Daily Archives: July 14, 2006

AUR#732 Jul 14 Gas Pipeline Joint Management With Russia?; No Gas Price Change In 2006; Putin Blames U.S.; Interview With Dmytro Firtash, RosUkrEnergo

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                       In-Depth Ukrainian News, Analysis and Commentary

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

                                          [Articles one and two]                     
Ukrainian politicians keep missing opportunities given to them by history
       Mr. Kwasniewski expressed concern that Ukrainian politicians keep missing
       the opportunities given to them by history and, therefore, precious time that
                                  should be maximized to carry out reform.

       The former Polish president noted that Ukraine’s political elite needs to be 
       working to gain the trust of both its own people and its foreign partners. 
       According to Mr. Kwasniewski, politicians need to avoid compromising

                                 on moral and ethical matters.  [Article 19]
Mr. E. Morgan Williams, Publisher and Editor  
               –——-  INDEX OF ARTICLES  ——–
              Clicking on the title of any article takes you directly to the article.               
    Return to the Index by clicking on Return to Index at the end of each article
                                   GAS PIPELINES MANAGEMENT
TV 5 Kanal, Kiev, in Ukrainian 1100 gmt 13 Jul 06
BBC Monitoring Service, United Kingdom, Thu, Jul 13, 2006


Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 13, 2006


Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006

Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006
Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006

Michele Baccinelli, Dow Jones Newswires, Rome, Italy, Thu, Jul 13, 2006

Associated Press (AP), Moscow, Russia, Thursday, July 13, 2006

              Demands for greater clarity about Dmytro Firtash’s past
Financial Times, London, United Kingdom, Friday, July 14 2006

INTERVIEW: With Dmytro Firtash, RosUkrEnergo Gas Trader
By Iryna Raznyk, Russia Newspaper Vedomosti
Reprinted in Vysokyy Zamok, Lviv, in Ukrainian 6 Jul 06; p 6
BBC Monitoring Service, United Kingdom, Thursday, Jul 13, 2006

By Arkady Ostrovsky in Moscow, Chris Condon in Budapest
and Carola Hoyos in London, Financial Times,
London, United Kingdom, Friday, July 14 2006

                     Europe’s Reliance on Gazprom Illustrates Dramatic
                              Shift in Balance of Power to Moscow
By Gabriel Kahn in Rome, Marc Champion in Brussels and
Gregory L. White in Moscow, The Wall Street Journal
New York, New York, Friday, July 14, 2006

12.                                     PUTIN VILLAGE
Now would also be an ideal moment to prop up the fledgling democracies
            in Georgia and Ukraine that are feeling the heat from Russia 
                         countries on a track to joining NATO.
REVIEW & OUTLOOK: The Wall Street Journal
New York, New York, Friday, July 14, 2006

13.                     THE EIGHT WONDER OF THE WORLD
ANALYSIS & COMMENTARY: Vitaliy Portnykov in Moscow
Zerkalo Nedili On The Web, Mirror-Weekly No 26 (605)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 8 – 14 July 2006

14.                         RUSSIA: BACK TO THE FUTURE?
   Russia has a tsarist political system, all decisions made by the presidency
By Dmitri Trenin: Statement prepared for a hearing before

the U.S. Senate Foreign Relations Committee
U.S. Senate, Washington, D.C., Thursday, June 29, 2006

Associated Press, Moscow, Russia, Wed, July 12, 2006

By Adam Schreck, The Wall Street Journal
New York, New York, Wednesday July 12, 2006


                              COALITION UNCONSTITUTIONAL
Associated Press, Kiev, Ukraine, Thu, July 13, 2006 

Associated Press (AP), Kiev, Ukraine, Thursday, July 13, 2006

         Politicians should avoid compromising on moral and ethical matters
International Centre for Policy Studies (ICPS)
Kyiv, Ukraine, Thursday, 13 July 2006

                 Ukrainian Think-Tank Reveals a Comprehensive Study of
                 Corporate Conflicts on the Edge of Old and New Europe
PressZoom Global News Service
Amsterdam, The Netherlands, Thursday, July 13, 2006

                          GAS PIPELINES MANAGEMENT

TV 5 Kanal, Kiev, in Ukrainian 1100 gmt 13 Jul 06
BBC Monitoring Service, United Kingdom, Thu, Jul 13, 2006

KYIV – [Correspondent] Ukraine’s gas pipeline can be used as payment

for cheap Russian gas. The new chairman of Naftohaz Ukrayiny [Ukraine’s
state-run oil and gas company], Oleksandr Bolkisev, has broken the big
news and officially confirmed that Moscow will maintain the previous gas
price for Kiev, 95 dollars per 1,000 cu.m., until the year end.

Meanwhile, both countries’ officials will be negotiating a possibility of
the joint management of the Ukrainian gas transport system.

[Bolkisev, in Russian] It is quite possible that Ukraine will only benefit
from this. We need to overcome the psychological side of this. No-one is
saying that we have sold or surrendered the gas transport system.

We are not saying that it is changing hands. No-one is digging these pipes
out. No-one is transferring them.

But if we say that until the issue is settled, Russia annually cuts the
[gas] transit through Ukraine, trying to diversify its transit routes
by-passing Ukraine and making political statements that Ukraine is a weak
link in the chain, then we need to consider this.

[This summer Naftohaz Ukrayiny is planning to pay off 380m dollars of its
debt to Rosukrenergo, the operator of gas supplies to Ukraine, Bolkisev

told a news conference today, Interfax-Ukraine reported at 1043 gmt. In a
separate report at 1110 gmt, Interfax-Ukraine quoted him as saying that
Naftohaz Ukrayiny will cut its foreign investment, focusing on only two or
three projects.]                          -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 13, 2006

KYIV – The transfer of the existing Ukrainian gas transport system to the
Kyiv-based international consortium for managing and developing Ukraine’s
gas transport system must be considered from an economic, rather than a
political point of view. Naftogaz Ukrainy Board Chairman Oleksandr Bolkisev
said this at a press conference in Kyiv on Thursday.

“We should consider the issue from an economic approach: whether it would be
an advantage or a disadvantage for Ukraine and the Ukrainian consumers. The
issue is ambiguous. I wouldn’t say right now it’s bad. We should study the
issue. If we manage to fill the gas transport system [with gas], expand
transit facilities, it is only an advantage,” he said.

“With this issue remaining unsettled,” Russia reduces gas transit shipments
through Ukraine every year, tries to diversify the routes of gas
transportation to Europe, and makes political statements about Ukraine being
an unreliable transit country, he said.

At the same time, the Naftogaz head said that no one can say what “this
management” [after the transfer] means. “We don’t say that the system is
transferred to ownership [of the international consortium].

“The Russian side expects a message, not from NJSC Naftogaz, but from the
government, and perhaps, from the president, as to what format the Ukrainian
side sees the gas transport consortium, i.e. there is a decision in
principle – whether it is a consortium in the format stipulated in an
agreement between Ukraine, Germany and Russia, or whether Ukraine sees its
actions in this sphere differently,” Bolkisev said.                 -30-

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

Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006

KYIV – Naftogaz Ukrainy is to attract in the near future a loan worth $150
million from ABN AMRO Bank N.V. (Netherlands) to pay debts to

RosUkrEnergo for gas imported since the beginning of the year, under a
syndicated loan worth $500 million, Naftogaz Board Chairman Oleksandr
Bolkisev said at a press conference in Kyiv on Thursday.

The company is holding talks with ABN AMRO on introducing one more

loan worth $150 million to pay off debt to RosUkrEnergo, he said. “We
were attracting from ABN AMRO a syndicated loan worth $200 million,
including for payment of a part of the debt in June. We continue working
in this direction, therefore we are to attract $500 million on this loan,” he said.

In June ABN AMRO granted Naftogaz, under a loan worth $500 million, the
first credit worth $200 million to pay off debts to RosUkrEnergo. Naftogaz’s
debt to RosUkrEnergo amounts to $381 million.

“We see how we pay off the debts, we see sources. I think we’ll meet our
obligations,” he said. In Q1 2006, RosUkrEnergo supplied to Naftogaz 16.5
billion cubic meters of gas. ABN AMRO Bank acted as lead manager for a debut
issue of Naftogaz Ukrainy of five-year eurobonds worth $500 million in 2004.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006

KYIV – Kyiv-based CJSC UkrGaz-Energo is considering attracting a loan
worth $1 billion from Credit Suisse to buy gas to be pumped into Ukrainian
underground storage facilities for the autumn and winter heating season.

UkrGaz-Energo’s supervisory board at a July 6 meeting allowed the company
board to hold relevant talks, Naftogaz Ukrainy Board Chairman Oleksandr
Bolkisev said at a press conference in Kyiv on Thursday.

UkrGaz-Energo Board Chairman Ihor Voronin reported in late May that the
company intends to attract a syndicated loan worth $1.2 billion to pump 12
billion cubic meters of gas into Ukrainian underground storage facilities.
UkrGaz-Energo expects to obtain a five-year loan, he said.  -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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Interfax-Ukraine, Kyiv, Ukraine, Thursday, July 6, 2006

KYIV – The price of gas imported by Ukraine won’t grow in 2006 and will be
$95 per 1,000 cubic meters at the Ukrainian-Russian border in the fourth
quarter of this year, Naftogaz Ukrainy CEO Oleksandr Bolkisev announced at a
news conference in Kyiv on Thursday.

Bolkisev and Gazprom CEO Aleksey Miller reached this agreement in Moscow

on July 6 [the same day the Regions Party, the SPU, and the CPU announced the
creation of the anti-crisis coalition].

Bolkisev said the reason for the payment for such a low price in comparison
with other European consumers was the appearance of a new gas distributor on
the Ukrainian market – JV UkrGaz-Energo – which was given the most lucrative
sector of the market – industrial consumers.

“This is a serious concession indeed [from Ukraine]. For this concession
we’ve received a transition period with the price of $95. It will the matter
of further talks how long the period will last and whether it will continue
into 2007,” he said.                              -30-

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

Michele Baccinelli, Dow Jones Newswires, Rome, Italy, Thu, Jul 13, 2006

ROME – Italy Industry Minister Pierluigi Bersani sent Thursday a letter to
European Energy Commissioner Andris Piebalgs asking for European Union

help to face possible gas shortages from Ukraine.

According to a Ministry statement, Bersani asked Piebalgs for an “immediate
E.U. initiative” and a meeting between European energy ministers to
guarantee regular gas flows from Russia to Italy through Ukraine.

In June, industry ministry officers said that “in the last weeks there has
been a reduction in gas imports from Russia, due to summer maintenance

works and (due) to the beginning of the litigation between Russia and
Ukraine.” The officers quantified the reduction as around 10 million cubic
meters a day.

Italy is already taking measures to face a possible new gas crunch during
next winter. At the beginning of 2006, Italy suffered disruptions to its gas
supply from Russia following a price dispute with Ukraine and a cold weather

Bersani said several times that Italy will suffer from gas shortages,
similar to the one which hit the country in January, for the next two to
three years.                                           -30-
By Michele Baccinelli, michele.baccinelli@dowjones.com
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Associated Press (AP), Moscow, Russia, Thursday, July 13, 2006

MOSCOW – Russian President Vladimir Putin said Thursday that U.S.

interests were behind Western criticism of Moscow during Russia’s
natural gas price dispute with Ukraine at the start of the year.

“All the hysteria about gas supplies to Ukraine…was aimed at providing

for American economic and political interests in Europe,” he said in an
interview with German television broadcaster ZDF.

Putin’s comments came ahead of a meeting with U.S. President George

Bush Friday and the summit of leaders of the Group of Eight leading
nations, which starts in St. Petersburg Saturday.

At the start of the year Russia halted deliveries of natural gas to Ukraine
in a bid to persuade it to agree to a near fivefold price increase. The
supply cut also led to a brief decrease in Russian gas supplies to Europe.

“If someone wants to support certain forces in one country or another, let
him pay for it,” said Putin, suggesting that the U.S. supports
Western-leaning Ukrainian President Viktor Yushchenko and wanted to

help him by ensuring cheap Russian gas supplies.
Energy security is high on the agenda of the G8 summit.

In the interview, Putin also repeated his reasons for Russia’s resistance to
European Union pressure to sign an energy charter. The charter would oblige
Russia to give foreign investors greater access to its energy sector.

Putin said Russia would get little in return for signing the charter. “We
ask our partners: ‘Good, we’ll allow you into our infrastructure, and where
will you allow us?’ They say: ‘We will allow (you) in there, too.’ But I ask
you ‘Where is your extraction? Where is your infrastructure of major
pipelines as we have?’ Our partners do not have it,” he said.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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              Demands for greater clarity about Dmytro Firtash’s past

Financial Times, London, United Kingdom, Friday, July 14 2006

As leaders of the Group of Eight industrialised nations meet in St
Petersburg tomorrow with energy high on the agenda, the spotlight is again
turning on Dmytro Firtash.

Mr Firtash, a secretive Ukrainian businessman, has emerged as a key player
in the European gas market at a time of heightened anxiety about security of
supply. He disclosed this year that he was the co-owner, along with Russia’s
Gazprom, of RosUkrEnergo, a joint venture that plays a central role in
shipping gas from Russia and central Asia to Ukraine and the west.

Calls by the US for a renegotiation of the contract for RosUkrEnergo to
supply gas to Ukraine – which ended a January stand-off between Moscow and
Kiev but opened the way to much higher prices – could fuel friction during
this weekend’s summit.

In disclosing his co-ownership of RosUkrEnergo, Mr Firtash was responding
in particular to allegations aired in the Ukrainian parliament that
RosUkrEnergo’s owners included Semyon Mogilevich, an alleged Russian
crime boss who appears on the FBI’s most wanted list.

Some Ukrainian politicians are now calling for a formal investigation into
the allegation, which was made by Viktor Taran, a member of the Yulia
Tymoshenko Bloc – one of five political parties vying for supremacy amid a
political stalemate.

Mr Taran said in a February debate: “Our faction was first to talk about the
corrupt structure of RosUkrEnergo and we named among its owners [Russian
President] Vladimir Putin, the criminal authority Semyon Mogilevich, Dmytro
Firtash, representatives of the new Ukrainian government and
their relatives.”

In an interview with the FT in April, the 41-year-old Mr Firtash admitted
knowing Mr Mogilevich, having first met him in Moscow in the early 1990s,
but denied they had ever done business together. His rebuttal has, however,
not dispelled the doubts surrounding the control of RosUkrEnergo and
demands for greater clarity about Mr Firtash’s past.

Ms Tymoshenko, a former prime minister who is expected to be either the main
opposition leader or a leading candidate if new elections are called, is one
of Mr Firtash’s most outspoken critics. Her bloc said in a recent press
statement that Mr Firtash’s disclosure had “done little to mollify concerns”
about RosUkrEnergo’s ownership.

The bloc said it would continue to push for a new gas deal in which Ukraine
would deal directly with Gazprom and Ros­UkrEnergo would be excluded.

Hryhory Nemyria, a member of parliament in Ms Tymoshenko’s bloc, told
the Financial Times the bloc would support “a full investigation” of
Ros­UkrEnergo and hoped for co-operation from US, European and
Russian law enforcement agencies.

“We see an investigation as a necessary step to bring transparency and
restore trust. There should be full disclosure of the people behind
Ros­UkrEnergo and how it obtained its position,” Mr Nemyria said.

The US has also continued to criticise both the gas deal and RosUkrEnergo.
In a recent Senate confirmation hearing, William Taylor, the new US
ambassador to Ukraine, said: “There is this shadowy, apparently unknown
organisation that plays a major role (delivering gas to Ukraine).”

Mr Taylor added: “This is one of (the new government’s) big decisions
they’ll have to make right away. If the new government decides it wants to
reconsider this deal, we have indicated we will support that.”

Carlos Pascual, a predecessor of Mr Taylor’s who is now at the Brookings
Institution, a think tank, last month called for the European Union to join
the US in supporting a renegotiation of Ukraine’s gas contracts. Writing in
the Washington Post, Mr Pascual described Ros­UkrEnergo’s ownership
structure as “murky”.

An FT investigation has found that Mr Firtash had connections with several
of Mr Mogilevich’s associates in 2001-04. When he was presented with this
evidence in the interview, Mr Firtash did not deny any of the documented
details found by the FT but insisted that he had not done business with Mr

For example, Mr Firtash admitted that from 2001 to 2003, Galina Telesh –
with whom Mr Mogilevich is believed to be in a long-standing relationship –
owned one-third of a Cyprus-registered company of which Mr Firtash was
part-owner and director. But Mr Firtash said he never met or spoke to Ms
Telesh and did not know her background. “I have never been a partner of
Mogilevich,” he said.

Mr Firtash, who started by trading consumer goods in western Ukraine, said
he moved to Moscow in about 1990 in search of bigger markets. He
subsequently developed his business during a decade of supplying goods to
Turkmenistan in a triangular barter trade, in which various gas traders paid
him and received gas from the Turkmen government in return. He admitted to
having been secretive but insisted he had always operated legally.

Until 2001, said Mr Firtash, he did his barter trades through a series of
temporary companies each used for just one or two deals and he thus never
appeared as director or owner of any of them. At no time did he do business
with Mr Mogilevich, he said.

Mr Firtash said his role in the barter business grew when he joined Highrock
Holding in 2001, initially as director and one-third owner.

Then in 2002 he established a company called Eural Trans Gas, which he said
won for itself the role of Ukraine’s sole supplier of Turkmen gas by
offering better terms than the previous supplier – Itera, a Russian gas
company. Ros­UkrEnergo took over that role in 2005 after Gazprom insisted
on having a stake in the business, he said.

Mr Firtash said that his partner in Highrock had been Igor Makarov, Itera’s
president, and that Mr Makarov was responsible for Ms Telesh’s involvement
at Highrock. However, Mr Makarov said he was never involved in Highrock
in any way. The FT also found other connections between Mr Firtash and
Mogilevich associates, which Mr Firtash explained in other ways.

Mr Mogilevich is regarded by the US as a powerful international crime boss.
A FBI agent who investigated Mr Mogilevich’s gang described him in a Justice
Department publication in 2003 as “the boss of more than 300 criminal
associates operating in more than 30 countries” whose “activities included
murder, extortion, trafficking in women for prostitution, smuggling,
money-laundering, bank and securities fraud, and, in numerous countries,the
corruption of public officials”.

An Israeli police report obtained by the FT gave a similar description and
said he was also engaged in armstrafficking.

In 2003, Mr Mogilevich and three associates were indicted in the US on
racketeering, securities fraud, money-laundering and other charges for their
alleged roles in the collapse of YBM Magnex, a listed Canadian company
that had its headquarters in the US.

There are standing international arrest warrants for Mr Mogilevich and two
associates, who are believed to be living in Russia. The third associate was
arrested in the US and has co-operated with US investigators.

Wolfgang Putschek, one of Mr Firtash’s bankers at Austria’s Raiffeisen Bank,
said the bank had voluntarily given information about RosUkrEnergo to the US
Justice Department.

Mr Putschek said Raiffeisen had “thoroughly screened” Mr Firtash. The banker
said: “There were three questions our compliance department had to answer.
First, did the client have any links to criminal activities? Second, did the
client have any links to known criminals? The answer to both was a clear

“The third question was, did the client have any links to known criminals in
the past? In the course of answering that question, some issues came up. But
they were explained. That is, they were cleared off.”

Last year Ukraine’s SBU national security police, headed at the time by an
ally of Ms Tymoshenko, announced that it was investigating suspicions that
Mr Mogilevich indirectly controlled RosUkrEnergo. But the investigation was
dropped after a new SBU chief was appointed in September.

In January, Oleg Palchikov, a Ros­UkrEnergo co-chief executive, rebutted the
allegation in an appearance on Ukrainian television. He said: “As for the
odious and mysterious personality of Mr Mogilevich, I think it is very
useful for those engaged in smear campaigns. Using the opportunity of
speaking live on the air, I would like to stress that our company has
nothing whatsoever to do with this individual.”

Gazprom officials have said they are pleased with Ros­UkrEnergo and have
described Mr Firtash as an accomplished businessman. Alexander Ryazonov,
a Gazprom deputy chairman, told a Russian newspaper last month he was
“not surprised” by Mr Firtash’s disclosure of his stake in RosUkrEnergo.

“Firtash has worked many years with Turkmen gas and he has a good position
in business circles in Ukraine. My impression of him is OK,” he said.

Viktor Yushchenko, Ukraine’s president, has said he knows little about
RosUkrEnergo, which he added was chosen by Gazprom to be Ukraine’s

He told the FT in an interview this year: “There has always been some
Russian structure that transits Turkmen gas across Russia. Ukraine has never
had any connection to the formation of these structures.”

Mr Firtash said of the president’s stance on the issue: “I think Yushchenko
was very correct when he said, ‘I will tear up the contract [with
Ros­UkrEnergo] only in one circumstance – when the price will be lower’.”

In an April interview, the Financial Times asked Dmytro Firtash about
evidence from official records in Russia, Israel and Cyprus of his
connections to associates of Semyon Mogilevich, an alleged crime boss.
Here are his explanations and, where available, those of others involved.

[1] June 2003 Mr Firtash replaced Galina Telesh (a woman with whom an
Israeli police report said Mr Mogilevich had been in a relationship since
the early 1990s) as director of the Cyprus-registered Agatheas Trading.
Later, Agatheas became direct one-third owner of Highrock Holding, another
Cyprus-registered company, where Mr Firtash had been director since 2001.

According to a Hungarian intelligence report obtained by the FT, Ms Telesh
and Mr Mogilevich were married in 1995.

Mr Firtash accepted that Ms Telesh beneficially owned one-third of
Highrock’s shares until June 2003.

However, Mr Firtash said he never knew Ms Telesh. He said his partner in
Highrock was Igor Makarov, president of Itera, a Russian gas trader. Mr
Firtash said his involvement as director and one-third owner of Highrock was
set up by Yelena Yargina, his lawyer, while ownership of the remainder was
arranged by Itera’s lawyers. “Yelena worked with Itera’s lawyers. “We don’t
know about this,” Mr Firtash said.

Mr Firtash said that after he fell out with Mr Makarov in late 2002, he took
full control of Highrock and “cleaned it up”, which eventually led to him
taking over as director and owner of Agatheas in June 2003.

Mr Makarov, however, who replied to written questions through a spokesman,
said neither he nor Itera had ever had any economic interest in Highrock or
undertaken any role in setting up Highrock or its parent companies.

The FT asked Mr Firtash to provide evidence that Mr Makarov was involved
in Highrock and was later shown part of a report by Kroll, the private
investigator, which said Highrock was jointly established by Itera and Mr

However, the part of the report seen by the FT did not explain why
Kroll believed Itera was involved in Highrock. Mr Firtash said his bank,
Raiffeisen, commissioned the Kroll report.

[2] November 2002 Igor Fisherman, one of three associates indicted with Mr
Mogilevichin the US in April 2003, registered a car with Moscow traffic
police and gave as his personal contact a telephone number that rang to
Highrock’s offices in Moscow, at Novy Arbat 14.

Mr Firtash said Mr Fisherman never worked at Novy Arbat 14 or came into
the office. “I don’t know why he gave that telephone number, but I can say
for certain he didn’t sit there and didn’t work there.”

[3] March 2002 Elmstad Trading, another Cyprus-registered company owned
by Mr Firtash, transferred ownership in a Russian company called Rinvey in
three roughly equal parts to Ms Telesh, Ms Yargina and Olga Zhunzhurova,
who is Mr Fisherman’s wife, according to the US indictment.

Rinvey then acquired stakes in Moscow perfume retailers. Ms Yargina
co-owned Rinvey until April 2003 and continued to work for Mr Firtash
throughout this period.

Mr Firtash acknowledged that Ms Yargina had joined Rinvey at his direction
but he said he could not remember why he had asked her to do so. He said he
had no involvement in Rinvey, its business and no ties to its other owners.
“It’s not my business. It’s obvious I couldn’t do that business,” he said.

Mr Firtash said he asked Ms Yargina to end her involvement with Rinvey
“when we were cleaning up”. He said she still works for him.

[4] November 2001 An Israeli lawyer called Zeev Gordon helped set up a
Highrock subsidiary in Israel called Highrock Properties. From December 2002
until early 2004, Mr Gordon was nominal (paper) owner of one-quarter of
Eural Trans Gas, a company beneficially owned by Mr Firtash. Mr Gordon
told the FT he counted Mr Mogilevich as a client and a friend.

Mr Firtash said his relationship with Mr Gordon had nothing to do with Mr
Gordon’s relationship with Mr Mogilevich. Mr Firtash said Mr Gordon had many
Russian- speaking clients: “When I asked Gordon, ‘Why do you have to work
with Mogilevich?’ he said ‘Listen Dima, it’s my business, just like you
trade in gas. I’m a criminal lawyer’.”

Mr Gordon said in a telephone interview he had been asked by Mr Firtash to
help with Highrock and Eural, that Mr Mogilevich denied any involvement in
Eural Trans Gas or RosUkrEnergo and that he did not know whether Mr
Mogilevich was involved in Highrock.                       -30-
LINK:  http://www.ft.com/cms/s/29f06170-12a2-11db-aecf-0000779e2340.html
[return to index] [Action Ukraine Report (AUR) Monitoring Service]


INTERVIEW: With Dmytro Firtash, RosUkrEnergo Gas Trader
By Iryna Raznyk, Russia Newspaper Vedomosti
Reprinted in Vysokyy Zamok, Lviv, in Ukrainian 6 Jul 06; p 6
BBC Monitoring Service, United Kingdom, Thursday, Jul 13, 2006

The RosUkrEnergo gas trader does not earn much from its gas supply
deal with Ukraine, the company’s co-owner, Dmytro Firtash, has said in
an interview reprinted from Russian newspaper Vedomosti.

Firtash disclosed the details of RosUkrEnergo’s role in relations between
Russian gas giant Gazprom and Ukraine, along with its plans to supply gas
from Central Asia to Ukraine and European countries. He said that the
company would sell its shares on the stock exchange.

The following is the text of Dmytro Firtash’s interview to Iryna Reznyk
entitled “Dmytro Firtash: ‘When I was a child, I woke up at four in the
morning and worked till late night.’ RosUkrEnergo co-owner gave an
explanation on why it was beneficial for Ukraine to cooperate with his
company” published in Lviv-based Vysokyy Zamok paper on 6 July;
subheadings are as published:

“I hope journalists will leave me in peace for a long time after this
interview,” Dmytro Firtash began our conversation. One of the wealthiest
people in Russia and Ukraine has been willing to remain in shadow for
many years, and he reluctantly gave his consent to having a meeting with a

“I am not a public person, and I never intended to become the one,” he said.
“There are people who like to be in the spotlight, but I do not belong to
them. Life recently forced me to speak about myself.”

It turned out late in April that Firtash was the principal Gazprom partner
in the RosUkrEnergo company that supplies gas from Central Asia to Ukraine
and Eastern Europe. Firtash and his partner Ivan Fursin control one-half of
this business.

Firtash did not make an impression of a secretive person during our personal
meeting: our conversation in his London office lasted over four hours.

RosUkrEnergo activity is currently being examined by the US Department
of Justice, but Firtash insists that he has nothing to conceal. “If I had
anything to conceal, we would not have been speaking with you now,” he

[Reznyk] Your life resembles a classical American-style success story: a
person born in the Ukrainian village of Bohdanivka has become one of the
wealthiest people in Russia and Ukraine.

[Firtash] You don’t say so, as everyone is writing that – on the contrary –
I am worth nothing, and [Russian businessman] Semen Mogilevich has allowed
me to manage his business and pays me salary. But I have achieved everything
myself, though I know that there still many people who do not believe this.

[Reznyk] But you should agree that it is next to impossible for a stranger
to enter gas business. How did you succeed?

[Firtash] Each time has its heroes. I was not born a businessman; I had a
normal Soviet family. My mother worked as an accountant at a sugar refinery,
and my father was a driver. I have been working a lot since my early
childhood. I have learned well that I should earn my daily bread myself.

My parents were not poor people at that time: they grew tomatoes at home and
earned 5,000 [Soviet] roubles every season, while the price of a Zhiguli car
was the same. At that time the whole western Ukraine lived for so-called
unearned incomes; people had two jobs: on a collective farm or at a plant in
the morning, and at home in the evening.

I was forced to work in greenhouses from morning till night, and at the age
of six I woke up at four in the morning and worked till late night. But I
was sick of growing tomatoes, and I began my independent life at the age of
17. It was already forever.

[Reznyk] How did your independent life begin?

[Firtash] I entered the Donetsk Railway College and got a diploma. I earned
some 250-300 roubles at the age of 20. It was not bad. I was enrolled to the
army in 1984. When I returned, I came to my parents and asked them for
money for my own business, but they told me: go and earn yourself.

                                      “I WAS LUCKY”
[Reznyk] Did you expect that your parents would refuse you?

[Firtash] I remember that I was greatly insulted by them, as everyone should
begin with something. I packed my suitcase and left for Chernivtsi. My army
friend helped me in employment as a fireman. But the country was becoming
different, and salaries were not paid any more.

Thus, I decided to act: my friends and I were dealing with foodstuffs
supplies. Everyone bought or sold something at that time; it happened that a
contract was concluded, and then one began searching goods, and the other
one – searching money.

But we managed to carry out a really large-scale transaction in 1988-89. One
of my friends who was living in Uzbekistan made a proposal to supply dried
milk there, as there was shortage of it, and he promised me to pay well. I
persuaded a director of the plant which manufactured dried milk to sell me
4,000 tonnes, and I borrowed 5m roubles from my friend the banker for this

He gave me the money to my word of honour. I sent dried milk to Uzbekistan,
however I received not money, but cotton for it. I had to travel to the
Odessa port and to make arrangement for unloading it. I was lucky again: I
reached understanding with the port manager, and he helped me to send the
cotton to Hong Kong and found a buyer there.

I was lucky in a certain way: I quickly found common language with necessary
people, and as a rule, I encountered honest ones. This transaction was going
on for eight months, and we earned 1.2m dollars. My net share was 50,000

[Reznyk] Did you move to Moscow after this?

[Firtash] It was already a very large sum for Chernivtsi, and it was
necessary to move on. I dealt with foodstuffs supplies in Moscow in 1990-91.
But major players emerged at this market soon, and they gradually ousted us.
It was necessary to look for new markets. Nobody wanted to work with
Turkmenistan at that time, but I took the risk.

We sent foodstuffs worth 3m dollars there, but the Turkmens had no money
to pay. I travelled there to look into the situation, and I was proposed gas
instead of money. It was there where I made acquaintance with Ukrainian
businessman Ihor Bakay who was ready to buy gas from me.

Bakay had his quota for supplying gas to Ukraine granted to him by former
Ukrainian President Leonid Kravchuk. I found myself there by chance: I
needed money for goods, and Bakay needed gas. Thus, we concluded a

[Reznyk] Does it turn out that Ihor Bakay is the one to whom authorship
of the “gas for foodstuffs” scheme belongs?

[Firtash] He was the first one who invented this scheme. Ihor Bakay actually
became the first large gas trader. No-one understood this business in a
right way before. The Ukrainian market was of no interest to Gazprom, as
Ukraine was unwilling and unable to pay for gas in cash. The option “gas in
exchange for foodstuffs” was beneficial for everyone and satisfied everyone.

Ukraine received gas, and Turkmenistan got rid of the headache it had
searching funds for foodstuffs. But at that time I had no relationship to
gas at all: I just supplied foodstuffs. Then Bakay’s company passed from the
scene, and he was replaced by Omraniya, and then by Itera [intermediary
companies]. Itera has managed to establish close business relations with
former Gazprom chief Rem Vyakhirev.

[Reznyk] Itera offered you to work jointly on the “foodstuffs for gas”
programme in 2000, and you began working through the Cypriot Highrock
Holdings and the Israeli Highrock Properties [companies] which sold goods
manufactured by Ukrainian and Hungarian producers they had received as
payment for gas.

Semen Mogilevich’s wife worked in one of these companies, and Igor
Fisherman searched by the US FBI together with Semen Mogilevich was
he financial director of Highrock Properties.

[Firtash] I became a co-owner of these companies later. Not my lawyers dealt
with their registration. I became the head of these companies some time
later. I learned by chance that Mogilevich’s and Fisherman’s wives had been
on the list of these companies’ founders. I immediately left for Cyprus to
re-register everything. I just did not make a double check due to my

When the US Department of Justice obtained these documents, they first
decided that I had been related to Mogilevich, but then I managed to prove
to them that it was wrong. I saw Semen Mogilevich several times, but I have
never had close acquaintance with him.

I could not have been his partner; I was Itera’s partner, and I dealt
exceptionally with foodstuffs supplies. I know Igor Fisherman, but he has
never been my business partner either.

[Reznyk] Itera is currently trying to obtain a pending debt for gas from the
Highrock Holdings through a Ukrainian court. What did you fail to share?

[Firtash] It is not exactly like this at all. Turkmenbasy [Turkmen President
Saparmyrat Nyyazow] began demanding only cash for gas in late 1999. We
have found a solution with Itera: we take gas, pay cash for it, and then we
compensate the difference at the expense of commodity supplies.

The situation occurred in 2000 when we purchased gas from Turkmenistan for
higher price than the one for which we sold it in Ukraine later on, and we
planned to compensate everything at the expense of commodity supplies.
We paid all my money for Turkmen gas in 2000, but when Itera received
commodity supplies, it compensated just for part of my expenditures.

                   “I BOUGHT A BANKRUPT COMPANY”
[Reznyk] You are the owner of the Zangas [company] which builds gas
pipelines outside Russia. Why did you need to buy this company? In addition,
why do its former co-owners, Mikhail Chernoy and his partners, insist that
you owe them 5m dollars?

[Firtash] The Zangas company had a brand known in the whole world. I needed
it for building pipelines in Turkmenistan in exchange for gas. There were
four dealers between me and the sellers, and I was not aware of the one who
owned Zangas at that moment. We agreed on the price, and we immediately paid
75 per cent of the sum, while the remaining 25 per cent were due to be paid

But when I began looking into the company I had bought, it turned out that
Zangas had numerous debts and obligations to customers. I managed to settle
the issue with Turkmenistan. But it turned out that Zangas had financial
obligations to Greece and loans taken for a Lebanese contract which had not
been repaid. I had to pay additional 50m or 60m dollars to repay all this.

Consequently, it turned out that I had bought a bankrupt company. Just
imagine that you were invited to a wedding, then all guests left, and you
were supposed to wash dishes, to clear the table and, in addition, to pay
for all this.

I met the founders and co-owners of the Hermitage Resources oil trader two
years ago and explained to them the reasons why I could not pay them the
remaining 25 per cent. Then they agreed with me. Speculations about our
conflict are just an echo of this old misunderstanding.

[Reznyk] What was the purpose of establishing the Austrian Zangas?

[Firtash] Bankruptcy of the Russian Zangas was the only way out. I
registered another Russian and an Austrian Zangas instead. I bought a
company with which could not be recovered, and I had to announce its
bankruptcy only because there was no other way out of the situation.

Gasification process is currently beginning in Russian regions, and Zangas
is ready to build gas-distributing networks for its own funds. We are ready
for passing these networks to the balance of regional administrations, and
they will be able to pay back within a few years.

[Reznyk] New Gazprom management ousted Itera from the scheme of Central
Asia gas supplies in 2002, but you retrieved your positions in this
business. How did you manage to persuade Gazprom of the necessity of
cooperation with the Hungarian Eural TG [gas trader]?

[Firtash] There was no need to persuade Gazprom of anything. As I have
already told you, Gazprom never controlled Central Asian gas supplies; it
did not deal with its transit and even did not have its own markets for
selling it. It was usually done by outside companies.

Gazprom was not willing to enter the Ukrainian market which totally failed
to pay. It concentrated on making Ukraine accurately transport the gas it
exported, and it made payments for this with its own gas.

New Gazprom management intended to establish more comprehensible relations
with the gas trader, as everyone understood that Itera’s success was based
on good relations with Rem Vyakhirev. As for Ukraine, it faced a risk of
having no gas at all on the New Year’s eve. I just appeared in due time and
in the proper place.

I had good knowledge of the Ukrainian market, and I also had good old
contacts with Turkmenistan. In addition, the Ukrainian leadership at that
time was well aware of the reasons of Itera’s complicated relations with
Gazprom. It played into my hands and, in addition, I offered cheap gas

It made no difference for Ukraine what the gas supplier is, because it had
to get guarantees for its supplies. I established Eural TG in October 2001,
and we signed a contract with Gazprom in November.

                            “I HAD TO CONCEAL MYSELF”
[Reznyk] But finally you had to replace Eural TG with RosUkrEnergo, did
not you?

[Firtash] Gazprom liked the scheme itself. It understood the way this
business could work, and it understood that its involvement in the supplies
would make this business more stable and better controlled. The choice of
the gas intermediary was a political decision before that moment, while now
we see that economy dominates.

Then Gazprom decided to get its share in this business and intended to buy
50 per cent of Eural TG, but a scandal was stirred up involving this
company. This is why an idea emerged to establish RosUkrEnergo, 50 per
cent of which would belong to Gazprom entities.

The major objective of RosUkrEnergo is to create an investment mechanism to
increase the capacity of gas transit from the Central Asia. This is why two
banks, Gazprombank and Raiffeisenbank, have become the company’s

Gas in Central Asia is not gas on the market yet. It should be delivered to
a customer, and the condition of transporting facilities in these countries
is far from being perfect.

One can invest in pipeline construction and renovation in Uzbekistan, but it
will be impossible to become pipeline owner there. It is not beneficial for
Gazprom. Meanwhile, RosUkrEnergo grants a loan to Uzbektransgaz [Uzbek
gas transportation company] which will build pipelines for this money and
will pay back with space in this pipe for five or six coming years.

We should pay it one dollar, but we pay 95 cents, while five cents are
already regarded as repayment. Who will grant Uzbekistan a loan on these
terms? Gazprom has too many strategic tasks to deal with the Central Asia as
well. Russian and Ukrainian funds are not suitable here, as they are too

[Reznyk] Yuliya Tymoshenko, the future Ukrainian prime minister, has
announced that she will begin demanding a revision of gas relations with
Russia and the exclusion of RosUkrEnergo from the scheme of Central
Asia gas supplies to Ukraine. Do you have fears that she will fulfil her

[Firtash] Yuliya Tymoshenko never fought against RosUkrEnergo; she
criticized the company’s non-transparent ownership structure, but this
factor has been already removed. Tymoshenko was dissatisfied with the
gas price for Ukraine which, in her opinion, was too high.

But this price has not been a RosUkrEnergo issue, the same way as it is not
now. Everyone in Ukraine now understands that low and subsidized price
results in inefficient energy consumption. Ukraine intends to join the
European Union, and it will have to increase gas prices to the average
European level.

If Ukraine wants to be an independent country, indeed, it may not request
preferences from anyone, and it should get accustomed to the idea that the
gas price will grow to reach the European level.

[Reznyk] Gazprom and Naftohaz [Ukrayiny gas trader] insisted until the most
recent time that it had not been aware of the true RosUkrEnergo beneficiary,
and they nodded at each other. Was it like this?

[Firtash] I was fully aware that it would have been impossible to establish
a joint venture directly with me, even in view of the fact that I was a
well-known figure on the gas market. For making good business and retaining
it, I had to conceal myself.

This is why Raiffeisenbank conducted all negotiations on my behalf. In
accordance with the trust management contract, the Austrian bank had no
right to disclose its customer’s name. Gazprom knew this bank and this
brand well.

[Reznyk] Why have you chosen exactly Raiffeisen?

[Firtash] This is the most aggressive bank in Eastern Europe. It began its
expansion in Poland, Hungary and Slovakia at once, and then it reached
Ukraine and Russia. I was a comprehensible person and an old client of
Raiffeisen. They trust me. Not a single bank can play an unfair game,
otherwise its correspondent accounts in the USA will be arrested.

As I have told you, we primarily intended to establish an investment
company, and later on to make it a trader. In order to obtain cheap money,
we needed a European bank which was able to attract cheap loans.
Raiffeisen has fulfilled all our agreements.

[Reznyk] According to the gas contract between Gazprom and Naftohaz
Ukrayiny dated 4 January 2006, RosUkrEnergo was supposed to purchase
56bn cu.m. of Central Asian gas from Gazexport [Russian gas trading
company] this year and sell it to Ukraine for the price of 95 dollars per
1,000 cu.m., along with 17bn cu.m. of gas for the price of 230 dollars per
1,000 cu.m. from Gazprom.

What is the sense of this scheme? Why does not Gazprom sell gas to
Ukraine on its own?

[Firtash] When this scheme was being developed, no-one knew that Gazprom
would purchase gas from Turkmenistan, as a three-year contract between
Turkmenistan and Naftohaz Ukrayiny and an intergovernmental agreement
between Ukraine and Turkmenistan were still in force.

Gazprom did not pass anything to RosUkrEnergo because at that moment it
had no Turkmen gas at its disposal. It did not have a single contract. It
was only in January 2006 when Gazprom managed to sign a contract for

all the Turkmen gas until the year 2025.

But neither Gazprom nor Gazexport would have been able to sell this gas to
Ukraine on their own in view of the political situation which emerged there
at that moment. This is why both Gazexport and Naftohaz Ukrayiny sold this
gas to RosUkrEnergo at the border between Russia and Ukraine. Gazexport’s
commissions equalled one dollar per 1,000 cu.m.

The Central Asian gas included the following: 41bn cu.m. of Turkmen gas for
the price of 66 dollars per 1,000 cu.m., 8.5bn-9bn cu.m. of Uzbek gas for
the price of 70 dollars and 6bn-6.5bn cu.m. of Kazakh gas for the price of
67 dollars. But the Kazakhs have received 2.5bn cu.m. from this amount as
payment for transportation at 45 dollars per 1,000 cu.m. of gas.

RosUkrEnergo additionally purchases Russian gas because the one from
Central Asia is not sufficient for Ukraine. It needs 80bn cu.m. of gas a
year, while its own extraction is 20bn cu.m.

[Reznyk] But the origin of the price for Central Asian gas for Ukraine
equalling 95 dollars is not clear, the same way as the reasons why Gazprom
sold its gas to RosUkrEnergo at such a high price – 230 dollars. It is not
so easy to “accommodate” this gas in Europe.

[Firtash] Gazprom sold the same 17bn cu.m. of gas to RosUkrEnergo which
it previously gave to Ukraine as payment for transit for the price of 50
dollars per 1,000 cu.m. Gazprom wanted to separate contracts for transiting
the exported gas and payments for the gas supplied for Ukraine’s needs
because this always created opportunities for shadow schemes.

Gazprom actually wanted to abandon barter trading. It recently got European
price for transit via Ukraine and the European price for its gas. (Yuliya
Tymoshenko said many times that transit price via Ukraine was not the
market one, but twice lower – editorial note.)

The very scheme of relating transit cost to amounts of supplied gas has
emerged due to the fact that Ukraine had no money to pay for imported gas.
It is already clear that corruption and crime cannot be eradicated while
barter schemes constitute the lion’s share of mutual payments.

RosUkrEnergo already purchases gas from Gazprom this year based on the
world price formula which equals about 248 dollars per 1,000 cu.m. of gas.
Gazprom make double profit on the same business: first it sells its gas to
RosUkrEnergo for high price, having already got revenues worth 1bn dollars,
and then it also gets one-half of the Swiss company’s profit from reselling
gas for exports.

RosUkrEnergo exports 14bn cu.m. of gas, of them 3bn cu.m. to Poland and
Hungary each, 1bn cu.m. of gas to Romania, and the rest of gas is directed
to Europe through Gazexport, and RosUkrEnergo gets its commissions in of
one-two dollars per 1,000 cu.m. of gas.

If this gas is mixed with the one from Central Asia and the 8bn cu.m. of gas
for the price of 60 dollars per 1,000 cu.m. which had been left for
RosUkrEnergo and pumped to underground storage facilities, we do not earn
much having the price of 95 dollars; if the price were lower, we would have
suffered losses.

You will be surprised, but RosUkrEnergo is actually subsidizing gas supplies
to Ukraine: Naftohaz owes us about 400m dollars. The RosUkrEnergo
coordinating board has decided to pump the undersupplied amounts of gas
in underground gas storage facilities for the sum of about 1bn dollars at
the expense of its own funds.

Consequently, Naftohaz will have to pump about 4.8bn cu.m., Ukrhazenerho
[Ukrainian gas company] 5bn cu.m., and RosUkrEnergo 5.2bn cu.m. Without
doing this it will be impossible to ensure supplies of the necessary amounts
of gas for Ukraine and Western Europe.

It is not a matter of business any more, but an energy security issue.
Therefore, being aware that Naftohaz is currently unable to pump this gas
for financial reasons, we have decided to provide funding to resolve this
common problem.

[Reznyk] But RosUkrEnergo is not a charitable organization, is it?

[Firtash] We are ready to suffer losses now because we realize: the time of
quick money has ended forever. Everyone willing to come to the gas market
using old schemes is destined to failure. Nowadays, if one is willing to
achieve success in the future, he should have a serious investment
programme. This is actually RosUkrEnergo’s know-how.

[Reznyk] You are unlikely to succeed in purchasing Central Asian gas in 2007
for the current prices. Uzbekistan will sell 1,000 cu.m. of gas for at least
140 dollars, and Turkmenistan also threatens us with price growth. To what
extent will gas price grow for Ukraine?

[Firtash] RosUkrEnergo is a private company, and obviously, we expect to
make profit in the future. Ukraine needs a transit period to restructure its
economy for European prices for energy sources. RosUkrEnergo has done
its utmost to practically ensure this transit period.

But we should understand: if Ukraine wants to be independent, it may not
constantly demand preferences in gas prices. RosUkrEnergo’s role should
notbe overestimated, but one should not cut down a branch on which he is
sitting either.

The company currently copes with difficult situations we inherited from the
previous period when barter trade and politics dominated on gas market.

Despite price growth, Ukraine got the lowest price in Europe this year,
while Gazprom achieved transparency in relations with Naftohaz by having
separated payments for gas supplies and services in transporting its gas to
Western Europe.

[Reznyk] You said that you were planning to sell RosUkrEnergo shares on
the stock exchange. In the opinion of the majority of experts, it will be
difficult to persuade Western investors to buy shares of a trader whose
business is based just on a contract with Gazprom.

[Firtash] RosUkrEnergo will go to the stock exchange sooner or later, but
Gazprom has not decided yet. RosUkrEnergo is not an intermediary and not a
sponger. We are trying to be useful for everyone, and we are looking for the
markets which had not been occupied by Gazprom or Naftohaz. We are
looking for opportunities to earn ourselves and to enable our partners to

RosUkrEnergo has large plans of entering European markets and of the IPO,
which primarily means complete openness of ownership structure, managerial
system and finance. We are willing to ensure maximum transparency in these
issues on our own because we have major investment plans related to gas
industry in Western Europe.

                                ABOUT THE COMPANY
RosUkrEnergo was founded in July 2004 by the subsidiary of Gazprombank,
Arosgas Holding, and the subsidiary of Raiffeisen Investment, Centragas
Holding (50 per cent each). Centragas beneficiaries are Ukrainian
entrepreneurs Dmytro Firtash (90 per cent) and his partner Ivan Fursin (10
per cent).

The company specializes in Central Asian gas transit and sales to Ukraine,
along with Eastern and Central Europe. As of 30 September 2005, Gazprombank
assets were worth 47.7bn [Russian] roubles [over 1.77bn US dollars].
Revenues for the first three quarters of the year 2005 equalled 83.3bn
roubles [about 3.1bn US dollars], and net profit 14.3bn roubles [over 531m
US dollars].

Emfesz is the gas trader registered in Hungary in 2003, its statutory
capital equalling 2.5bn dollars. It supplied 2.6bn cu.m. of gas to Hungary
in 2005 (about 25 per cent of the country’s demand). Enfesz concluded a
contract for supplying gas to Poland in March 2006, and it plans to sell 3bn
cu.m. of gas (also about 25 per cent of the country’s market demand) there.
According to the company’s information, its revenues in 2005 equalled 438.9m
dollars and net profit 47.24m dollars.

                                     CURRICULUM VITAE
Dmytro Firtash was born on 2 May 1965 in the village of Bohdanivka in
Western Ukraine. He graduated from the Donetsk Railway College in 1984. He
served in the army in 1986-88. In 1989 he worked as a fireman in Chernivtsi
(Ukraine). He has been involved in private business since 1990, being a
co-owner of companies in Russia, Ukraine, Hungary, Turkmenistan, Estonia
and the United Kingdom.                             -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Arkady Ostrovsky in Moscow, Chris Condon in Budapest
and Carola Hoyos in London, Financial Times,
London, United Kingdom, Friday, July 14 2006

Gazprom, Russia’s gas monopoly, yesterday gained direct access to more
European customers in return for giving Eon, the German utility, a 25 per
cent stake in its giant Siberian gas field.

The long-negotiated deal comes just two days before the Group of Eight
summit in St Petersburg and illustrated Russia’s vision of energy security –
the main theme for its chairmanship of the rich countries’ club.

Russia says it is prepared to give foreign companies access to its oil and
gas reserves in return for Gazprom, its gas monopoly, receiving direct
access to European retail markets, where profit margins are several times
higher than in production.

Gazprom agreed to swap a stake of 25 per cent minus one share in the giant
Siberian Yuzhno-Russkoye gas field for Eon’s stakes of just under 50 per
cent in two Hungarian gas companies and the prospect of co-operating in two
European power station projects.

A spokesman for Janos Koka, Hungary’s economy minister, said Budapest could
not interfere with a transaction between two private companies though
regulators would check that the deal complied with competition rules.

Since a price dispute between Russia and Ukraine in January briefly limited
gas supplies to other European countries, including Hungary, Budapest has
sent contradictory signals on its energy strategy. On one hand, officials
have said they wish to reduce Hungary’s reliance on Russian gas, which
accounts for more than half of its energy needs.

But Hungary has also been careful not to spurn Gazprom, which recently
agreed a plan that would see it and domestic energy company Mol build a gas
storage facility in Hungary.

Gazprom is currently choosing between several international companies
jointly to develop a vast Shtokman field in the Barents Sea. The company
said an announcement on Shtokman was likely next month even though some
officials had speculated one might be made during the G8 summit.

Gazprom is also seeking access to retail markets in France and the UK. In an
interview with the French daily Le Figaro, Alexander Medvedev, Gazprom
deputy chief executive, said the group wanted co-operation agreements with
the country’s two big energy groups, EDF and Gaz de France.

Although the tone of the G8 summit is likely to be cordial, leaders will be
meeting against a backdrop of tension over energy security as oil reaches
$76.5 a barrel.

It also coincides with a deteriorating relationship between Moscow and the
International Energy Agency, the major consuming countries’ energy watchdog.
The IEA warned in 2004 that Russia’s main gas fields were declining sharply
and needed investment.

The suspension of supplies to Ukraine since then has transformed an academic
dispute into a political duel.

“Can Gazprom deliver? It has for more than 30 years. Yet, disturbingly, a
potential supply gap has begun to appear that will take money and time to
close,” Claude Mandil, the IEA chief, wrote in the FT in March. Gazprom
countered by hinting that it could divert future supplies from Europe to Asia.
Additional reporting by Peggy Hollinger in Paris
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

                   Europe’s Reliance on Gazprom Illustrates Dramatic
                           Shift in Balance of Power to Moscow

By Gabriel Kahn in Rome, Marc Champion in Brussels and
Gregory L. White in Moscow, The Wall Street Journal
New York, New York, Friday, July 14, 2006

Russia’s brief cutoff of natural-gas supplies to Ukraine in January shocked
European customers farther down the pipeline into rethinking their
decades-long dependence on their giant neighbor. But for all the concern,
economic, political and geological realities are driving Europe deeper into
Russia’s embrace.

That’s the somber backdrop as leaders from the Group of Eight leading
nations gather in St. Petersburg this weekend for a summit where energy
security is a top agenda item.

Europe’s dilemma reflects how dramatically the balance of power between the
world’s energy importing and exporting countries has changed as oil and gas
prices have soared in the past few years, turning Russia from a supplicant
for foreign aid to a cash-rich power courted for its energy resources.

“Competition for access to energy resources between the three largest gas
markets — Europe, Asia-Pacific and North America — will grow,” Alexei
Miller, chief executive of Russia gas monopoly OAO Gazprom, proudly told
shareholders last month. “The natural-gas market is now a seller’s market.”

As a result, the debate over whether to embrace or contain Gazprom is
quickly being decided in Russia’s favor.

Europe has grown increasingly dependent on gas to generate its electricity,
and its share of global gas consumption is soaring. It already gets a
quarter of its gas from Russia, a level that is expected to rise to a third
by 2015.

That means that, like the U.S.’s concerns about Middle Eastern oil, Russian
gas is the continent’s top energy security worry. Not only is there a risk
that Russia might use its control of Europe’s gas as a political tool, but
the International Energy Agency says Russia may not even have enough gas to
fulfill its promises to supply Europe.

How to respond to the dilemma has split the European Union, further
increasing Russia’s leverage. Instead of scrambling to find new sources of
gas, countries such as Germany and Italy, both of which will be attending
the G-8 summit in St. Petersburg, are racing to become Russia’s preferred
partners to lock in long-term supplies.

On Thursday, Germany’s major utility, E.On AG, said it had reached a deal
with Gazprom to take a stake of 25% in the giant Siberian Yuzhno-Russkoye
gas field. Italian oil-and-gas giant Eni SpA is trying to negotiate a
sweeping accord with Gazprom that would see the two countries cooperate on
everything from recovering gas in remote areas in Russia to supplying the
Italian domestic market.

“In terms of energy security, there is no doubt that Russia is very
important for Italy,” says Eni’s chief executive, Paolo Scaroni.
But as individual countries seek the best deal with Gazprom, they end up
competing with each other for privileged access to Russian gas and
strengthening Gazprom’s hand in the process.

“Not everyone can be Gazprom’s privileged partner,” says Paul Domjan, a
former adviser on energy security to the U.S. military and now the director
of a London-based consultancy.

This approach has infuriated some of the EU’s ex-Soviet satellites, such as
Poland and the Baltic states, which have recent memories of Russian
domination. They are scrambling to diversify their energy supplies by
building liquid-natural-gas terminals, alternative pipelines and
nuclear-power stations.

Yet even in the old Eastern Europe, energy companies are making deals with
Gazprom that are likely to solidify its hold. A project known as Nabucco — 
to build a $5.8 billion, 3,000-kilometer gas pipeline from eastern Turkey to
Eastern Europe that would be able to tap gas supplies direct from Central
Asia, and perhaps Iran and Iraq — has won strong EU backing.

But even as partners last month formally approved the project, due for
completion in 2011, Gazprom raised questions about Nabucco’s commercial
feasibility by proposing a much cheaper alternative to deliver Russian gas.
Hungary’s MOL, one of the companies lined up to build Nabucco, has
acknowledged it is exploring other possibilities with Gazprom.

For Russian President Vladimir Putin, the situation is a vindication of his
drive over the past six years to use Russia’s vast energy resources to carry
his country back to the forefront of global affairs. This realization has
strengthened the Kremlin’s resolve to resist European and U.S. calls to open
its energy sector to foreign and other private investors.

Russian officials reject as pure politics any attempts to question their
reliability as a supplier. But that isn’t how it looked to Europe’s
governments in January, when Russia cut supplies to Ukraine in a price
dispute, reducing pressure in a key pipeline that stretches across the
Ukraine all the way to Italy.

Immediately, politicians started talking about the need to find alternative
energy sources while attempting to put pressure on Russia to end Gazprom’s
monopoly over its gas-distribution network, through which all Russian and
Central Asian gas has to pass on its way to the countries of the EU.

EU officials also warned Gazprom that if it wanted to buy assets inside the
EU, it would have to abide by the same competition rules as EU companies.

However, Europe has less bargaining power with Russia. A decade ago,
convinced that gas was a plentiful, clean and efficient energy source,
Europe began investing heavily in gas-fired electricity generation.

Western Europe’s share of global gas consumption rose to 17.4% in 2004 from
14.9% a decade earlier. At the same time, however, Western Europe’s own gas
reserves began dwindling just as global demand, fueled in part by the rise
of India and China, began to boom and prices skyrocketed.

Eni’s Mr. Scaroni estimates Western Europe’s rising demand for gas, coupled
with a steady drop in internal production, means the continent will need to
find up to an additional 220 billion cubic meters by 2012 — or nearly 2½
times Italy’s annual consumption. Addressing an industry conference in
Amsterdam last month, he asked bluntly: “Where are we going to find all that

While Mr. Scaroni doesn’t see Gazprom as the answer to Europe’s problems,

he sees few other solutions. Eni is investing in liquefied natural gas that
will allow Italy to procure gas from different sources. But Mr. Scaroni’s
calculation is that the closer Eni can get to Gazprom, the more secure Italy
will be in the long term.

“This gives them a responsibility to the Italian market…and it strengthens
our relationship,” he says.                        -30-
Write to Gabriel Kahn at gabriel.kahn@wsj.com, Marc Champion at
marc.champion@wsj.com and Gregory L. White at greg.white@wsj.com
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12.                                   PUTIN VILLAGE
 Now would also be an ideal moment to prop up the fledgling democracies
 in Georgia and Ukraine that are feeling the heat from Russia and put those
                           countries on a track to joining NATO.

REVIEW & OUTLOOK: The Wall Street Journal
New York, New York, Friday, July 14, 2006

Tomorrow, at the Group of Eight summit in his hometown of St. Petersburg,
Vladimir Putin will throw a coming out party for an economically rejuvenated
Russia. Yesterday the master of the Kremlin marked the steady erosion of
democracy by signing into law a bill that bans legislators in an already
emasculated Duma from changing parties.

Throughout President Putin’s six years in power, a conceit indulged by the
Western nations whose leaders are visiting this weekend has been that the
Russia of strong growth and the Russia of creeping authoritarianism are
different places. Russians themselves are told to sacrifice freedom for
stability and prosperity.

Both are dangerous illusions. For Mr. Putin’s governing approach undercuts
the very gains he will advertise this weekend. As the world stood by, Russia
became a danger to the West, to its neighbors and not least to itself.

The Russia of today little resembles the chaotic country that hobbled out of
the detritus of the Soviet Union. The credit for this turnaround — the
country grew cumulatively 65% since 2000 — goes foremost to high oil
prices, up sixfold in Mr. Putin’s tenure.

The smart policy moves came early on, in 2001-2002, when Prime Minister
Mikhail Kasyanov put in a 13% flat income tax, the headline of a sweeping
overhaul of a corrupt tax system.

But Mr. Putin’s commitment to free markets has proved as fleeting as to
democracy. Mr. Kasyanov, dumped in 2004, went into opposition with other
disenchanted liberals. Monopoly control, be it over the Duma or media or
business, is the defining characteristic of the Putin era. The slide toward
single-man rule put a halt to efforts to modernize Russia’s broken
institutions and open up the economy.

High oil prices were the fig leaf that let Mr. Putin pursue another agenda:
centralizing economic and political power inside the Kremlin. The share of
state-controlled companies is 40% and rising. The largest oil company,
Yukos, saw its best assets sold, for a song, to middling state-owned oil
company Rosneft, whose chairman is a Kremlin official.

The chairman of Gazprom, the world’s largest gas producer, is a deputy prime
minister. In the wake of the Yukos persecution, oil output suddenly started
to drop. Without free competition and private ownership in oil and gas, the
Russian economy can’t meet its growth potential.

Mr. Putin wasn’t interested in profit maximization as much as he was in
gaining an instrument of political power. In this goal, he has succeeded, as
Europe found out in January, during a cold spell, when Kremlin-run Gazprom
turned off its gas supplies to Europe overtly over a price dispute with
recently democratized Ukraine. “Yesterday tanks, today oil” is how the head
of Polish intelligence describes Russia’s current threat posture.

In recent months Mr. Putin has felt emboldened to break with the other G-8
nations over Iran, to try to push the U.S. out of Eastern Europe and Central
Asia while reasserting Russian dominance in its “near abroad,” and to work
on building an anti-American alliance with China.

Such behavior gives lie to a long-held belief in some U.S. foreign policy
circles that Mr. Putin, if uncriticized about his domestic policies, would
play ball on issues that matter to Washington. He hasn’t.

And so, at St. Petersburg, Western leaders face a tough question: What, if
anything, is to be done about Russia?

First off, words and deeds matter. In his now famous Vilnius speech in May,
Vice President Dick Cheney warned Russia against using energy blackmail
against its neighbors and attacked backsliding on democracy. It’s too bad
this tough love didn’t come earlier on in the Putin Thermidor, and we hope
Mr. Bush will repeat the message in St. Petersburg.

For too long, the Putin regime could interpret America’s softly, softly
approach — leave aside the open coddling from Western Europeans — as a
tacit endorsement. As both the G-8 hoopla and Mr. Putin’s thin-skinned
response to the Cheney speech show, this Russian government cares deeply
about Western opinion.

Now would be a good time to recommit resources to election monitoring and
democracy building. Woken up by January’s gas war, the Western Europeans can
lend a hand for a change. The new Russian middle class will appreciate and,
one day, may take advantage of this engagement.

Now would also be an ideal moment to prop up the fledgling democracies in
Georgia and Ukraine that are feeling the heat from Russia and put those
countries on a track to joining NATO.

Globalization is the West’s main leverage. Russians want in. Rosneft this
week is trying to join three dozen other Russia companies on the London
Stock Exchange; British market regulators are presumably taking a close look
at its acquisition of plundered Yukos assets before giving its IPO a green
light. Russia needs a deal with the U.S. to join the World Trade

Though securing a Russian commitment to a rules-based system is good in
itself, Congress will be right to look closely to make sure that Moscow can
be trusted to honor its commitments. We see no reason to reward Mr. Putin by
signing the agreement in St. Petersburg.

In the early days after 9/11, Mr. Putin recognized a shared strategic goal
in countering Islamic terrorism and the proliferation of weapons of mass
destruction, before losing interest. Future projects, such as the mooted
deal with the U.S. on civilian nuclear cooperation, ought to depend on
whether the Kremlin shows a real willingness to work with others on these
threats. Iran is a good place to start.

Russia doesn’t deserve its place among the G-8 democratic nations, and the
task of the U.S. and other members is to encourage reform that will make it
worthy of membership. Political and economic freedom aren’t only nice words
to be hauled out at gatherings like this weekend’s St. Petersburg summit.
For Russia they are the key to future prosperity and stability, a future
that Mr. Putin has put in jeopardy.                        -30-
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13.                    THE EIGHT WONDER OF THE WORLD

: Vitaliy Portnykov in Moscow
Zerkalo Nedili On The Web, Mirror-Weekly No 26 (605)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 8 – 14 July 2006

Russia’s presence in the club of the world’s most developed nations – given
that the country’s economic growth rates are slow and fueled, primarily, by
oil dollars, which are an exhaustible resource – is an achievement, in and
of itself. However, it is not President Putin’s achievement.

It was not even Russia but the Soviet Union that was invited to join the G-7
back in the early 1990s to encourage democratic reforms there. At that time
the process did not go beyond meetings with Mikhail Gorbachev and later
Boris Yeltsyn, head of the new state emerging from the ruins of a collapsed

When Russia finally became a full-fledged G-8 member (albeit uninvolved with
its economic mechanisms) at the 1997 Denver Summit participants concurred
that Russia was “completing its historic transformation into a democratic
market economy.” Vladimir Putin’s administration would hardly qualify for
membership today based on this criterion. Much more important is its
forthcoming chairmanship of it.

The chairmanship has a very strong propagandistic potential from the
Kremlin’s perspective. For the UK or Italy, for example, hosting a G-8
Foreign Ministers’ meeting or Prosecutors’ General conference is a routine

thing, yet another international forum in a series of similar events under the
aegis of NATO, the EU or other international organizations.

Yet one should not forget that Russia is not integrated into either NATO or
the EU, therefore it has few occasions to bring together foreign or defense
ministers from the West, except for OSCE, which is unpopular in Russia and
chairmanship of which does not allow for grand gatherings anyway. The CIS
and SOC summits are not impressive enough to persuade Russian citizens that
their motherland is a reemerging superpower.

Russian leaders have been working hard to influence information about the
country globally. Their Soviet predecessors never would have dreamt of
running a non-stop informational broadcasting channel in English to
enlighten the world about Russia’s accomplishments, or a similar Vesti 24
channel in Russian. To counterbalance Davos, the Russians decided to
organize an Economic Forum in St. Petersburg, and the international business
community swallowed up the bait!

Of course, the representation of heads of state and large corporations was
not as broad and diverse as at Davos, but the Russian President had a chance
to enjoy being in the limelight and making his guests wait for a meeting
with him for hours on end. The G-8 summit is, undoubtedly, the greatest
achievement of all and the most telling evidence of Putin’s clout.

When so many world leaders came to Russia before it was to celebrate the
60th anniversary of the victory in WWII or 300th anniversary of St.
Petersburg, it was not to discuss big politics. Besides, on those occasions
the most renowned players in international politics mingled with a crowd of
CIS and Central European leaders, whereas this time Vladimir Putin will
welcome the “cream of the crop”.

When the Russian President decided to change the venue of his meeting with
the Georgian President during the Economic Forum in St. Petersburg for
Constantine Palace (where the G-8 Summit is to take place), he seemed to be
telling Mikhail Saakashwili: “Look, President Bush whom you like to visit so
much, will be sitting here soon. See the difference?”

Russian TV viewers are also supposed to see the difference. They have come
to perceive all developments relating to G-8 as part of their home news. Yet
Vladimir Putin’s guests are most unlikely to take a similar approach. To
them, the G-8 is both a club and a tool. Western leaders often meet outside
the club – at NATO or EU summits.

Understandably, President Bush does not attend European events but is
invisibly present, which annoys Chirac and pleases Blair. As for Japanese
top officials, Western leaders have established special cooperation
mechanisms with them. Canada, although not represented at the EU summits,
participates in all important NATO meetings.

The EU consultations with Canadians focus on economic issues, while those
with Russians are, first and foremost, of a political nature. Russian
leaders should be urged to respect democracy, opposition and free press.
Recently, Condoleezza Rice said she would raise these subjects at the G-8
Summit, which, reportedly, infuriated Vladimir Putin because the Russian
President resents being told what to do. He wants to tell others what to do.

His country is surrounded by states where human rights are violated, as well
as those of Russian-speaking minorities, opposition, etc., etc., etc. So
President Putin wants his Western partners to admit it and call these
underdeveloped democracies to account while citing Russia as an example
because Russia is a democracy, as Vladislav Surkov, Head of Presidential
Office, put in plain words the other day.

It is a true, sovereign democracy that does not look up to Uncle Sam, unlike
some of its neighbors. Surkov’s press conference for foreign journalists was
a warning for the G-8 leaders to mind their own business.

Russia’s main concern at this summit will be energy, rather than democracy.
Moscow has long but unsuccessfully been trying to promote its power supply
companies in spite of Western economies’ plans to de-monopolize this sector.
Recently it has made headway as a number of European states have ceased to
insist on de-monopolization.

The only uncompromising opponent to Russia’s energy policy and ambitions is
the USA. Yet the G-8 leaders are not going to make any specific decisions on
the matter. Instead, they are more likely to restate their usual positions:
Russia wants to flood Europe with oil and gas but they do not want it to for
fear of its rapidly growing role in the world’s economy.

The parties could reach a compromise on rogue countries but, probably, will
not. North Korea opened a unique opportunity to the US, having launched its
missiles in the vicinity of the Russian coastline on the eve of the G-8

At least the Russian TV, traditionally loyal to Kim Chen Ir, changed
the tenor of its comments immediately: it depicted the Nakhodka residents’
terror, censured North Korean diplomats for their insolent statements and
called upon Pyongyang “not to trouble trouble.”

More than that, a report from the ground argued that Kim Chen Ir did trouble
trouble, after all. On the following day, however, the journalist was proven
wrong and Russia, having denounced North Korea’s behavior, allied with China
to blackball the Japanese resolution on North Korea in the UN Security
Council. It did so not because it likes what Kim Chen Ir is doing but
because it dislikes what Bush is doing.

Put differently, Russia does not want to side with the USA. It wants to be
in a different camp, even though it might not exist at all. Russia is trying
to create it, hence the recent summit of the Shanghai Organization for
Cooperation, which worries the US State Department so much.

However, the new camp did not get created – Beijing refused to support the
Japanese resolution for totally different reasons than Moscow – but the
Kremlin prefers to pretend it is fully operational. This accounts for recent
clanges in Russian diplomacy in the Middle East.

Not only did the invitation to the Hamas leaders to visit Moscow legitimize
one of the most detested terrorist organization in the region but also
encouraged its Damask-based radical wing to dictate its will to the Hamas
government in Palestine. Eventually, it provoked a new regional crisis, in
which Russia turned out to have a very limited mediatory potential.

If Russia supported the West’s tough stance on North Korea from the start,
agreed to be exact in relations with a country posing a threat to its
security and revised its attitude toward the paranoid dictatorship in North
Korea, sooner or later it would have had to apply a similar approach to
Iran. Today nobody can deny Iranian nuclear tests which are taking place
again near Russian borders.

This is what Bush would like to discuss with Putin, but what he does not
want to hear about. Therefore Russia’s approach to the issue of North Korean
missiles is inconsistent with the G-8 membership: Russia proposes to treat
rogue countries with caution even when they start shooting at it. Thus, the
current paradigm of Russian policy – a paradigm of reviving a virtual
superpower that would vie with the USA for world leadership – and does not
provide for another option.

It would be essential to pay attention to the G-8 leaders’ behavior off the
stage, rather than to their official press conferences and declarations.
What will Putin discuss with Bush? The American President is concerned about
the situation in Iran, North Korea, Iraq and the Middle East while his
Russian counterpart is preoccupied with succession of power, Gazprom and
Russia oligarchs’ capacity and control over neighboring countries’ economy.

In other words, Bush is focused on global challenges, while Putin – on
domestic. What Putin will try to do during his meeting with Bush is to
exchange Moscow’s geopolitical non-interference for the West’s
non-interference with Russia.

All the SOC summits, negative voting on North Korea, critical position on
Iraq are meant to persuade Washington that it would be better off keeping
peace with Moscow and leaving its development to those who know what
is best for Russia (as well as for Ukraine, Georgia and the like).

Putin’s task will be to persuade the US President that his country will only
benefit from a quiet transfer of power in the Kremlin, and to dissuade him
from putting holes in Mordashov and Miller’s wheels, since big money is at

President Bush could have his own agenda and his own understanding of
how far the compromise should go. That is why his talks with the Russian
President behind the scenes promise to be the most interesting and
intriguing event of the G-8 Summit. We will not be told about them, but we
will, no doubt, learn about the outcome.

We will see how the situation will develop in the eighth member of the
exclusive club; we will see if the presidential administration will manage
to turn that country into the eighth wonder of the world in the form of a
“sovereign democracy” integrated with the West but spitting on its values
and interests.                                   -30-
LINK: http://www.mirror-weekly.com/ie/show/605/53898/
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
14.                       RUSSIA: BACK TO THE FUTURE?
    Russia has a tsarist political system, all decisions made by the presidency

STATEMENT: By Dmitri Trenin: prepared for a hearing

before the U.S. Senate Foreign Relations Committee
U.S. Senate, Washington, D.C., Thursday, June 29, 2006

Dmitri Trenin

Mr. Chairman, Ladies and Gentlemen of the Committee,

It is an honor and a privilege to be asked to testify before this Committee.
Let me address the issues I was asked to comment on in the letter of
invitation signed by Senator Lugar.

Developments in Russia and Their Potential Impact on the Future of the
U.S.-Russia Relationship

                                  POLITICAL REFORM
Russia has a tsarist political system, in which all major decisions are
taken by one institution, the presidency. In fact, this is the only
functioning political institution in the country. Separation of powers,
enshrined in the 1993 Constitution, does not exist in reality. On the
contrary, unity of power and authority has become the new state-building

All other federal institutions (i.e. the parliament, the cabinet, the high
courts) are dependent on, and de facto subordinate to the President and his
private office (collectively referred to as the Kremlin). The tradition is
back in the saddle.

Over the last six years, the degree of power centralization has grown
dramatically. Regional legislation has been brought in conformity with the
federal Constitution and federal laws. The Federation Council (upper
chamber) has ceased to be the regional leaders’ club and has become a
Russian version of the German Bundesrat, with its members (who proudly call
themselves senators) appointed, and recalled, by the regional authorities.

The governors of Russia’s 88 regions have lost their independence rooted in
direct elections, and are now hired and fired by the Kremlin. Single-mandate
constituencies in the elections to the State Duma (lower chamber) are being
phased out. From the next election (December 2007) on, only party lists will
compete, with the entrance bar set very high (7% of the popular vote).

The reform of the judiciary has not resulted in expanding its independence.
The courts are even more dependent on the authorities, and the State
Prosecutor’s office has become the principal political instrument in the
hands of the Kremlin for dealing with its adversaries.

While authoritarian and over-centralized, the Russian political system rests
on the acquiescence of the governed. Vladimir Putin has remained popular
throughout the six years he has been in power. Above all, he is credited
with reinstating stability lacking under both Boris Yeltsin and Mikhail
Gorbachev. For this democratically-legitimized authoritarian system to
continue to operate in the current mode, Putin’s successor needs to be
genuinely popular.

Managing succession under such conditions is extremely difficult. All
indicators point to Putin’s desire to step aside when his term is up (spring
of 2008) and let a new man take over. Yet, both informal successors (first
deputy Prime Minister Dmitri Medvedev and Defense Minister Sergei Ivanov
who is also a deputy PM) have obvious problems with electoral appeal.

Thus, Putin may make an 11th hour surprise choice in favor of a lesser-known
figure who would be able to galvanize support for the supreme authority and
allow it to sail smoothly through the succession straits.

There can be no guarantee of a smooth sailing, of course. It is true that
political opposition in Russia is no match for the authorities. The
Communist party, Yeltsin’s former nemesis, has been much reduced in
influence and effectively locked up in a niche of elderly nostalgics.

The liberals and democrats remain pathetically disunited and are growing
increasingly marginal. Nationalists represent a more serious challenge. In
the past, the Kremlin was been able to tame them with the help of the
super-loyal Mr. Zhirinovsky.

However, a recent project to found a pro-Kremlin nationalist party, Rodina
(Motherland), led by Dmitri Rogozin, had to be terminated when the party
threatened to spin out of control and become a real opposition force.

Currently, the Kremlin’s strategy is to give a new lease on political life
to Mr. Zhirinovsky; to co-opt the more conformist nationalist elements
within the ruling bloc, United Russia; and to present extreme nationalists
as a “clear and present danger” (to replace the now emasculated Communists)
which can only be effectively dealt with by the Kremlin itself.

It is true that ultra-nationalism and populism are the biggest threat to
Russia’s domestic development and to Russia’s relations with the rest of the
world, starting with its neighbors. The problem is the Kremlin’s own
political effectiveness.

All the unity of power notwithstanding, the Kremlin itself is far from
united. The constellation of clans, which could be visibly represented by
the many towers of the Kremlin fortress, is never static. There have always
been different interests (including some very material ones), different
instincts (depending on the people’s past experiences), and different views
about  the way the world goes and the way Russia should be run. While the
President reigns, he acts as an arbiter. As he is preparing to hand over
power, the situation becomes highly dynamic.

Grosso modo, there are two competing groups whose membership does not
neatly coincide with the popular notions of the siloviks vs the liberals.
Both factions agree on the need for a strong authority at home and a
great-power policy abroad. They differ (apart from their private business

interests) on the degree of bureaucratic control over the economy and the
assertiveness and unilateralism in Russia’s foreign policy.

Thus, it is the internal rivalries and clashes, whether within the
Presidential administration, the cabinet, or the ruling bloc as a whole,
rather than open political competition, that is likely to mark and shape
Russia’s politics in the near and even medium term.

The implications for the United States and indeed for all other countries
are as follows. One has to accept the reality of a highly centralized
political system with a sole decision-maker. One needs to acknowledge the
weakness of the political forces who seek to modernize the system by
bringing the competition into the public domain and turning the presently
undivided “Authority” into a combination of an accountable government and a
professional civil service.

One has to guard against the (still distant) possibility of
ultra-nationalists and populists taking over the state machine and pushing
Russia down the path of absolute state domination at home and revanchism

Yet, Russia, seen historically, is not going in the wrong direction. Rather,
it has returned to the path of natural development which she was forced to
abandon by the Bolsheviks. It was never serious to expect Russia to emerge
as a liberal democracy after three quarters of a century of Communist rule.
By the same token, to regard Yeltsin’s Russia as a democracy was wishful

Russia was freer, and more pluralist, and the state was very weak, but it
was not democratic. In future, there will be no cutting corners. For a
number of reasons, Russia’s modernization can not proceed through
integration into the European and Euro-Atlantic institutions, as it did in
Central Europe and can do in Eastern Europe.

Russia would have to perform that feat on its own. There are many factors
working against it. There are a few, however, two working for. One is the
factor of money, i.e. indigenous capitalist development. The other one is
the country’s openness to the outside world.               -30-
NOTE: Dmitri Trenin is deputy director of the Carnegie Moscow Center, a
senior associate of the Carnegie Endowment and co-chair of the Moscow
Center’s Foreign and Security Policy Program. He has been with the Center

since its inception. In 1993-1997, Trenin held posts as a Senior Research
Fellow at the NATO Defense College in Rome and a Senior Research Fellow
at the Institute of Europe in Moscow.

He served in the Soviet and Russian armed forces from 1972 to 1993,
including experience working as a liaison officer in the External Relations
Branch of the Group of Soviet Forces(stationed in Potsdam) and as a staff
member of the delegation to the U.S.-Soviet nuclear arms talks in Geneva
from 1985 to 1991. He also taught at the are studies department of the
Military Institute from 1986 to 1993.
For the full text of Dmitri Trenin’s testimony, please click on the link:
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Associated Press, Moscow, Russia, Wed, July 12, 2006

MOSCOW — President Vladimir Putin called U.S. Vice President Dick

Cheney’s criticisms of Russia “an unsuccessful hunting shot,” according
to a transcript of a television interview released Wednesday by the Kremlin.

The remark, from an interview given to the U.S. television network NBC,
apparently referred to the errant shot by Cheney on a hunting trip that
wounded a companion.

Cheney, in a May speech in the ex-Soviet republic of Lithuania, accused
Russia of cracking down on religious and political rights and of using its
energy reserves as “tools of intimidation or blackmail.”

Asked about Cheney’s remarks, Putin said: “I think the statements of your
vice president of this sort are the same as an unsuccessful hunting shot.
It’s pretty much the same.”

Both Cheney’s criticism and Putin’s caustic response underline the tensions
that exist between the U.S. and Russia, as both countries prepare for the
Group of Eight summit of industrialized nations beginning Saturday in St.

Western leaders are expected to raise concerns at the summit about Russian
moves that are seen as anti-democratic, including a new law placing
restrictions on non-governmental organizations, tightening state control of
news media and making the upper chamber of parliament an appointed body
instead of an elected one.

Russia, in setting the agenda for the G-8 summit, has made energy security
one of the top issues. However, Russia this year unsettled Europe when a
dispute with Ukraine over natural gas prices resulted in a temporary
reduction of Russian natural gas deliveries to Europe. Most of Russia’s
Europe-bound gas transits Ukraine.

Despite his sharp comments on Cheney’s statement, Putin said Russia wasn’t
being obstinate to criticism. “I am glad that we have critics. It would be
worse if there were one voice, as it was in the time of the Soviet Union at
meetings of the Communist Party. If we hear both critical and positive
observations, it means that we have the possibility of better orienting
ourselves toward what we’re doing,” Putin said, according to the transcript.

In a separate interview with Canadian TV channel CTV, Putin was asked about
Kremlin signals to Western officials that it would look askance at their
attending a pre-summit conference in Moscow organized by opposition forces.

Putin indicated their attendance was being seen as interference in Russia’s
internal affairs. The opposition “is doing this (conference) in the run-up
to State Duma elections at the end of 2007. And if officials of other
countries support this undertaking, it simply means they are trying to
influence the internal political arrangement of Russia a little bit,” he
said, according to the Kremlin’s transcript.

Putin also reiterated criticism of the U.S.-led forces in Iraq and their
Iraqi allies in the wake of the abduction and killing of four Russian
Embassy staff last month.

“If the United States and their allies took upon themselves the
responsibility for Iraq when they took the decision to send armed forces
there, then of course they hold the responsibility for the security of
citizens and the security of the diplomatic corps,” he told NBC, according
to the transcript.                                   -30-

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

By Adam Schreck, The Wall Street Journal
New York, New York, Wednesday July 12, 2006

Leaders of the Group of Eight industrial powers will hold their annual
summit for the first time in Russia later this week, with a host of issues
on the table.

The meeting, which runs from July 15 to 17 in St. Petersburg, is a chance
for Russian President Vladimir Putin to show off the fruits of his country’s
oil-fueled economic boom and reassert its political pull. But it also comes
amid growing questions about Moscow’s commitment to democracy and free

Some critics, like U.S. Vice President Dick Cheney, have accused Russia of
restricting citizens’ rights and using its vast energy reserves as “tools of
intimidation or blackmail.”

Those comments in May were just the bluntest sign of tension between
Washington and Moscow. U.S. Secretary of State Condoleezza Rice and her
Russian counterpart were heard bickering over Iraq and other issues at a
meeting in late June, and the two countries are at loggerheads over Russia’s
entry into the 149-nation World Trade Organization.

During his visit, President Bush plans to meet with Russian civil-society
and human-rights groups and is likely to pressure Mr. Putin over his
commitment to democracy, White House officials have said.

Still, the U.S. and other G-8 members want and need Russia’s support in the
standoffs over Iran’s nuclear-energy program and North Korea’s missile
program. And Russian officials, as hosts, have set an ambitious policy
agenda. Mr. Putin has chosen to focus on the themes of energy security,
infectious disease and education.

Here is a look at this year’s key issues:

                                           ENERGY SECURITY
At the top of Russia’s agenda is the touchy subject of energy security. A
dead-of-winter spat earlier this year between Russia and Ukraine over
natural gas punctuated the host nation’s influence as an energy provider.
Western Europe gets a quarter of its heating gas from Russia, where
state-controlled OAO Gazprom has the market cornered. When it comes to oil,
only Saudi Arabia exports more.

Mr. Putin is calling on the G-8 to “redouble efforts to ensure global energy
security” and is pushing for greater stability in energy markets. Coming to
a consensus won’t be easy though. The very concept of security depends on
who’s doing the talking.

The U.S. and EU are focusing on security of supply. They want greater access
to Russia’s vast energy reserves and distribution networks — something
Moscow has so far resisted. Russia, meanwhile, wants to ensure security of
demand, and is looking for new avenues into potentially lucrative Western
retail markets. The U.S. and EU are unlikely to grant that access unless
they get some concessions of their own.

The summit’s energy agenda also includes a focus on environmental protection
and renewable sources — topics that dovetail with last year’s emphasis on
climate change and lower carbon emissions — but these could be overshadowed
by more contentious discussions.

                                     INFECTIOUS DISEASE
Past summits have tackled the spread of specific diseases, such as HIV and
malaria — both again on the agenda. This year, Russia hopes to broaden the

Russia is looking to develop a global system to monitor and respond to
disease outbreaks, including avian flu. It also would like to see improved
resources for health-care providers and better systems for coping with
health issues following natural disasters. Finally, Russia wants to restart
discussions on eradicating polio, measles and tropical diseases often left
out of the spotlight.

The G-8 has shown a commitment to fighting infectious disease in the past.
At its 2001 summit, the group formally launched the Global Fund to fight
HIV/AIDS, malaria and tuberculosis with an initial combined pledge of $1.3
billion. Members promised an additional $1.5 billion at last year’s meeting.

But hopes are fading for a promising public-private plan to develop vaccines
for diseases in the Third World that was slated for discussion. France is
refusing to support the plan, which is backed by the U.S., U.K. and Italy,
unless the U.S. agrees to an airline tax designed to funnel aid to poor

Mr. Putin has pitched improving education, the last major item on his G-8
agenda, as key in the fight against terrorism. “It is very easy for the
missionaries of various extremist organizations . to work with illiterate
people,” Mr. Putin said in a television interview earlier this year.
Specifically, Russia is seeking internationally accepted professional
qualifications and a greater focus on educating migrants, as well as
less-tangible goals like increased innovation and higher standards.

The U.K., meanwhile, is pushing for increased education funding for
developing nations. Earlier this year, it boosted its funding to $15 billion
over the next decade.

                                       OTHER ISSUES
Among other issues likely to be discussed are regional hotspots such as the
Middle East as well as perennial concerns, including counterterrorism and
nuclear proliferation. Three will be closely watched:

Iran – At their meeting in late June, G-8 foreign ministers expressed
frustration that Iran had not yet responded to an incentive package offer
meant to curtail its nuclear ambitions. The country now has until July 12 to
accept the package, although leaders in Tehran have said they won’t respond
before mid-August. Russian foreign policy adviser Sergei Prikhodko said
earlier this month that while Iran will likely be discussed at the summit,
it won’t be the dominant issue.

North Korea – North Korea’s Fourth of July missile tests drew widespread
condemnation and prompted some G-8 members to call for increased pressure on
Pyongyang. Japan is proposing the group issue a joint statement denouncing
the tests. At the U.N. Security Council, G-8 allies U.S., Japan and Britain
have pressed for sanctions, but Russia and China have so far resisted such a

Debt cancellation – The G-8 has been under pressure from U.K. charity Oxfam
and Live-Aid organizer Bob Geldof to expand debt cancellation to the world’s
poorest nations and keep promises made by the group’s leaders at earlier
summits. Last year, the G-8 wrote off $37 billion of developing-world debt
and promised $50 billion more aid annually by 2010.
Write to Adam Schreck at adam.schreck@wsj.com

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

Associated Press, Kiev, Ukraine, Thu, July 13, 2006 

KIEV, Ukraine — President Viktor Yushchenko’s allies kept up noisy protests
in Parliament against the new pro-Russian coalition even as the Parliament
speaker warned that he planned to push ahead today with naming lawmakers to
parliamentary committees.

Mr. Yushchenko, whose Orange Revolution Party rebuffed overtures to join
Viktor Yanukovych’s Party of Regions in its new coalition, said in a letter
to lawmakers that Parliament’s move this week to declare the Orange
Revolution coalition dead and replace it with a new alliance of pro-Russian
parties violated the constitution as well as parliamentary rules.

Such decisions contradict principles used by European parliaments, raise
questions about their legitimacy “and will demand from me an adequate
response,” the president said. The warning was the strongest signal yet that
Mr. Yushchenko might consider using his right to dissolve parliament and
call new elections.

Mr. Yushchenko’s warning came after lawmakers from his party and that of his
estranged Orange Revolution ally, Yulia Tymoshenko, sounded sirens and
disrupted Ukraine’s parliament as part of a continuing effort to harass the
new coalition.

Socialist Party leader and Parliament Speaker Oleksandr Moroz said the noisy
disruptions were “an attempt to break the work of parliament, to win time
and not allow the cabinet of ministers to be formed.”

The new coalition, which the president considers illegitimate, this week
nominated Mr. Yanukovych, the Kremlin-backed politician who Mr. Yushchenko
defeated in 2004 to win the presidency, as its prime minister.

Ukraine has been plagued by political turmoil since March parliamentary
elections, in which the Party of Regions won the most seats but fell short
of a majority. After weeks of bargaining, the Orange Revolution struck a
deal to form a coalition but that agreement collapsed when the Socialist
Party switched sides and formed a coalition with the pro-Russian Communists
and Party of Regions last week
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Associated Press (AP), Kiev, Ukraine, Thursday, July 13, 2006

KIEV – Lawmakers with President Viktor Yushchenko’s parliamentary faction
demanded an investigation Thursday into an attack on television journalists
by allies of his former Orange Revolution rival [Viktor Yanukovych].

Two journalists from the channel STB Volodymyr Novosda and Marharita Sytnik
said lawmakers from the pro-Russian Party of Regions attacked them Wednesday
and seized a tape with their coverage of a rally outside parliament. Kiev
police spokesman Volodymyr Polishchuk said police would investigate the

Party of Regions representative Oleh Kalashnikov called the allegations a
provocation, but his party later apologized anyway.

“We are open to the media and will do everything possible (so) that the
media can feel itself free,” said top party representative Yevhen
Kushnaryov. He also said the lawmakers involved in the incident denied using

On Thursday, Yushchenko’s faction and former Prime Minister Yulia
Tymoshenko’s faction won support for an investigation from the parliamentary
Speaker Oleksandr Moroz.

When Party of the Regions head Viktor Yanukovych was prime minister in 2004,
his government and party were strongly criticized for putting pressure on
the media.                                             -30-
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    Politicians should avoid compromising on moral and ethical matters

International Centre for Policy Studies (ICPS)
Kyiv, Ukraine, Thursday, 13 July 2006

KYIV – International Centre for Policy Studies (ICPS) organized a roundtable
on “The Political and Economic Situation in Ukraine: How ICPS sees it.”

ICPS presented its assessment of the political situation in Ukraine,
especially problems linked to the formation of a coalition and likely
changes to the country’s domestic and foreign policy. The Centre’s analysts
also presented their view of the economic situation in Ukraine to
participants, along with an economic forecast for the next three years.

Participating in the roundtable was the President of Poland from 1995 to
2005 and now Chair of the ICPS Supervisory Board, Alexander Kwasniewski.

Mr. Kwasniewski expressed concern that Ukrainian politicians keep missing
the opportunities given to them by history and, therefore, precious time that
should be maximized to carry out reform.

The former Polish president noted that Ukraine’s political elite needs to be
working to gain the trust of both its own people and its foreign partners.
According to Mr. Kwasniewski, politicians need to avoid compromising on
moral and ethical matters.

Other participants in the roundtable included top politicians, political
analysts, experts, journalists, and representatives of foreign missions in
Ukraine: Donald Banks, Ellen Berends, Yevhen Bystrytskiy, Ihor Burkovskiy,
Mykola Veresen, Bohdan Hawrylyshyn, Sheila Gvaltney, Andriy Yermolayev,
Vitaliy Klichko, Jacek Kluczkowski, Helen Cray, Evelyn Lee, Ksenia Liapina,
Carmona Mathieu, John-Christer Ahlander, Mykola Onyshchuk, Lev
Partskhaladze, Oleksandr Paskhaver, Yegor Sobolev, John Tedstrom,

Volodymyr Fesenko, Oleksandr Chaliy, and Ihor Shumylo.

The International Centre for Policy Studies is one of the top think-tanks in
Ukraine, publishing ongoing analysis of the political and economic situation
in the country. The Centre’s activities focus on introducing the principles
of public policy into the policy-making process of Ukraine, which are a
necessary support for an effective and stable democracy.    -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
                 Ukrainian Think-Tank Reveals a Comprehensive Study of
                 Corporate Conflicts on the Edge of Old and New Europe

PressZoom Global News Service
Amsterdam, The Netherlands, Thursday, July 13, 2006

AMSTERDAM – The Corporate Relations Research Center, a Kyiv,
Ukraine based Think-Tank, made public the outcomes of its most recent
research on corporate conflicts occurring due to new European countries’
integrating into Western Europe.

The “Risks and Prospects of Ukraine’s European Integration” research is
grounded on the over 15 series of expert interviews with the representatives
of Ukrainian and Eastern European investment banks, legal firms, economic
research institutions, journalists and independent analysts, as well as on
the own analysis by CCSR European Integration Department.

According to Oleksandr Kamenets, President of the Corporate Relations
Research Center, “This study consolidates information on key issues and
pitfalls, slowing down many Eastern European companies while striving to
enter EU markets. With a core emphasis on Ukrainian companies’ risks and
experience, we provide a valuable source of information and analysis of
corporate risks in one of the most attractive investment destinations”.

Rostislav Ishchenko, Vice-president of the Center, firmly believes that “The
study will help many businesses operating in, or considering starting
activity in Eastern Europe, to develop their risk mitigation strategies
towards cross-border cooperation.

Also, some cases within this study are likely to draw the attention of the
European governmental bodies and NGOs aiming at promoting fair
competition and facilitating European integration of the new independent
states, as well as those focusing on fighting the corruption and

The present issue of the study mainly focuses on such risk factors for
New Europe’s companies as:

     [1] Antidumping applications to fight competitors;
     [2] Applying unfair competition;
     [3] Lobbying unfair legislation in international competition;
     [4] Limiting market access;

The key industries analyzed involve: air transportation, metallurgy, and
pipe production, as well as some features of other heavy industries.

The issue of “Risks and Prospects of Ukraine’s European Integration”
research is available for free download at

You are also welcome to request your complimentary hard copy here
http://corporativ.info/en/?/newsletter ( limited volume )

The “Risks and Prospects of Ukraine’s European Integration” research is
grounded on the over 15 series of expert interviews with the representatives
of Ukrainian and Eastern European investment banks, legal firms, economic
research institutions, journalists and independent analysts, as well as on
the own analysis by CCSR European Integration Department.
For additional information, please, contact: Oleksandr Kamenets,
President, PO Corporate Relations Research Center
13 Anri Barbusa St., Office 305, Kyiv, 01004, Ukraine
Tel. + 380 044 528 36 50; Fax. + 380 044 528 34 13
info@corporativ.info; www.corporativ.info
LINK: http://presszoom.com/story_117149.html

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21.                             LANGUAGE AND PROFITS

COMMENTARY: By Stephen Velychenko
aaus-list@ukrainianstudies.org, USA, Thursday, July 13, 2006 

One agent of Russification in independent Ukraine are global corporations
and their distributors who do not produce Ukrainian-language versions of
their products. Another agent are independent publishers in Ukraine.

One of them JED SUNDEN, publishes about 12 popular-glossy magazines
and one small-format daily paper distributed free weekday mornings. ALL

Mr Sunden himself, sympathises with Ukrainian independence. TO his credit
he publishes the respected KYIV POST and he was hasseled by the Kuchma
regime for its articles. Nonetheless, the fact remains, his publications
russify Ukraine and keep it in the Russian-Language communications sphere.

I would suggest you publicize this fact among Ukrainian professionals and
business organizations and ask them to contact Mr Sunden with proposals
about publishing all his titles in Ukrainian, and perhaps organizing a
consortium of his fellows to do the same.

The objective should be to release at least one hundred popular-mass
magazine titles now in Russian in Ukrainian instead.

We must all sit down together and think of a way people like Mr. Sunden in
Ukraine can both help Ukraine leave the Russian language communications
sphere and still make profits.                        -30-  

NOTE: Stephen Velychenko is a Resident Fellow, CERES, Research
Fellow,Chair of Ukrainian Studies, Munk Center, University of Toronto
Devonshire Place, Toronto M53 3K7. velychen@chass.utoronto.ca 
Contact Jed Sunden, Kyiv Post http://www.kyivpost.com/contact/
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