a Ukrainian-born U.S. engineer at work on the

Gas consumption is expected to be cut in half even as the furnaces produce
twice as much steel, a capacity increase the plant needs to meet orders. The
engineer says the refitted plant will also cut pollution. (
Write to Marc Champion at
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
They are learning to accept the cold realities of an independent existence.

ANALYSIS & COMMENTARY: By Julian Evans in Kyiv
British freelance journalist based in Moscow, Moscow, Russia, Saturday, May 6, 2006

For decades, like a spoilt child, Ukraine has relied on unlimited and very
cheap gas from Russia. As a result, says Kamen Zahariev, head of the
EBRD’s Ukraine office, “Ukraine was probably the least energy efficient
country in the world”.

The economy, as a result, was literally spoilt. It relied and still relies
on enormous steel and chemical enterprises that were bureaucratic,
unwieldy, beholden to politicians, and built on the premise of cheap gas.

Those enterprises continue to dominate the Ukrainian economy, accounting
for around 40% of GDP. And they are highly inefficient, still using
Soviet-era technology, which there was no incentive to upgrade while gas
remained so cheap.

Ukrainian steel mills, for example, are among the last in the world to use
open hearth furnaces, while the rest of the world is using oxygen

Ukrainian people were also extremely profligate in their use of gas.
Housing utilities tariffs have not gone up for five years, and gas was
cheaper here than it is in Russia.

That was the luxury of being part of the Soviet or post-Soviet space. The
drawback was lack of control over one’s own political destiny, a distorted
and very politicized economy, and an inability to question the government
or those businessmen connected to it. Cheap gas in exchange for civil and
economic rights, was the bargain offered by the Kremlin.

Now, like a teenager who wants some space from his parents and has abruptly
been cut off from his trust fund, Ukraine is facing up to the price of

The gas hikes are already taking their toll. Analysts predict Ukrainian GDP
will lose around two points this year, because of lower profits from steel
and chemical companies. A few chemical companies could be forced into
bankruptcy. The government is also in the red, with a budget deficit of
around $2 billion.

This week, Naftogaz Ukraine, the state gas company, announced its making
a loss of $500 million a year. It was downgraded by Fitch, causing a drop
in Ukrainian bond prices. And as of May 1, ordinary Ukrainians are feeling
it too – gas prices for housing utilities went up 25%, and could easily go
up more this year.

But Ukrainians recognize there is no going back, and they are learning to
accept the cold realities of an independent existence. In fact, higher gas
prices are actually pushing profound restructuring in the economy, which
could ultimately help Ukraine’s emergence as a healthy democracy.

First of all, Ukrainian industry is becoming more energy efficient.
Chemicals and steel factories are switching to local forms of energy, like
coal or hydroelectricity. They are also finally investing in new
technologies to make themselves more efficient.

Municipalities, which are among the worst wasters of energy in the country,
are also upgrading their technology, in areas like water treatment and

Foreign multilaterals are helping them – the EBRD has put around $100
million into various projects, and the World Bank is talking about setting
up a $300 million fund for a similar purpose.

But the fact is that the steel and chemicals sectors are going to be less
profitable in the future, particularly as China becomes a net steel
exporter in the next few years. That’s driving a shift in the economy
towards SMEs. Nikolai Oudovichenko, deputy chairman of Ukreximbank,
says: The future of Ukraine lies in more of the GDP being produced by
SMEs. They are more flexible, less energy dependent, more sophisticated.”

Interesting SMEs are growing in printing, in automobile parts, in textiles,
in recreation and tourism. The tourism sector in particular is growing – the
number of tourists who visited Ukraine tripled last year, thanks to the
government waiving the necessity of visas for visitors from the EU and US.

The retail sector is also booming, and is increasingly becoming the driver
for economic growth. Foreign banks have bought around 30% of the sector
in the last 18 months. Their presence means the sector’s growth is not
limited by capital adequacy issues, as is the case in the more closed and
state-controlled banking sector in Russia. SMEs are also doing well here
too, in areas like consumer finance, household goods and furniture.

Why is this good news for Ukrainian democracy? Because an economy that’s
built on SMEs is more likely to produce a thriving democracy than one
dominated by huge state-dependent enterprises. SMEs are less dependent
on political support, either from the Ukrainian government or the Russian

That means they are more inclined to stand up to the state and act as a
check on state power. It means economic power is more diversified,
and less easy for bureaucrats to control. It means support for political
parties is more diversified. It means less people work for the state, so
less people vote to support heavily Statist or authoritarian governments.

The hike in gas prices is also producing a new mental attitude that can
only be productive for Ukrainian democracy – the attitude that independence
is worth paying for, even if it means tightening one’s belt and adapting to
new realities. That kind of Stoical willingness to make sacrifices for
one’s freedom is the essence of liberalism.

More expensive gas is thus forcing Ukraine to become more mature, to move
beyond Soviet-era behaviour. Compare this to Russia, where the blessing of
huge natural resources also curses the country to remain in a quasi-Soviet
economy, in which huge and inefficient enterprises controlled by the
presidential administration dominate the economy, and ordinary people
likewise expect the state to support them through cheap gas and utilities.

The number of bureaucrats is rising each year, because people still believe
the only way to get ahead is to join the state and salute one’s superior.
Yes, economic growth is much higher in Russia than in Ukraine, but that
growth was not really earned.

And the cost of that growth is you end up with a country where everything
comes back to the Kremlin – the economy is dominated by it, the country’s
top managers are answerable to it, and each individual and family relies on
it for cheap gas.

The idea of standing up for oneself, of not having to bow and scrape to
bureaucrats, is lost. Russia’s great hydrocarbon resources mean it is much
harder for the country to become a pluralist democracy. Ukraine’s lack of
hydrocarbons must just help it on its way. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

COMMENTARY: By Andrea Felsted and David Victor
Financial Times, London, UK, Tuesday, May 9 2006

The world’s energy system seems to have come unhinged. Oil is trading at
record high prices because demand keeps rising even as supplies become
unreliable. Oil exporters from Iran to Russia and Venezuela are using their
petrocash to pursue agendas that undercut western security and interests.
Supplies of natural gas also seem less secure than ever.

The root cause of these troubles is dysfunctional energy politics. The
countries with the strongest incentives to cut their vulnerability to
volatile energy markets – notably America – are unable to act because
influential politicians view all serious policies as politically

Efforts to boost supply have little leverage because the most attractive
geological riches are found mainly in countries where state-owned companies
control the resources and outsiders have little clout. Thus, the current
energy debates are generating a volcano of proposals that have no positive
impact on tight markets.

Yet these structural barriers to serious policy remain hidden because the
debate labours under the meaningless umbrella of “energy security”. Proper
policy on oil and gas must start with the distinct uses for these fuels –
each requiring its own political strategy.

The effort on oil must focus on transportation. Vehicles and aircraft work
best with liquid fuels that can store large quantities of energy in a
compact space and flow easily through pipes to engines. Searching for a
better substitute is worthwhile, but the effort faces an uphill battle.

With today’s technologies, no other energy liquid can reliably beat
petroleum. Liquids can be made from coal, as South Africa and China are
doing. But that approach is costly and has unattractive environmental
implications. Brazil and the US have focused on ethanol, which they distill
from sugar or grain from crops.

However, those programmes, which account for less than 0.5 per cent of the
world’s energy liquids, have a negligible impact on the oil market. Yet,
America is redoubling its ethanol effort because it is politically
unbeatable to reward corn growers and grain handlers who are a formidable
force in US politics.

Indeed, requirements for ethanol in America have created a more rigid fuel
supply system that actually raises the price of oil products, although
ethanol’s backers originally claimed they would cut energy costs.

That same political force also blocks imports of cheaper Brazilian ethanol.
In principle, a better approach is so-called “cellulosic ethanol”, which
promises lower costs as it converts whole plants into ethanol rather than
just the grain. But like most messiahs, its attraction lies in the future.
So far, nobody has made the system work at the scale of a commercial

The best way to temper oil demand today is by lifting efficiency. Even this
economic winner is politically difficult to implement. The US, which
consumes one-quarter of the world’s oil, has not changed fuel efficiency
standards for new cars in 16 years. Every big economy – even China’s – has
stricter fuel economy rules than America’s.

Political gridlock has stymied even modest proposals to allow trading of
efficiency credits.A trading scheme is politically inconvenient as it could
force US carmakers (which make generally inefficient cars) to buy valuable
credits from foreign brands. No politician wants to multiply Detroit’s

Even better ideas – such as a stiffer petrol tax – stay stuck on opinion
pages of newspapers and in academic journals. Despite what is increasingly
termed today’s “energy crisis”, these ideas barely cross the lips of
politicians who want to remain viable among the thicket of anti-tax
conservatives and pro-Detroit lobbyists.

The approaches needed for natural gas are quite different. In western
Europe, which has long depended on imported gas from Russia, Algeria
and a few smaller suppliers, the vulnerabilities are particularly stark. In
principle, though, gas dependencies are easier to manage than oil because
gas has rivals for each of its major uses.

In electric power generation, countries must preserve diversity – ensuring,
for example, that advanced coal and nuclear technologies remain viable.
While “diversity” is motherhood in energy policy, in reality it requires
difficult choices.

In continental Europe, for example, policy­makers have not seriously
confronted the conflict between the need for diversity while, at the same
time, opening the power sector to more competition . Historically, companies
in competitive power markets have invested heavily in gas because gas plants
are smaller and require less capital than coal or nuclear plants.

Gas suppliers who dream of extending their powers forget that it is harder
to corner gas markets when users have a choice. Algeria learnt that lesson
in 1981 when it left a key pipeline empty in a pricing dispute with Italy –
extracting a better price at the time but losing billions of dollars for the
future by destroying its reputation as a reliable supplier.

That lesson should be sobering for Russia today. In December, Gazprom,
Russia’s giant state gas company, cut deliveries to Ukraine, which then
siphoned supplies that flow on to Europe. The company rattled its pipes
again last month – threatening retaliation if Europe dared try to wean
itself from Russia’s gas.

While Gazprom’s management must pander to Russian nationalism (where
pipe-rattling is welcome), the company’s long-term viability rests on its
reliability as a supplier to lucrative west European markets.

Similarly, the recent decision by Evo Morales, Bolivia’s president, to
nationalise his country’s gas fields will give him a boost domestically and
might generate some instant extra revenue, but it will also encourage his
customers in Brazil and Argentina to look elsewhere for energy.

“Resource nationalism” is back in vogue. But for gas suppliers in
particular, it usually ends badly – not least because the infrastructure is
costly to build and buyers can afford to be choosy. Gas users can further
subdue Russia’s rattling by multiplying sources of supply. A robust market
for liquefied natural gas will help.

The tendency for gridlock in energy politics means that policymakers must
focus where tough decisions matter most, such as efficiency in the use of
oil and diversity in the application of gas. Yet, prospects for serious
policy are poor – not least because the US, which should be a leader, is the
most hamstrung. Luckily, the markets are responding on their own – albeit
slowly and patchily.

Costly oil is encouraging conservation and new supplies; LNG is
accelerating, and gas buyers are more wary of Russian gas than they were a
decade ago when Russia was seen as a reliable supplier. If the political
structure remains dysfunctional on matters of energy, then the best second
is perhaps no policy at all. -30-
The writer, director of the programme on energy and sustainable development
at Stanford University and adjunct senior fellow at the Council on Foreign
Relations, is co-editor (with Mark Hayes and Amy Jaffe) of “The Geopolitics
of Natural Gas,” published next month by Cambridge University Press

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Says Dmytro Firtash is an old friend and good businessman

Ukrayinska Pravda website, Kiev, Ukraine, in Ukrainian 28 Apr 06
BBC Monitoring Service, UK, in English, Saturday, May 06, 2006

Former Ukrainian presidential aide Serhiy Lyovochkin has denied any link to
RosUkrEnergo controversial gas trader but said one of its founders, Dmytro
Firtash, is his “old friend and good businessman”.

Speaking in an interview to a website, he predicted that pro-Orange and
opposition forces will unite in the new parliament to form a coalition
government. Lyovochkin said negotiations to this end were under way and
were “progressing successfully”.

He said the state should sell its stake in the national telecommunications
giant, Ukrtelecom, in which Lyovochkin chaired the supervisory board.
Lyovochkin ended by saying he still has good relations with former
President Leonid Kuchma.

The following is the an excerpt of the article by Serhiy Leshchenko,
entitled Serhiy Lyovochkin: I know that negotiations on a coalition between
Our Ukraine and the party of Regions are moving along successfully”,
published in Ukrayinska Pravda on 28 April, subheadings have been inserted

For two and a half years Serhiy Lyovochkin was first aide to [former]
President [Leonid] Kuchma. During Lyovochkin’s time, Kuchma regained the
political form which he had lost during the cassette scandal and during this
same time, Kuchma led the country to a revolution.

The post of first aide was made for Lyovochkin on the day that Viktor
Medvedchuk came to head the presidential administration. Lyovochkin came
to the Presidential Administration back in 1999 and worked as Kuchma’s
consultant for three years. He did not carry the former president’s bags and
it would be a mistake to think that he was merely responsible for the
president’s schedule.

Otherwise they would not have invited Lyovochkin to then-opposition figure
[and current President of Ukraine] Viktor Yushchenko’s birthday party and
Mykola Martynenko would not have come to see him at Bankova Street [the
address of President Kuchma’s administration].

Lyovochkin was a counterweight to [then-presidential chief of staff Viktor]
Medvedchuk in the presidential administration. He recalls those times like
people recall wars, but declines to speak on the subject. Sources say that
the confrontation went as far as an instruction from Medvedchuk being
prepared to detain Lyovochkin at Boryspil airport.

Lyovochkin played his role in the election for mayor of Mukacheve being
revoked in the end. He also helped in seeing that negotiations at country
homes took place during the Orange Revolution between Yushchenko and

However, opponents also say many interesting things about Lyovochkin. For
example, about him being linked to RosUkrEnergo and of his work schemes as
head of the supervisory council of Ukrtelecom and of his friendship with the
well-know [alleged] crime figure Maksym Kurochkin.

After the authorities changed, Lyovochkin became aide to the speaker of
parliament [Volodymyr Lytvyn] and moved to an office located in the new
parliament building on Sadovyy Street, and as number 13 on the bloc election
list, missed getting into parliament with the rest of Volodymyr Lytvyn’s

But Lyovochkin feels no despair and neither does his friend Yuriy Boyko, the
former head of Naftohaz, who dropped in his office several times during the
Ukrayinska Pravda’s interview.

They plan to return to power under the quota of the “Donetsk people” after a
coalition is formed between Our Ukraine and the Party of Regions. And
Lyovochkin has no doubt that things are headed that way.

[Interviewer] First, a simple question: what do you predict will be the
coalition in the new parliament?
[Lyovochkin] There will be a wide coalition. You cannot call yourself a
“democratic coalition” and unite only people of one colour. The idea behind
and essence of a democratic coalition is the right of everyone who shares
its principles to take part.

[Interviewer] The reality is that [former Prime Minister Yuliya] Tymoshenko
will not be in a coalition with the Party of Regions. And if Our Ukraine
joins with the Party of Regions, their electorate will leave for
Tymoshenko’s bloc.
[Lyovochkin] Those are different topics. The main topic is a democratic
coalition. If the coalition is democratic, it should be open for all those
participants of the current parliament.

[Interviewer] But there is a lot which divides them. How can they be in one
[Lyovochkin] I believe this is in fact a task for negotiators. I think and I
know that the positions of the Party of Regions, Our Ukraine and the Yuliya
Tymoshenko Bloc [YTB] have a lot in common both on NATO, forming the
SES [Single Economic Space – an economic bloc between Russia, Ukraine,
Belarus and Kazakhstan] and on the idea of the country’s movement towards
the EU and Ukraine’s role and place in the modern world.
That is, there are far more positions which bring them together than those
which drive them apart.

[Interviewer] What do you mean?! The Party of Regions is against joining
NATO and our Ukraine is for joining NATO. What is common here?
[Lyovochkin] I would say that this is not a question for today. The
coalition is being formed for five years, but it will lay the main
parameters which will form policy and the economy for the next 10 to 15

We must look at the situation as in terms of dynamics. Today the Party of
Regions is firmly against joining NATO. Our Ukraine says: “We are for
joining NATO”. But both sides understand that realistically joining NATO
will not happen as soon as tomorrow.

[Interviewer] But what will happen in three years?
[Lyovochkin] How do you know it will be three years and not eight? That is
desirable. After all the choice “to join or not to join” NATO is not what is
lying at the base. What is lying at the base is the need to guarantee the
security of the state, democratic standards and standards of the economy.
And both the Party of Regions and Our Ukraine must search for answers to
these challenges. In the future the positions of these leading political
players will come together and they will come together for the good of
Ukraine. And that concerns the YTB, too.
I do not see any single, principle position which would not allow the four
forces – the Socialist Party of Ukraine [SPU], YTB, Our Ukraine and the
Party of Regions to sit at the negotiating table.

[Interviewer] But look, Tymoshenko is a real leader, one who will take votes
away from Yushchenko if he joins with the Party of Regions.
[Lyovochkin] The term “take away votes” can be used during an election.
When there is an election, then the term “take away votes” will come up. I
am categorically against thinking in such terms.

[Interviewer] You are a political scientist and you know that preparation
for the next election begins the day the last campaign ends.
[Lyovochkin] People who have been given the people’s trust must think in a
different way. They are obliged to think: “What are we doing to fulfil our
promises?” They must show progress, otherwise others will come and fill
their place. And no political scientist can help them.

[Interviewer] So you do not think that Tymoshenko is a big danger?
[Lyovochkin] I do not think she is a danger at all.

[Interviewer] You are speaking in absolute terms, but there are relative
terms, too. You have drawn a variant that is ideal for you. But there is
also reality, and Tymoshenko will not now join the Party of
Regions…[ellipsis as published]
[Lyovochkin] That variant is not ideal for me, it is ideal for the country.
Look at the map: Ukraine is again being conditionally divided into two

[Interviewer] Kuchma did not stop that in 2004.
[Lyovochkin] That is something completely different. We are talking about
what is happening after the 2006 election. And there is an historical task
before the political elite – to unite Ukrainian lands. The creation of a
democratic coalition has been declared.

[1] First, if it is democratic, it must be open for all. [2]Second,
principle differences between the participants in the coalition will be
withdrawn at the negotiating table. [3] Third, personal conflicts. This is
the biggest field for differences. And in reality, these differences lie
exclusively in dividing up posts.

[Interviewer] How can you compromise if the Party of Regions says: “We want
to have the prime minister, the first deputy prime minister and the deputy
prime minister for fuel and energy”?
[Lyovochkin] I think the president and Our Ukraine can agree to that, if
they get the posts of speaker and the uniformed agencies. The foreign policy
bloc, the defence bloc and the Security Services of Ukraine [SBU] are left
to the president. Pursuant to the constitution, the president chairs the
National Security and Defence Council [NSDC].

This will provide the necessary balance. Responsibility for the economic
bloc and consequently for all the campaign promises will lie squarely on the
shoulders of the Party of Regions.

[Interviewer] How do you know Yushchenko is ready for that?
[Lyovochkin] Because such negotiations are under way. At a high level.
Moreover, they are progressing quite successfully. I think that at a certain
stage they will be open to the SPU and YTB.

[Interviewer] Then how do you explain [Our Ukraine representative Roman]
Bezsmertnyy signing a protocol with Tymoshenko?
[Lyovochkin] The protocol which has already been denounced? I think there is
not one, single centre for making decisions in Our Ukraine. Every group is
playing it own game. But the president will have the last word…[ellipsis
as published]

[Interviewer] Have you heard anything about the chair of the Supreme Court
being part of the division of posts since [Vasyl] Malyarenko has already
signed a letter of resignation?
[Lyovochkin] Malyarenko’s leaving is a loss for the judicial branch. Now
every political force will be trying to influence the appointment of the
head of the Supreme Court…[ellipsis as published]

[Interviewer] Who is making claims for the Supreme Court now?
[Lyovochkin] There are several names. I think Moysyk and Onopenko will try.
You cannot rule out other names rising up from the depths of the Supreme
Court. In any case, Malyarenko’s leaving is a great loss. This is a person
with a position of principle and a wonderful reputation.

[Interviewer] What do you mean? He had business relations with [Party of
Regions functionary Mykola] Azarov and [former Prosecutor-General
Svyatoslav] Piskun.
[Lyovochkin] I’ve known Vasyl Tymofiyovych for a long time. Friendly
relations have never influenced his position.

[Interviewer] Let’s get back to the question of what will happen to
Yushchenko’s electorate if he joins with [Party of Regions leader Viktor]
Yanukovych? Even if this is accompanied by economic growth! There was
economic growth under Kuchma, but he lost the 2004 election.
[Lyovochkin] Kuchma did not lose the election, because he did not take part
in them. You and I know that if Kuchma had taken a harder stance under some
certain conditions, then he probably would have won again. But I don’t want
to talk on that topic. Maybe later, in my memoirs…[ellipsis as published]

[Interviewer] Everyone is making a fright saying that Tymoshenko is evil for
the economy. Are you against her being prime minister? After all, she was a
first deputy prime minister under Kuchma and headed the budget committee,
you dealt with her…[ellipsis as published]
[Lyovochkin] I have not had to deal with Tymoshenko in my work, but what
I’ve seen over the course of the last year creates the impression that there
simply are a lot of things that she does not know. She makes a lot of
decision based on intuition.

But in any case, Tymoshenko is foremost a politician and only second a
manager. And so her coming to be prime minister will undoubtedly give her a
plus in terms of politics, but will not give a thrust to the executive
branch as a whole.

Last year was marked by lower investments, a fairly high rate of inflation
and several crises. And I stress that these were crises of a management
nature, one which could have not arisen.

The dynamics of the past several years demonstrate positive tendencies in
the economy, which should be supported by the professional actions of the
authorities. We have deflation of 0.3 per cent, we have GDP growth of 2.4
per cent and trends showing we are overcoming falls in industrial
manufacturing have been seen and household savings are significantly rising.

This is a result of the current government not making risky moves in the
economy and declining a hands-on, planned-socialist regime of management.

[Interviewer] So then why replace [current Prime Minister Yuriy] Yekhanurov?
Why do you think Yushchenko will agree to Yanukovych being prime minister if
he is comfortable with Yekhanurov?
[Lyovochkin] Yushchenko is right when he says the issue of who is prime
minister should not be the top question. Yushchenko has given himself the
following equation: the government programme should be such-and-such. And
here is a list of people who, from his point of view, can achieve it. And
probably there is a second list – those who can’t…[ellipsis as published]

The personnel issue is limited here since any MP who gets a seat in the
government will give up his [MP] mandate. This will unavoidably lead to a
weakening of factions because as a rule the best representatives of a
political force leave for the executive branch.

As an example, the Our Ukraine a YTB factions were really weakened when
the leaders of these factions left for the executive after the revolution.

[Interviewer] Let’s talk about you. Why did you lobby RosUkrEnergo’s
coming to Ukraine?
[Lyovochkin] No comment. Because I did not lobby it, and don’t want to
talk about it.

[Interviewer] But everyone knows you lobbied for them.
[Lyovochkin] There are a lot of rumours on this topic.

[Interviewer] Rumour has it that you, together with [Yuriy] Boyko and
Firtash, brought RosUkrEnergo to Ukraine, built the whole scheme and
even got money from its functionaries.
[Lyovochkin] That is not true. In fact, I do not think that RosUkrEnergo is
bad. The price of gas will go up anyway. But if it was 230 dollars, even
after the first quarter, then that would be far worse than the price which
we have now.

[Interviewer] Who is behind RosUkrEnergo?
[Lyovochkin] That has been published: Raiffeisen and Gazprom.

[Interviewer] And who is behind Raiffeisen-investment, which simply
represents certain individuals?
[Lyovochkin] I’ll tell you honestly, that as a consumer of gas, I don’t care
who is behind Raiffeisen. I am interested in its price.

[Interviewer] People on the side are making billions off of RosUkrEnergo!
Such money doesn’t just flow by that easy in Ukraine!
[Lyovochkin] As far as I know, last year, RosUkrEnergo did not do any
business in Ukraine.

[Interviewer] It transited gas to Ukraine from Turkmenistan!
[Lyovochkin] It fulfilled these services, using the capacity of Russia’s
Gazprom and Uzbek and Kazakh gas operators. Ukraine paid for the service.
After all, we pay interest on external debt with budget money. Why aren’t we
interested in who is behind the banks where Ukraine has taken out loans?

[Interviewer] People say [alleged crime figure Semyon] Mogilevich is behind
[Lyovochkin] I don’t think that is possible.

[Interviewer] Who is Firtash, and what are your ties to him? What is his
role in the scheme of transporting gas via RosUkrEnergo?
[Lyovochkin] Firtash is my old friend and a successful businessman. For many
years he has been engaged in paying Turkmenistan in goods for gas shipped to

[Interviewer] A PricewaterhouseCoopers report on RosUkrEnergo was
published this week in which it says that Firtash and Fursin are behind the
It is well-known that Firtash is your old comrade and from this, people
believe you have something to do with RosUkrEnergo.
[Lyovochkin] If a company conducts an international audit, then obviously
this is the choice of the shareholders. Subsequently, if the published
information is true, then the people in question are making no secret of
their shares.

[Interviewer] Do you know Tretyakov?
[Lyovochkin] Pretty well.

[Interviewer] Everyone calls him the one carrying on your deeds. When
Tretyakov became first aide to the president, he, like you, joined the
supervisory council of [state-owned companies] Ukrtelecom and Oschadnyy
Bank…[ellipsis as published]
[Lyovochkin] He is a very active guy. I think that the participation of
people directly subordinate to the president strengthens the role of any
representative body, especially in natural monopolies and in Oschadnyy Bank.

In particular, Ukrtelecom has made colossal progress in all financial
indicators in the past three years. The year when I headed the supervisory
council, we rejected schemes which had been used prior to us and
Ukrtelecom’s income grew 248 per cent! In one year! Without increasing

Nevertheless, my firm position is that Ukrtelecom should be privatized right
away. And in consideration of it specifics, it would be better with the
participation of national capital, because Ukrtelecom today makes it
possible to control all the information flow within the country… [ellipsis
as published]

[Interviewer] Explain something else: what right does a person have who is
simply the president’s aide and who organizes his schedule and brings him
documents to sign, to head the supervisory council of a huge enterprise like
Ukrtelecom? You were not in communications and came to Ukrtelecom under
Kuchma…[ellipsis as published]
[Lyovochkin] I am an economist and have a doctor’s degree…[ellipsis as

[Interviewer] Did you successfully defend [your dissertation] under Leonid
[Lyovochkin] Is that something like “before our era” and “after our era” [or
BC and AD]?

[Interviewer] You broke the record held by [Dmytro] Tabachnyk who became a
doctor of history while working as head of Kuchma’s administration?
[Lyovochkin] No, I don’t think so. I defended my doctorate in 2004. The
topic was “Macro financial stabilization in the context of economic growth”.
My candidate doctorate was in 1997, right after post-graduate studies. The
topic then was “The state debt of the Unites States”. Then I got into
business…[ellipsis as published]

(From Ukrayinska Pravda: In fact, Lyovochkin became a doctor of economic
sciences at the age of 31. Dmytro Tabachnyk also became a doctor of history
at 31, while head of the presidential administration.) [Passage omitted:
Came to work for Kuchma on recommendation from Viktor Yanukovych.]

[Interviewer] Do you plan to be a politician in the future?
[Lyovochkin] Since 1998 and up to the present day, I have been working as a
civil servant. I will now be making a decision to continue my civil service
or get involved in something else.

[Interviewer] How can you remain a bureaucrat if you lost the election? That
is, will you move to a new [political] force?
[Lyovochkin] I don’t think that my people lost the election. The bloc in
which I was on the list did not get enough votes to be in parliament. But I
do not make a tragedy of this. My decision will depend on the format of the

[Interviewer] Do you have offers to work for the authorities? From the
Orange or the Blue?
[Lyovochkin] There are offers from various political forces.

[Interviewer] Why didn’t you run under the Party of Regions, if you have
always been considered a Donetsk man?
[Lyovochkin] I worked with Volodymyr Lytvyn and did not think it possible
to run in the list of another force. I am thankful to him for including me
in his list.

[Interviewer] Please tell why people include you when speaking of those
who have an interest in the Industrial Union of Donbass [IUD]?
[Lyovochkin] The leaders of the IUD and I are tied by old friendships.
We met a long time ago as partners in business.

[Interviewer] Did you take part in IUD’s capitalization?
[Lyovochkin] No.

[Interviewer] Tell us about Kuchma. What kind of relationship do you have?
[Lyovochkin] From my side – friendly and respectful.

[Interviewer] Does he call you?
[Lyovochkin] He does. And I call him, too.

[Interviewer] Is it true that you and Kuchma became relatives?
[Lyovochkin] It is true – Leonid Danylovych [Kuchma] is the godfather to my
daughter Olena.

[Interviewer] Did Kuchma come to the baptism himself? They say there have
been cases when Kuchma became god-father without even taking part in the
sacrament…[ellipsis as published]

[Lyovochkin] He was at our baptism.
[Interviewer] If it is no secret, can you tell who your other god-parents

[Lyovochkin] My son Oleksiy’s god-father is my good friend and talented
young politician Eduard Prutnik and the god-mother is a firm believer, a
churchwoman. She lives with her family in Russia. [Passage omitted:
Personal observations on Kuchma and others.] -30-
FOOTNOTE: Analytical energy experts who have studied and watched
this sector in Ukraine for many years say there are some good sources
in Ukraine who think that Lyovochkin was most likely the key player in
running the Eural Trans Gas scheme out of the presidential administration
of Kuchma and had to be privy to the information about who was behind it.

When Eural transformed into RosUkrEnergo sources indicate Lyovochkin
was most likely involved in the process, along with former President Kuchma.
In 2003-2004 Firtash was known to be a frequent visitor to the Presidential
administration where it is believed he had access to Kuchma and Lyovochkin.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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Ukrainian state energy company riddled with unsecured debt

Kiyevskiy Telegraf, Kiev, Ukraine, in Russian 28 Apr 06
BBC Monitoring Service, UK, in English, Friday, May 05, 2006

The Ukrainian state energy company Naftohaz Ukrayiny took almost 4bn dollars
in loans, most of them unsecured, from Western and Russian banks, which
could lead to Ukraine losing control over its gas pipelines, journalist
Halyna Akimova has said.

Naftohaz chairman Oleksiy Ivchenko used faulty logic to justify high debt
ratio by comparing the company to Russia’s Gazprom, which can guarantee
loans with its gas reserves, unlike Naftohaz, Akimova said.

In addition Naftohaz cannot even use cheap domestic gas because the gas
extracting company, Ukrnafta, in which the state has a controlling share, is
managed by people representing a private business group and it sells gas at
market prices, Akimova added.

The following is the text of Akimova’s article entitled: “Dead man’s chest.
Who will get Naftohaz and in what condition, if Ivchenko leaves?”, published
in the Kievskiy Telegraf newspaper on 28 April, subheadings have been
inserted editorially:

The future of Ukraine depends a great deal on Naftohaz Ukrayiny. Some
things, which seemed to be unrealistic a short time ago, have recently
become obvious.

[1] For example, it is obvious that Oleksiy Ivchenko needs to catapult
himself into parliament. And that regardless of whether he leaves or not,
Naftohaz will be left with huge debt liabilities.

These liabilities are underwritten in such manner that the creditor can
obtain a court order freezing all the assets of Naftohaz, and if the state
decides to restructure the company and transfer some assets, the state’s
movable property and real estate can be impounded as that of an owner of a
commercial entity.

[2] It is also obvious that Viktor Yushchenko, who is scrupulous in money
matters, will not allow this shameful situation to develop, and [Finance
Minister Viktor] Pynzenyk (meaning the Finance Ministry) will have to foot
the bill. Anticipating this moment, the finance chief has begun a belated
“war” against the waster.

[3] Finally, it is obvious to the select few that the question of control
over Naftohaz is one of the key issues in the talks, and the question of
whether a coalition with the Party of Regions materializes or not, depends
on this too… [ellipsis as published]

The main issue under discussion is whether Naftohaz provided collateral
assets when taking loans from foreign creditors. There are two exactly
opposite answers: Oleksiy Ivchenko said that it did not, while the SBU chief
Ihor Drizhchanyy said in his letter No 214 dated 7 April 2006 that it did,
and that it even signed all the assets as collateral. Who is right?
Paradoxically, they both are right.

The devil is in the details, i.e. what Mr Ivchenko means by the term
“collateral-free loan”. Does he really believe (naively or mockingly) that
the so-called “unsecured loans” can be taken for free like drinks from the
mini-bar at a five-star hotel? Meaning, they do not need to be repaid?

Even the former SBU chief Oleksandr Turchynov back in his time said at a
news conference about the danger of losing the gas pipelines and Black and
Azov Sea shelf because of loans, noting that Naftohaz used strategic assets
as collateral. The findings of the SBU in the Turchynov era were virtually
identical (curious coincidence) to those in the letter signed by the current
SBU chief Ihor Drizhchanyy.

It said that, according to an inspection conducted jointly by the SBU and
the audit directorate into the effectiveness of the use of debt by Naftohaz
in 2004-05, it turned out that in two years Naftohaz took a total of
20.197bn hryvnyas (almost 4bn dollars) in loans. The money were used for
replenishing operating capital and payments for supplied natural gas.

If I am not mistaken, Ivchenko used some of these loans to pay into the
state budget. He should not have done that. But let us return to the topic
of collateral. Commenting on Turchynov’s statement, Ivchenko accidentally
dropped this phrase: “Loans taken by Naftohaz are unsecured loans without
any collateral guarantees, neither state nor corporate.”

Later he happily bragged about Naftohaz receiving 600m dollars credit line
from Deutsche Bank A.G. in 2005 and saying that this credit line was
unsecured, meaning that it was not guaranteed by collateral assets from

Poor, naive Ivchenko. He must think that his audience includes only
graduates of parochial schools who are absolutely exalted by the words
“unsecured loan”. These foolish creditors, we don’t need to repay the money
and they will not be able to take anything away!

People who studied law and economics, including, apparently, some SBU
analysts, are seeing this problem in a completely different light. They are
saying that an unsecured loan is much more dangerous than a secured one.

“He should have pledged a seaside resort or a recreational compound as
collateral,” a competent source, who wished to remain anonymous, told us.
“This way, the collateral asset in the event of failure to pay would have
been obvious. In our situation, Naftohaz is guaranteeing these loans with
all of its assets,” he said.

Moreover, our source said that in Western countries collateral loans are
usually given to little-known borrowers who arise doubts about their
solvency. It is unclear whether they have the means to repay. Other
entities, who are known to own lots of assets and will not be able to hide
them, receive unsecured loans. If they prove to be insolvent, ALL of the
borrower’s assets are impounded, and then some share of them are cut to pay
off debts.

To put it plainly, we can imagine a hypothetical situation when an
international court satisfies the demands of one of the creditors and orders
to give him 10 metres of a gas pipeline. This would be enough to legally
paralyse exports to Europe or set such a tariff that these 10 metres become
“golden” for us.

But not all the loans taken by Naftohaz are unsecured. Some of the loans
have collateral assets. It is known for sure that the tranches, which are a
part of the agreement between Nafothaz and Deutsche Bank dated 8 March 2005
(total amount 2bn euros), are unsecured. Another 200-million-dollar
unsecured loan was received in November 2005 from the British Standard Bank
London. The interest on this loan is LIBOR plus 1.65 per cent per annum.

There is no information on whether the preliminary agreements on credit
lines for 3bn euros from Credit Suisse First Boston (CSFB) and 2.5bn euros
from Societe Generale were implemented. We can only hope that the protocol
of intentions was left on paper.

I may be mistaken, and the money from these credit lines could possibly have
been already received. This will be even worse for the country: the number
of those who could claim Naftohaz’s property will increase greatly.

The collateral loans were mentioned not too long ago in one of his
interviews by the former secretary of the National Security and Defence
Council, Petro Poroshenko. He did not say anything specific, but admitted
the existence of the loans. Whom did Naftohaz pledge its assets (and which
assets exactly): Raiffeisen Bank, Vneshekonombank or Alfa-Bank?

We can only guess who will want to receive their money back (what was the
term of Naftohaz’s loan?) and what they will receive, in the event that the
money is not available. The answers to these questions need to be given by
senior officials who conducted an audit of Naftohaz under Ivchenko. Mr
Ivchenko himself avoided direct answers to the media’s questions.

He cited examples from the experience of Gazprom. “All such structures,
including Gazprom, have debt ratio of about 70 per cent. This is normal
international practice for such corporations.” [ellipsis as published]

Again we are witnessing this childish naivety, whether skilfully played or
natural. Attention, Mr Ivchenko, try to answer this question on the first
attempt: how is Naftohaz different from Gazprom? That is correct, Gazprom
produces gas as opposed to buying it at European prices.

Until the Russian gas fields are empty, Gazprom can take as much debt as
200 per cent of its capabilities. In order to repay a loan, it will just
have to sell more gas. If new pipelines are build, this will be absolutely

But how are we going to repay if, according to the Finance Ministry, the
company had 118m dollars in back taxes alone, and last year this number grew
almost 90 percent, while the losses in the first quarter of 2006 (as
Ivchenko said) were about 2.6bn hryvnyas [520m dollars]?

It is an interesting sort of vicious cycle. Let’s say, Pynzenyk, who has a
“burning” budget, can force Ivchenko to pay what he owes. Ivchenko will take
another loan in the same manner, which will eventually have to be repaid by
the Finance Ministry. Why?

Because Naftohaz, unlike Gazprom, is not exactly flushed with gas. The 18bn
cu. m. of own production (out of 78bn needed) is not enough to pay off
debts, but enough to make some money on “cocktails”.

As one of our sources logically noted, the simple arithmetic problem of
adding three numbers (the price of Ukrainian-produced gas, the Russian
transit gas and the Turkmen gas from RosUkrEnergo) an important detail is
omitted, which makes it impossible to come to the right answer. This detail
is the proportion of three components in the “cocktail”.

Ukrainian gas costs 25 dollars [per 1,000 cu. m. to residential consumers,
while imported gas costs 110-130 dollars to industrial consumers, but they
are mixed, and domestic gas is sold (interestingly, to whom and at what
price) to industrial companies, while imported gas is given to residential
consumers, resulting in losses, which make it impossible to pay off debts.

This situation is a dead end because of two “smart ones”: gas producer
Ukrnafta refuses to sign an agreement with Naftohaz on selling gas to
residential consumers, and keeps selling it at market prices. Ukrnafta,
which is controlled by one of the financial-industrial groups, explains its
refusal to sign an agreement with Naftohaz by the notion that “it cannot
sell gas at a loss, as this would lead to criminal penalties”.

That is why, according to Ivchenko, Naftohaz buys additional volume from
RosUkrEnergo, a total of about 2bn cu. m. While these two companies are
pointing fingers at each other and saying “It’s your fault! No, it’s your
fault!”, smart lads with access to gas channels are stuffing their pockets
from the sale of “cheap” gas at high prices.

The state is not able to put pressure on Ukrnafta: having a controlling
stake, in reality it has not had a say in company management for a long

Generally, it looks like the best way for Mr Ivchenko and his long-time
junior partner, current deputy Andriy Lopushanskyy, is to go to parliament.
It makes no sense for him to wait until a criminal case is launched under
Article 364 Part 2 of the Criminal Code “abuse of authority and official
position, resulting in grave consequences”.

The Prosecutor-General’s Office denies that the case already exists. At the
same time, finding someone to replace Ivchenko is a very difficult problem
for the president. It turned out that it is not easy to find a suitable
candidate. Ivchenko’s current deputy Yevstakhiya Lekhytska can become a
technical chairman.

However, [1] first of all, she is responsible for company finances. Those
same finances which have big problems now. [2] Second, Aleksey Miller is not
such a gentleman to make concessions to a woman, whom he does not see as a
serious negotiator.

The same, but without the gender factor, can be said of Ihor Vasyunyk – the
brother of the first deputy head of the presidential secretariat, Ivan
Vasyunyk. Ihor was appointed as Ivchenko’s deputy on 15 December 2005,
before that he was the head of the procurement department at Naftohaz.

He has the support of Pynzenyk, but he is not a real power capable of
influencing international gas policy. Some people are saying that Oleksandr
Tretyakov is also willing to take Ivchenko’s seat. Maybe he will be able to
convince the president to give it to him.

Experienced observers admit that if an official or secret coalition is
formed with the Party of Regions, Yuriy Boyko can possibly return to
Naftohaz. Especially since some of his team members were able to keep their
jobs and are now working successfully at RosUkrEnergo.

The Yuliya Tymoshenko Bloc will not let Boyko return, because Turchynov
was curious about his activities when SBU searched the offices of Naftohaz.
Tymoshenko would like to take gas schemes under personal control, but who
would let her?

Time is running out for Ivchenko and Lopushanskyy to make the decision,
and the fate of Naftohaz is unclear. What is also unclear is the fate of the
whole country, which has been presented a challenge by the Russian side.

Aleksandr Medvedev said in an interview with a Ukrainian business weekly
that Gazprom, which owns 50 per cent stake in the exclusive supplier of gas
to Ukraine, RosUkrEnergo, intends to raise the price of gas for Ukraine to
230 dollars per 1,000 cu. m. starting on 1 July 2006.

At the same time, Medvedev said that Gazprom is still interested in
Ukrainian gas transport system, and noted that Kiev would then have an
opportunity to buy gas at discount prices.

It is up to Yushchenko to decide who will conduct negotiations with the
Russians from the Ukrainian side – whether it will be officials from
RosUkrEnergo (UkrGazEnergo), who are Gazprom sympathisers, or the
new chief of Naftohaz. Yushchenko has very little time left to make his
decision… [ellipsis as published] -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Ukraine’s Supreme Court dismissed Regal’s latest appeal vs a state company

By Rebecca Breamand Sarah Spikes, Financial Times
London, United Kingdom, Tuesday, May 9 2006

Regal Petroleum shares fell by more than 50 per cent yesterday before
recovering to close down nearly 20 per cent after the company lost a key
court case in Ukraine. The court’s decision has placed the ownership of the
group’s only profitable assets in doubt.

It also emerged that Regal’s efforts to find a new corporate broker were
failing, which could lead to the company being delisted from the London
Stock Exchange. Corporate Strategy, the boutique broker, yesterday told
Regal it would not sign up as the group’s new nominated adviser (nomad),
following weeks of talks.

Regal has been locked in a dispute in Ukraine with state-owned CNGG, its
former joint venture partner, since 2004. CNGG claims Regal’s two gas
production licences are not valid, and last year successfully challenged
Regal in court. Late on Friday it was announced that Ukraine’s Supreme
Court had dismissed Regal’s latest appeal against CNGG.

In response, Regal shares fell 16p to 65p yesterday. The company was listed
on Aim in 2002 at 60p a share, but the stock rose to more than 500p in March
last year after Frank Timis, the founder, made grand claims about the
potential of its exploration projects in Greece.

The shares crashed two months later after Regal said it had failed to find
commercial quantities of oil at a key Greek well. Regal said yesterday the
outcome of Friday’s court case was “a disappointment, and came out of
the blue”.

The group said it would make a final appeal against CNGG’s claims, but that
if this case was lost, its gas assets in the country would revert to state
ownership. Regal’s two gas fields – the only part of the group that is
profit-making – currently produce 2,000 barrels of oil equivalent a day.

Should Regal fail, it would then have to reinvent itself as an exploration
company without cash flows, focusing on its projects in Romania and Egypt.
Meanwhile, it emerged that Regal shares could soon be delisted from Aim
because of the group’s difficulties in finding a new broker and nomad.

Evolution Securities, the group’s current nomad, resigned in March but said
it would carry on working with the company until a replacement was found.
Evolution faced fierce criticism last year after it raised £45m for Regal
less than a month before bad news about its key Greek exploration project –
the Kallirachi 2 well – was released and the stock plummeted.

Regal has held detailed discussions with Corporate Synergy, but yesterday
the broker decided against becoming its new adviser.
It was also confirmed yesterday that Martin Byrnes, a non-executive director
of Regal and close associate of Paul Morgan, chief executive and chairman,
had quit the company after newspaper reports claimed he had failed to
disclose a previous conviction in Australia when he joined the board this

Regal said Mr Byrnes, who was charged with improper use of his position as a
director of Magnacrete in the 1990s, later had this conviction overturned.
Because the conviction was overturned, there was no obligation to disclose
the original charges, Regal added.

Mr Byrnes had been planning to leave the Regal board as soon as a new broker
was found, Regal said. Evolution and Corporate Synergy both declined to
comment yesterday. But it is understood Evolution is losing patience with
Regal, and might drop the group if it does not find a new nomad soon. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Limited theatrical release in New York City, May 11-17th

REPORT: from Amy Grappell, Producer, Ukraine Documentary
Action Ukraine Report (AUR) #695, Article 7
Washington, D.C., Tuesday, May 9, 2006

Morgan, my documentary “LIGHT FROM THE EAST” will be having
a limited theatrical release in NY at the PIONEER THEATER May

Discounted tickets and Q&A are being offered to student groups and
organizations who would like to make a screening night into an
educational event for their group.

Check out the PIONEER Website for further info or contact me directly to discuss
further. Your suggestions in helping me do outreach in NY based
University Eastern European Studies programs or organizations is much

Thanks — Amy Grappell, 512-619-6025.

“LIGHT FROM THE EAST” The story of an American theater troupe
that witnessed the fall of Communism Opens in New York May 11-17,
2006 at the Pioneer Theater

“Personal, political, historical…I loved It.” – Richard Linklater,

1991. Glasnost. Perestroika. The Soviet Union opens its doors to the
West. A troupe of young American actors from La Mama Theater in NY
travels to Kiev to participate in the first American/Ukrainian cultural
exchange theater project in history.

The play they are to perform is based on the life of Les Kurbas, a
revolutionary Ukrainian theatre director who was murdered in one of
Stalin’s purges. Two weeks into their trip, Gorbachev is kidnapped, the
Kremlin is overthrown by a military coup and the entire USSR is plunged
into volatile uncertainty.

As rehearsals progress, the play ironically begins to mirror action in
the streets. Kurbas and his company struggled to make art during the
revolution that ushered in Communism; the international troupe performs
the life of Kurbas as the walls of Communism come tumbling down.

During the massive political changes of 1991, including the fall of
Communism and the Ukraine declaring its national independence,
LIGHT FROM THE EAST takes viewers on a philosophical inquiry
into the meaning of freedom.

“Beautifully captures the spirit of the former Soviet Union and the soul
of its people.” – Albert Maysles

“After the recent, quiet Revolution in Ukraine, this movie is almost a
must see as it uses a cultural exchange theater project for the focal
point of examining a people who despite political realities are driven
by dreams that become realities.” – Louis Black, Publisher, AUSTIN

The Two Boots Pioneer Theatre, 155 East 3rd Street, between
Avenues A and B (closer to A), New York City, (212) 591-0434

Thurs May 11 9pm; Fri May 12 9pm; Sat May 13 9pm
Sun May 14 9pm; Mon May 15 9pm; Tues May 16 9pm
Weds May 17 9 pm

Advance tickets: click by showtime or call (800) 595 4849 (service
charges do apply) admission $9 (members $6.50)
Film URL
Film Trailer
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
NOTE: Send in a letter-to-the-editor today. Let us hear from you.

Natalie Kononenko, Kule Chair of Ukrainian Ethnography
University of Alberta, Modern Languages and Cultural Studies
Edmonton, Alberta, Canada, Friday, May 5, 2006

Dear Colleagues,

I am writing to announce several major additions to our Ukrainian
Traditional Folklore Web site,

1) We have updated the sound files page which can be found under
verbal culture on the Web site above or at

We have systematized the page, creating larger categories. Now,
instead of having to scroll through a long list of keywords, you will
find a much shorter list of categories. Click on the category that
interests you and then go to a more detailed list of keywords. The
keywords, as before, lead you directly to a sound file.

These are my recordings made in Central Ukraine between 1998 and
2005. Most of the information is about family rituals: weddings,
baptisms, funerals. There are also many songs, stories, personal
narratives, information about beliefs in the supernatural, and so forth.

2) We have added a number of images to the rushnyk or ritual towel unit
under material culture. There are pictures of rushnyky taken in 2005
and a discussion of changes in tradition, specifically the introduction
of motifs from Western Ukraine into the Central area and the
proliferation of “text” towels, rushnyky with words in addition to the
pictures and symbols.

3) We have added a bulletin board. Since people tend to ask me the
same questions time and again, I prefer to answer them in bulletin
board format so that the information is available for others to use.

I used to provide this service on, but the bulletin board
collapsed because of too many pornography posts. To keep out those
who do want to post pornography or advertisements, you will have to
register. But the service is well worth it. My brama Ask Pani Natalka
page was very popular. You can refer to students to this page, both to
search for information and to post questions. I will do my best to

Natalie Kononenko, Kule Chair of Ukrainian Ethnography
University of Alberta, Modern Languages and Cultural Studies
200 Arts Building, Edmonton, Alberta, Canada T6G 2E6.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Founded a publishing company in Ukraine last summer with local partner

Handelsblatt (English abstracts), Germany, Friday, May 05, 2006

GERMANY – Verlagsgruppe Handelsblatt (VHB), the German publishing
group responsible for publications such as financial daily newspaper
Handelsblatt, is planning to expand in eastern Europe, and says that it is
examining markets in the region together with partners.

The company, which has already entered the Bulgarian newspaper and
specialist magazine market and founded a publishing company in Ukraine last
summer with a local partner, says that it wishes to reduce its dependence on
the German market, which is experiencing difficulties.

The company is optimistic with regard to this year, saying that it has
already achieved growth in advertising revenue. VHB hopes to increase
turnover by 5 per cent this year, thanks to expansion in eastern Europe and
in the field of specialist media. The company also expects profits to rise.
Last year, VHB increased its turnover by 3 per cent to 271m euros. The
ebitda before restructuring costs totalled 12.9m euros, compared with 14.6m
euros for the previous year.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
PZU insurance company invested ZL75.2 million in Ukraine

Polish News Bulletin, Warsaw, Poland, Wed, May 03, 2006

WARSAW – According to data collected by the Commission for Insurance
and Pension Funds Supervision (KNUiFE), Polish insurance firms have
invested as much as ZL248.01m abroad, constituting a ZL110.63m increase
in 2005, with most of the investments bringing losses.

Investment in foreign subsidiaries registered in the EU has grown by
ZL41.53m; and by ZL69.1m in those registered outside the EU. Foreign-
based subsidiaries are owned by PZU, TUiR Warta, TU Allianz Polska and
Commercial Union Polska, among others. The biggest investments, amounting
to ZL198.68m, have been carried out by property insurers. Life insurers have
spent ZL49.32m.

TUiR Warta acquired stocks in the British Gdynia America Shipping for
ZL3.94m, while TU Allianz spent even less, which indicates that the bulk of
the sum has been invested by Poland’s major insurer. PZU invested ZL75.2m
in Ukraine and ZL118m in Lithuania. PZU also suffered the most significant
losses: ZL100m. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Polish News Bulletin, Warsaw, Poland, Sunday, May 07, 2006

WARSAW – The lengthy negotiations between the Polish and Ukrainian
veterinary services have come to an end. On 5 May the two sides reached an
agreement regarding the ban on Polish meat products. The ban is to be lifted
on 20 May.

It came into effect in late March due to the lack of necessary veterinary
documentation concerning the exported products. According to Polish Chief
Veterinary Inspector Krzysztof Jazdzewski, over 20 domestic companies will
soon be able to export their produce to Ukraine. All of them supplied meat
products to Ukraine before the ban was introduced.

In the first three quarters of 2005, Polish companies exported 60,000 pigs
and 5,300 tonnes of pork to Ukraine, which constituted 67 percent and 3
percent of all exports of those products during that period. Polish meat
will be allowed to cross the Polish-Ukrainian border at two selected border
crossings. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
If you are receiving more than one copy of the AUR please contact us.
Investment of $1.4 B Marks Largest Foreign Investment In Bulgaria

Business Wire, Monday, May 08, 2006

The AES Corporation (NYSE:AES) [Arlington, Virginia] today announced
plans to begin construction of the company’s first power plant in Bulgaria,
a $1.4 billion 670 MW lignite-fired plant.

The project is the single largest foreign investment to date in Bulgaria and
one of the largest greenfield investments in Southeast Europe. AES said it
expects construction to begin May 9, 2006 when the project’s lenders make
their first disbursement of funds to the project.

The new Maritza East I plant, located near the town of Galabovo, Southeast
Bulgaria, will be the first large scale power plant to be built in that
country in more than 20 years. Upon completion, the base load facility will
serve as a source of electricity for Bulgaria and Southeastern Europe.

It is supported by a 15 year power purchase agreement with the national
electricity utility in Bulgaria, Natsionalna Elektricheska Kompania (NEK),
and a 15 year lignite supply agreement with the state owned mining company,
Maritza East Mines (MMI).

The plant will be constructed under the terms of a turnkey contract with
ALSTOM and is expected to begin operations in 2009. ALSTOM will use its
clean combustion technologies and provide the two pulverized coal boilers of
335 MW each, the two steam turbines, the two generators and the balance of
the plant.

“Bulgaria is experiencing good economic growth, political stability and good
opportunities in the power sector as it prepares its accession to the
European Union. Bulgaria is the kind of market we want to do business in,”
said Paul Hanrahan AES President and Chief Executive Officer. “Our new
plant will help supply Bulgaria’s growing electricity needs and maintain the
country’s position as an energy hub for the region.”

Financing for the project is through a consortium comprising the European
Bank for Reconstruction and Development, Calyon, BNP Paribas and ING
Bank. German and French export credit agencies and the Multilateral
Investment Guarantee Agency of the World Bank are providing debt
insurance cover to the lenders for a portion of the debt.

“Maritza East 1 will be the newest, most efficient and cleanest fossil fuel
power plant in Bulgaria, meeting World Bank environmental standards and
employing world class technology and equipment. We are very pleased with
the support we’ve received from the Bulgarian government on this project and
look forward to a long-term partnership with them,” said Matthew Bartley,
Executive Director, AES Maritza East 1.

The Maritza plant expands AES’s strong presence in Eastern Europe. AES
has been in this region for nearly ten years, since it acquired three power
plants in Hungary in 1996. Today, AES has two distribution companies in
Ukraine which serve 1.2 million customers and generation plants in the Czech
Republic and Hungary. AES is also the leading company in biomass conversion
in Hungary, generating more than one third of the nation’s total renewable
generation in 2004, which is the most recently available data.

AES is one of the world’s largest global power companies, with 2005 revenues
of $11.1 billion. With operations in 26 countries on five continents, AES’s
generation and distribution facilities have the capacity to serve 100
million people worldwide. Our 14 regulated utilities amass annual sales of
over 82,000 GWh and our 127 generation facilities have the capacity to
generate over 44,000 megawatts.

Our global workforce of 30,000 people is committed to operational excellence
and meeting the world’s growing power needs. To learn more about AES, please
visit or contact AES media relations at
Corporation Media: Robin Pence, 703-682-6552 or Investors: Scott Cunningham
FOOTNOTE: AES also has some major power plant investments in Ukraine.
They are an active member of the Ukraine-U.S. Business Council in Washington.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Send in a letter-to-the-editor today. Let us hear from you.

ANALYSIS: By Catherine Belton, Staff Writer
Moscow Times, Moscow, Russia, Friday, May 5, 2006

The U.S. government appears to be stepping up its drive to secure energy
supplies from Central Asia in a bid to counter Gazprom’s growing clout and
thwart a mounting challenge from China, as analysts signal the start of a
tense new Great Game.

U.S. Vice President Dick Cheney is expected to push in Kazakhstan on Friday
for a major new gas pipeline from the country to bypass Russia and take
Kazakh gas westward through Azerbaijan and on to Turkey. Kazakhstan on
Thursday gave an early signal it was interested in the project following
talks between Kazakh officials and EU Energy Commissioner Andris Piebalgs.

The new push comes as consumer nations grow increasingly nervous about
future supplies, with energy prices soaring to all-time highs, and concerns
mount about dependence on Gazprom. The gas giant has locked in a monopoly
hold on gas supplies out of Central Asia and Russia, while it supplies
Europe with 25 percent of its gas needs.

In a sign of the growing pressure, Cheney lashed out at Russia in a speech
in the Lithuanian capital, Vilnius, on Thursday for using its energy
resources as “tools of intimidation or blackmail.” In the strongest
statement yet by a senior U.S. official, he said Russia was throwing its
weight around “either by supply manipulation or attempts to monopolize

Washington’s latest attempt to secure additional Caspian energy supplies
comes after several years of wavering U.S. policy in the region due to
concerns over increasing authoritarianism there. The administration of U.S.
President George W. Bush offered an olive branch to Azerbaijani President
Ilham Aliyev just last week, granting him his first visit to the White
House since he succeeded his father as president in October 2003. Energy
cooperation was one of the main issues on the agenda, as was democracy
reform, a U.S. State Department official said.

“Cheney … has decided that this is getting ridiculous,” said Zeyno Baran,
director of the Eurasian Policy Center at the Washington-based Hudson
Institute, referring to the U.S. administration’s previous balking over
democracy concerns at high-level meetings with regional leaders . “Soon
there won’t be any more democracies in the region to participate with.”

“You can say all you want about how we will not take part in these great
games, but Russia and China are taking part in them and there is a risk
that the United States is losing out,” Baran said by telephone from
Vilnius, where she was taking part in the Cheney trip.

Gazprom has been signing off on a string of major new supply agreements
with Uzbekistan and Turkmenistan. While President Vladimir Putin last week
threatened to send more Russian energy east, China has been stepping up its
activities in Central Asia as it seeks to secure supplies from Kazakhstan
and Turkmenistan.

China’s CNPC last year bought Kazakh oil producer PetroKazakhstan, and the
first oil from Kazakhstan reached China last week via a major new pipeline.
Turkmen President Saparmurat Niyazov last month paid a six-day visit to
Beijing, where he signed off on a plan to send 30 billion cubic meters of
gas annually by a new pipeline to China beginning in 2009. Not satisfied,
China is in talks with Kazakhstan over a gas pipeline from that country,

“The Chinese are now waving their checkbooks,” said Alfa Bank chief
strategist Chris Weafer, who is also an expert on OPEC politics. “The whole
historic Great Game is back, and the Caspian is very much front and center
as the main region for energy security.”

When Putin named energy security as a priority during Russia’s presidency
of the Group of Eight nations this year, the expectation was that Russia
could use its growing might as an energy supplier to leverage its interests
and gain an increasingly important seat at the top table of global
politics, Weafer said.

But Russia’s standoff with Ukraine over the New Year, in which it briefly
cut off gas supplies, led to growing fears Russia was using its energy
might as a political weapon. As a result, G7 nations have begun discussing
energy security on a much broader level and have stepped up efforts to
diversify supplies.

Gazprom’s increasing wealth at a time of sky-high energy prices is also
sparking new worries, said Matt Sagers, director for energy economics at
Cambridge Energy Research Associates. “Nothing in terms of strategy is
different. What is different … is that Gazprom now has muscle.”

The Caspian is becoming a focal point in the search for new supplies
because of its vast energy reserves and the fact that Caspian nations may
be easier to reach than those in regions such as war-torn North Africa,
Weafer said.

A State Department official said Thursday that the U.S. foray into Central
Asia was more of an attempt to ensure diversity of supplies than a direct
response to Gazprom’s increasing clout.

“We have to help the European gas market function more efficiently,” the
official, who was speaking on condition of anonymity, said from Washington.
Gazprom’s ability to buy gas from Central Asia for as low as $55 per 1,000
cubic meters and sell it for $240 or more to Europe thanks to its monopoly
on all pipelines running west out of the region was “a perverse situation,”
he said.

“This generates enormous rents that are distributed in nontransparent
ways,” he said, adding this was not in line with the U.S. reform agenda.
“We can address that by increasing competition and diversifying pipeline

Russia should adhere to the principles of the Energy Charter and allow
third-party access to pipelines, he said, adding that Russia had called on
Ukraine to do exactly that during the price standoff. “What’s good for the
goose is good for the gander,” he said.

The official played down Putin’s threats last week that Russia could send
energy east if the West did not lift obstacles to its expansion in markets
there. It is clear “there’s bargaining going on here,” he said, adding that
Russia was not going to give up on its most prestigious market, Europe.
“The Russian government has decided that energy could be the most
influential tool to influence Europe. … It has clearly established
revenues there.”

Weafer said, however, that Putin’s saber-rattling last week had sent
shivers down Europe’s spine, even if it would take a decade to build the
infrastructure necessary to take Russian energy eastward.

“In 10 years’ time, Europe is facing its greatest crunch,” he said. “There
will be a real energy crisis in Europe if it has not secured major new
energy supplies by then.”

Russia is “taking into account the fact that China and India have a huge
appetite for energy and will give favorable terms,” Weafer said.

Baran said that even though U.S. officials would not openly admit they were
concerned by any threat from Chinese deals, privately they were expressing
increasing concern. “There’s a sense that it’s going to be impossible to
compete with them. It’s becoming increasingly difficult to win any open
tender because the prices are just incredible,” she said.

Weafer said the extended period of high oil prices had changed the entire
dynamic between consumer and producer countries, as producers, buoyed by
windfall revenues, become increasingly independent. “The United States has
finally woken up to the fact that it is not going to be able to secure
energy supplies based on political relationships,” he said. “The Chinese
have already changed the rules of the game with their checkbooks.”

Other analysts disagreed, however.

Kazakhstan is unlikely to antagonize Russia by moving fast on a new gas
pipeline westward, while the low quality of gas in Kazakh fields would also
make any such project extremely costly, said Valery Nesterov, oil and gas
analyst at Troika Dialog. Proposals to hook Turkmen gas up to a Kazakh
pipeline westward would likely serve to push up prices for Russia rather
than win the United States and Europe easier access to the gas, he said.

Another big problem for any direct Kazakh route to the West is that it
would have to go under the Caspian Sea, the demarcation of which has
yet to be agreed on by its littoral states, including Iran, Baran said.
“Iran would be a threat to any pipeline project,” she said.

With obstacles like these, any discussion of a Kazakh pipeline by Cheney
would just be “the start of a long process,” she said.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Brussels backs an old “American” gas project

Vremya Novostei, Moscow, Russia, Friday, May 5, 2006

On a visit to Kazakhstan yesterday, EU Energy Commissioner Andris
Piebalgs expressed support for the idea of building a Trans-Caspian
pipeline that would export gas from Kazakhstan and Turkmenistan to
European consumers, bypassing Russia.

Growing fears of dependence on natural gas from Russia are
prompting Brussels to consider increasingly unusual ways of getting
gas elsewhere. On a visit to Astana (Kazakhstan) yesterday, EU
Energy Commissioner Andris Piebalgs expressed support for the idea
of building a Trans-Caspian pipeline that would export gas from
Kazakhstan and Turkmenistan to European consumers, bypassing

“We support construction of A fourth corridor for transporting
gas to Europe,” Pielbags said. “We will support construction of a
Trans-Caspian pipeline because it would give us additional volumes
of gas and provide Kazakhstan with another means of export

Bakhtykozha Izmukhambetov, Kazakh Minister for Energy and
Minerals, promised “to make the European Commission an offer to
study the possibility of construction of the Trans-Caspian pipeline
and its funding.”

To reach its destinations in Europe, however, Central Asian gas
has to travel across the Caspian Sea, which is in the focus of a
great deal of discord; and across Azerbaijan, with its military
ambitions; across the unpredictable Georgia; and across Turkey,
involved in intricate geopolitical games of its own.

This is no easy task, as can be seen from the pitiful example of the
Trans-Caspian pipeline the Americans proposed building a decade ago.
For all their powers of persuasion, the Americans never succeeded in
reaching a consensus with all involved parties (leaving aside the economic
viability of the project itself).

The political and market situation has changed greatly. An
unprecedented high gas prices may make even a horrendously expensive
project worthwhile, while Europe is obsessed with diversification of
gas suppliers… Even so, viability of the project is extremely
questionable. The Blue Stream pipeline enabled Gazprom to establish
itself in Turkey, far ahead of its rivals.

Moreover, Blue Stream compromised the export potential of Azerbaijan’s
gas, which was to be delivered to the Turkish market by the Baku-Tbilisi-
Erzerum pipeline, almost built by an international consortium with BP
playing the leading role.

The plan for bringing Turkmen gas to European markets, proposed
in the early 1990s, was estimated to cost $2.5 billion. The project
never amounted to anything, because of the intricacies of relations
between the Caspian states and more than difficult relations between
presidents of Turkmenistan and Azerbaijan.

When Washington’s interest in the region flared up again in 1999,
Ashkhabad received $750,000 for research. General Electric, Bechtel,
and Royal Dutch/Shell even formed a consortium for the project.

However, Ashgabat and Baku never settled the matter of national shares
in the project, and that was the end of the project. Construction of a gas
pipeline from Azerbaijan to Turkey began instead. The first gas from
Shakh-Deniz field is expected in Erzerum this autumn.

The Russian-Ukrainian gas conflict revived the subject of the
Trans-Caspian pipeline again, and it was Washington again (not
Europe) that dusted it off and offered to the countries of the
region. The idea to revive the project was promoted at the debates
in Carnegie Center in Washington this February with references to
Russia’s “unreliability” as supplier of gas to Europe. The latest
events fit what might have looked like a puzzle once.

On a tour of Turkey and Greece, US Secretary of State Condoleezza
Rice did her honest best to persuade the local governments to opt for
the projects not connected with the Russian gas. EC President Jose
Manuel Barroso appealed to the United States for help in
withstanding energy pressure applied by Moscow. President Ilham
Aliyev of Azerbaijan is on his first official visit to the United
States at present. US Vice President Dick Cheney is expected in
Kazakhstan today.

Russia gas has an edge for the time being. Unlike its Central
Asian rival, it has already secured a solid position in the Turkish
market. Blue Stream is running at nearly full capacity. Leaders of
Russia, Italy, and Turkey met in 2005 and proclaimed the intention
to boost the capacity even more in order to export some of the gas
via Turkey to the Balkans, South Europe, and even Israel.

In fact, the builders of the Baku-Tbilisi-Erzerum pipeline
themselves aren’t convinced that Ankara will need Azeri gas in the
foreseeable future. Baku officials and particularly Energy Minister
Natik Aliyev speak of the possibility of the domestic use of gas
from Shakh-Deniz (export of between 6.6 and 16 billion cubic meters
of gas to Turkey was considered at first) and abandonment of gas
import from Russia. An anonymous spokesman for BP-Azerbaijan
admitted as much this April when he called Azerbaijan itself the
most promising market.

But neither should Gazprom relax. Global competition is so
vicious that even reliable partners could end up on the other side
of the barricades some day. Reliable partners, and Turkey is
anything but – given its aspirations for EU membership. Moreover,
Western consumers could even form a tactical coalition. At least,
some actions by Washington and Brussels indicate that it may be in
the offing. (Translated by A. Ignatkin) -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Associated Press (AP), Kiev, Ukraine, Friday, May 5, 2006

KIEV- Ukraine is disappointed with the Commonwealth of Independent States,
a loose alliance of ex-Soviet republics, and may consider withdrawing if the
group cannot prove its usefulness, a senior aide to President Viktor
Yushchenko said Friday.

“If there aren’t going to be results, this question will arise, if not
tomorrow then in the nearest future,” said Kostyantyn Tymoshenko,
Yushchenko’s foreign policy adviser.

The CIS was created after the 1991 Soviet collapse, but the Moscow-dominated
group has been eyed with increasing suspicion by its more pro-western
members, Ukraine and Georgia, which have sought in recent years to move out
of the Kremlin’s shadow.

Georgian President Mikhail Saakashvili is currently studying the possibility
of quitting the group. Tymoshenko said such a move wasn’t on Ukraine’s
agenda today, but noted that “we have said more than once that we are not
pleased with how the CIS functions.”

Last month, the 12-member organization rejected a request by Kiev to
recognize the 1930s famine in Ukraine as genocide. Ukraine has also tussled
with the group over alleged bias in its election observer missions. Under
Yushchenko, who defeated a Kremlin-backed candidate for the presidency in
2004, Ukraine has begun a pro-western drive, aiming for future membership in
NATO and the European Union. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Commonwealth of Incompliant States

COMMENTARY: By Vladimir Solovyev, Sergey Sidorenko, Kiev
Kommersant, Moscow, Russia, Saturday, May 6, 2006

Kiev followed the example of Tbilisi yesterday and announced tat it is
seriously questioning the expediency of membership in the Commonwealth
of Independent States. That announcement was the main outcome of the
Vilnius summit of heads of the Baltic and Black Sea states. Unlike Georgia,
which has nothing to lose from its departure from the CIS, Ukraine’s
separation presents a number of problems.

The press service of Ukrainian President Viktor Yushchenko organized a
special briefing on the future of the CIS by the head of the foreign
relations service of the president’s secretariat Konstantin Timoshenko. Mr.
Timoshenko reported that the Ukrainian leadership is not satisfied with the
effectiveness of the organization’s functioning and that the president is
seriously considering Ukraine’s withdrawal from it. “Unless something
changes, the question of Ukraine’s withdrawal from the CIS will become a
practical plan, if not tomorrow, then in the near future,” Timoshenko said.

The presidential adviser’s appearance was the apotheosis of a series of
anti-CIS moves by Ukrainian authorities. For a week, various officials have
been harshly criticizing the CIS. Ukrainian Deputy Foreign Minister
Vladimir Ogryzko set the tone when he stated during a visit to Moscow that
Kiev is disappointed the CIS has turned from an organization of action to
an organization of conversation. He said that Ukraine has repeatedly made
specific proposals within the CIS and none of them were developed by the

Ogryzko cited the example of President Yushchenko’s proposal to set up
common border protection for the CIS countries, which was ignored. “Will
there be any desire to make new proposals after that? The question arises
as to why we need that shell? For business or as a club?”

The Ukrainian Security Council followed the Foreign Ministry. Its secretary
Anatoly Kinakh hit at a sore spot when he said that the CIS has lost its
economic meaning. “Hundreds of documents have been passed by the CIS,
but they are not implemented. The procedure for creating a free trade zone
between member states has not been completed,” he recalled.

Yushchenko did not touch on the topic of the CIS directly at the Vilnius
summit. But it was clear from his speech at the forum that the CIS is not
the future Kiev has in mind. Yushchenko called maximum closeness to
NATO and the European Union the main goals of his presidency. “It will be a
great honor for me to solve those problems,” he said. “There is no worthier
challenge for our political elite today.” The Ukrainian president said it
was possible that he plan to begin the process of joining NATO would be
put into action at the November meeting of the organization in Riga.

The storm of criticism of the CIS coincided with the Vilnius summit. Most
observers agree that the countdown to the dissolution of the CIS has begun.

The presidents and foreign ministers of the Baltic, Eastern European and
Scandinavian countries were present at the summit and its main moderator
was U.S. Vice President Dick Cheney. In his speech, Cheney criticized
Moscow’s policies in the former Soviet Union and stated that they pose a
threat to democracy. Cheney praised Russia’s neighbors and held up
Ukraine and Georgia as examples for the other former Soviet states.

Kiev and Tbilisi took that praise as a signal to act. The statements by
Ukrainian leaders came immediately after Georgia, another country of
triumphant democracy, expressed the same intentions. Georgian President
Mikhail Saakashvili has instructed the Georgian administration to determine
the advantages and disadvantages of CIS membership. Georgian politicians
immediately informed the head of state that the advantages of CIS
membership were extremely few.

Chairman of the Parliamentary Committee on Foreign Affairs Konstantin
Gabashvili stated that “the only advantages of the CIS were visa-free travel
and free trade and without them membership loses all meaning.” Georgia
and Ukraine are in different positions, however. Georgia has nothing to
lose, since visa and trade wars have been in progress against for a long time.
Relations between Ukraine and Russia, despite their disagreements, have
been privileged.

Russian politicians threaten the leaders of the color evolutions with big
economic problems in response to their anti-CIS initiatives. Vadim Gustov,
chairman of the Federation Council Committee on CIS Affairs, predicted high
unemployment in Ukraine, reconsideration of economic agreements and higher
energy prices.

“The Ukrainian economy is oriented toward the Russia. The Russian market
is basic for Ukrainian goods. No one needs their goods in Europe, and
whom Ukraine will sell them to outside the CIS is a big question,” he said.
He called the criticism of Russia at the Vilnius summit “a return to the
Cold War.” “A sanitary corridor is being created around Russia and Ukraine
has been pulled into that game,” he said.

Gustov was seconded by chairman of the Duma Committee on Foreign Affairs
Konstantin Kosachev, who said that Kiev and Tbilisi are pursuing a policy
of deteriorating relations with Russia to speed up the process of
integration with Western European and Transatlantic structures. “I’m afraid
that counting on easing that integration is mistaking wishes for facts. No
one in those structures is waiting for Georgia or Ukraine,” Kosachev

The parliamentarians’ statements are only warning. Russia has shown how it
treats incompliant neighbors more than once. The gas war with Ukraine and
the trade wars with Georgia and Moldova are from the only means of exerting
pressure that Russia has at its disposal. If Ukraine decides to leave the
CIS, Russia could make travel from that country subject to receipt of a

Moreover, Russia could cancel the policy implemented two years ago
that allows Ukrainians to stay in Russia for up to three months without
registration. Those measures could have much more unpleasant effects for
Ukraine than the wine war does for Moldova.

In Kiev, they are convinced that the matter will not reach those extremes.
“We have never descended to such crude means of influence as import
prohibitions on made-up pretenses based on sanitary norms,” press secretary
of the Ukrainian Foreign Ministry Vasily Filipchuk told Kommersant. He said
that Moscow should learn he lessons of last year’s gas war. “Judge for
yourself who suffered more. After that, the world community began to doubt
Russia’s reliability as an energy resource provider. Moscow only harms
itself with such steps,” he said. -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Interfax, Tbilisi, Georgia, Sunday, May 7, 2006

TBILISI – Georgian and Ukrainian diplomats have gathered at the
Georgian Foreign Ministry Sunday to discuss consequences of
Georgia’s possible exit from the Commonwealth of Independent States,
Georgian Foreign Minister Gela Bezhuashvili told reporters on Sunday.

“A Ukrainian Foreign Ministry delegation arrived in Tbilisi overnight.
Experts have met today to weigh negative and positive consequences this
step may entail,” Bezhuashvili said.

“There are countries in the commonwealth with which we are linked with
strategic relations. It’s clear to everyone that this organization has long
lost its effectiveness and we seriously view the issue of withdrawal from
the CIS,” the Georgian foreign minister said.

Bezhuashvili admitted that his country’s exit from the CIS could complicate
Georgian-Russian relations.

“But we are not alone in the dialogue with Russia. If problems arise, we’ll
mobilize all resources to consolidate the international community and get
Russia face the world opinion,” the minister said. sd
[return to index] Action Ukraine Report (AUR) Monitoring Service]
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RIA Novosti, Moscow, Russia, Sunday, May 7, 2006

MOSCOW – The government of Russia is considering canceling benefits
for Georgia and Ukraine, if they decide to withdraw from the Commonwealth
of Independent States, a government source said Sunday.

Georgian foreign minister Gela Bezhuashvili said Sunday Georgia had started
consultations with Ukraine on their withdrawal from the CIS, a loose
association of former Soviet republics.

“In the wake of statements made by the leaders of Georgia and Ukraine about
the possibility of their withdrawal from the CIS, the government of Russia
is considering canceling a number of benefits, which these states enjoy
within the CIS,” the source said.

“No doubt, in this case Russia will review many agreements and accords
concluded within the CIS, including in the social sphere,” the source said.

Russian experts say Georgia’s withdrawal from the CIS will mean for most
of the republic’s population a rupture or a considerable weakening of
traditional economic and humanitarian ties with Russia and other CIS

Experts say Georgia could sustain the greatest losses in this case in the
economic sphere, in particular, in agriculture, which employs half of the
republic’s able-bodied population and sells its products mostly in the CIS

According to experts, it would be difficult for Georgia to find alternative
markets because its products are frequently of low quality. The search for
alternative markets would reduce the republic’s export revenues and would
lead to agricultural product overstocking and the bankruptcy of
agricultural producing and processing businesses. This would also lead to a
higher unemployment rate.

According to official figures, there were 370,000 unemployed people in
Georgia in mid-2005 or 18% of the workforce. According to unofficial
figures, the unemployment rate was as high as 40%.

Georgia’s withdrawal from the CIS would also affect the republic’s energy
sector, which covers only 40% of the country’s energy needs while 60% of
electricity is largely supplied from Russia, experts say. -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Interfax, Moscow, Russia, Friday, May 5, 2006

MOSCOW – Georgia and Ukraine will lose more than they gain from
quitting the CIS, said Vadim Gustov, head of the Federation Council
Committee for CIS Affairs.

“It is obvious that the European Union, which Ukraine aspires to join, is
not ready to integrate with the country. It is remarkable that no European
politician has named an approximate date for Ukrainian entry into the
organization,” Gustov told Interfax on Friday.

The EU is not ready to integrate with 46 million Ukrainians, because no EU
country even imagines where to get the funds to turn Ukraine into a country
on the level of Sweden, he said.

“Quitting the CIS, which Ukrainian President Viktor Yushchenko has
mentioned, would be a huge mistake of the Ukrainian authorities,” he said.
It is more feasible for Kyiv to move to integration within the framework of
the CIS, he said.

Moreover, he urged Ukraine to think about the consequences of quitting the
CIS. “Ukraine may see high unemployment rates. Moreover, the issue of a
radical revision of economic relations with Ukraine, including in energy
deliveries, is coming to the foreground,” Gustov said.

Analyzing the situation, Gustov drew attention to the fact that
Yushchenko’s statement on Ukrainian quitting the CIS followed “rather
harsh statements on Russia” by U.S. Vice President Dick Cheney.

“Everything Cheney was speaking about is a return to the Cold War. In fact,
the policy of constructing a cordon around Russia is being conducted, and
Ukraine is participating in the game,” Gustov said.

“Yushchenko fulfills commitments to those who supported him at the
elections” and his policy is not independent, because “the United States
guides him,” he said.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Morgan Williams, Publisher and Editor
Action Ukraine Report (AUR) #695, Article 20
Washington, D.C., Tuesday, May 9, 2006

WASHINGTON – Taras Kuzio, Visiting Professor at the Institute for
European, Russian and Eurasian Studies, George Washington University
Washington, DC has two new journal articles out. They are:

[1] Taras Kuzio, ‘Post-Soviet Ukraine. The Victory of Civic
Nationalism’ in Lowell Barrington (ed.), “Nationalism after
Independence. Making and Protecting the Nation in Postcolonial and
Postcommunist States” (Ann Arbor, MI: University of Michigan Press,
2006), pp.187-224.

[2] Taras Kuzio, ‘Oligarchs into Businessmen: Ukraine’s Transition to
the Post-Kuchma Era’ in Egle Ridzeviciute ed., “Contemporary Change
in Ukraine. Baltic and East European Studies 5″ (Stockholm: Baltic
and East European Graduate School, Sodertorns Hogskola, 2006),

If you would like to receive copies of these articles contact Taras
Kuzio at: Taras Kuzio, Visiting Professor Institute for European, Russian
and Eurasian Studies, George Washington University, 1957 E Street,
NW, Suite 412, Washington, DC 20052, USA; Tel: 202 994 7914;
Cell: 202 294 1715;Fax: 202 994 5436; -30-
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