Behind the Breaking News
A briefing from the Institute for the Study of Conflict, Ideology and Policy
Volume VI, Number 2 (3 March 2008)

Shades of 2006: Russia squeezes Ukraine over gas again
By Tammy Lynch
Senior Fellow
Institute for the Study of Conflict, Ideology and Policy
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On 3 March, Gazprom reduced gas supplies to Ukraine by 25% in the midst of a dispute over gas price and gas debt.  (1)  The action comes in the midst of conflicting and confusing statements by both sides, as Gazprom claims a debt for billions of cubic meters of gas Ukraine says it never had, and Ukraine demands that all gas intermediaries be removed from the process. 

Background:

In 2007, Ukraine contracted to receive Central Asian gas provided by Gazprom.  Apparently without receiving the consent of the new Ukrainian government, Gazprom and the gas intermediary RosUkrEnergo (50% owned by Gazprom) began sending a mix of Russian and Central Asian gas to Ukraine in late 2007. 

Gazprom claimed it needed to top off Central Asian gas with Russian gas because of a decrease in supplies from Turkmenistan, which previously had supplied most of Ukraine’s gas. (2)

Without negotiating with the government, Gazprom billed Ukraine $314 per 1000 cubic meters for its “Russian” gas, instead of the previous $179 per 1000 cubic meters.  Gazprom claims the new price was necessary to adjust for the more expensive cost of Russian gas, and that it is based on contingencies in an earlier contract between RosUkrEnergo and Naftohaz.  (3)  That contract does not appear to be available publicly, and the price is disputed since it was never negotiated between those involved. 

Gazprom now is also claiming that Ukraine illegally used 4 billion cubic meters of Russian gas.

Ukraine refuses to agree to a new price until Gazprom agrees to remove all gas intermediaries from the process.  “I always believed there should be no intermediaries, no short-lived corporations,” Ukrainian Prime Minister Yulia Tymoshenko said on Saturday.  “We have Gazprom and Naftogaz. Let’s sign an agreement and buy gas.” Tymoshenko suggests that intermediaries make it impossible to determine fair, open payment principles.  (4) 

The level of debt claimed by Gazprom is unclear, with figures changing regularly.

For its part, Turkmenistan disputed Gazprom’s claims last week.  The country said it had provided the gas that was promised, implying that there may have been no need for Russian gas.  The Turkmenistan Foreign Ministry called Gazprom’s claims “absolutely incorrect and without basis.”  The country, it said, “carried out and is carrying out all obligations in strict adherence with the conditions [of its contract].” (5)  These claims have not been verified, although Turkmenistan possesses an export metering system that presumably could confirm (or disprove) the statements. 

Ukraine is at a disadvantage – unable to verify which country is providing its gas, since it comes through the same pipes from Russia. 

Prime Minister Yulia Tymoshenko claims individuals associated with Ukraine’s gas trade may have taken Central Asian gas for their own re-exporting purposes, and then requested the Russian gas to cover the shortfall.  "Some 4 billion cubic meters of gas disappeared without a trace from Ukraine's gas balance and are currently being imputed as Ukraine's debt," Tymoshenko said.  Later, she explained, “It turned out that …  they [the intermediaries] had been using gas envisaged [for Ukraine in] 2008.”  (6)  The RosUkrEnergo intermediary is 50% owned by Gazprom.

Ukraine’s media have noted that one of the Ukrainian owners of RosUkrEnergo owns a facility in Hungary that provides gas to Europe. 

All involved in the gas trade vigorously deny Tymoshenko’s charges and say that they have no knowledge of the whereabouts of the missing gas.

Effects: 

Consumers are unlikely to see large effects from the gas slowdown in the short-term, although some industrial producers could be hit a bit harder.  Since the majority of these producers (primarily of steel and aluminum) are in the east of the country, where support for the opposition is centered, the issue has already spurred a number of attacks from opposition representatives.  Still, many of these producers are guaranteed inexpensive gas through separate agreements and will barely be touched by the situation.  Investment firm Alpha Capital calls the situation "neutral for most industrial users." (7)

Gazprom’s action also underscored what most already knew – there will be no change in policy in the Kremlin regarding its gas deals with Ukraine.   In 2007, the previous Russia-backed government developed a debt of over $1 billion for gas.  That debt was not brought up by Gazprom until the new Tymoshenko government was coming into office, and it is Tymoshenko who had to pay it. 

So far, Tymoshenko and President Viktor Yushchenko have reacted to the gas slowdown quietly.  Both Gazprom and Tymoshenko appear prepared to defend their positions fiercely, however.  For Gazprom, giving into Ukraine would be interpreted as a sign of weakness and a possible signal to other countries to follow Ukraine’s path.   For Tymoshenko, removing intermediaries from the gas trade has been a four year crusade that may have provided her political bloc the edge in last year’s parliamentary election.  Voters would not forgive her for backing down without a fight. 

Tymoshenko also has seized on this issue to differentiate herself from President Yushchenko—who supports the continued use of intermediaries—in advance of the 2009/10 presidential election.   Success, even in part, could provide a major boost to Tymoshenko’s popularity, which already surpasses Yushchenko’s.  For this reason, both Gazprom and Yushchenko will be working to make a quick deal that does not provide the Prime Minister with any opportunity to declare victory.

Source Notes:
(1) Gazprom Notifies Ukrtranshaz Of Gas Supply Cut, Ukrainian News Agency, 10:38 CET, 3 Mar 08 via www.ukrnews.com.
(2) “Ukraine's gas supply from Central Asia cut; Forced to import Russian gas at much higher price,” Platts Oilgram News, 17 Jan 08 via Lexis-Nexis. 
(3) Ibid.
(4) “Ukraine's PM says Russia will not cut gas supply,” Reuters, 0315 EST, 1 Mar 08 via www.reuters.com
(5) Turkmenistan.ru, 0816 GMT, 27 Feb 08.
(6) "Gazprom Does Not Speak Ukrainian, " Gazeta.ru, 22 Feb 08 and Zerkalo Nedeli, 23 Feb 08, p 4.
(7) Alpha Capital Ukraine, Breaking News Alert, 3 Mar 08.