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An Inscrutable Squabble

Is the current gas dispute about hard-nosed business, bare knuckles politics, or deep-seated corruption? 5 January 2009 When Russia cut off gas supplies to Ukraine on 1 January, headlines focused on the dispute over the price of gas and debts that Russia says it is owed by Ukraine for past gas shipments. But were those issues really the crux of the matter?

Two days earlier, on 30 December, the Carnegie Endowment for International Peace had linked up its offices in Washington, D.C., and Moscow for a video conference on the dispute.

Experts at the conference discussed how the standoff looks from the Kremlin and Kyiv, who stands to gain or lose, and whether the disagreement is essentially political or economic.

A guide to some players in the negotiations:

• RosUkrEnergo, the monopoly middleman company that transports gas from Central Asia to Ukraine and on to other European customers. It is owned in part by Gazprombank and in part by Ukrainian businessmen.

• Naftogaz Ukrainy, the Ukrainian state oil and gas company. It is a holding company.

• UkrGazEnergo, a joint venture between Gazprom and Naftogaz Ukrainy created in 2006 to supply gas to the Ukrainian domestic market. In April 2006 it became the sole Ukrainian purchaser of the gas imported by RosUkrEnergo.

Following are excerpts from the transcript of that discussion, edited for brevity and clarity.

DMITRI TRENIN, director of the Carnegie Moscow Center:

Seen from Moscow, [the situation] does look very familiar. The end of the year is approaching and Ukraine has not paid up, and this is a scandal again, and Russia has every right to demand every penny; Ukraine is balking and the negotiation is coming closer and closer to the deadline and the Russian government and Gazprom – because there’s precious little daylight that people see between the government and Gazprom – so Russia as it were is standing firm.

Russia has no reason to give Ukraine a break; after all, the Ukrainian government or rather the Ukrainian president has been trying to pull the country into NATO and in the recent war in Georgia Ukraine had been supplying – or prior to the war Ukraine had been supplying Georgia with military material – that was a statement by a senior Russian general that Ukrainian military people had been responsible for shooting down a Russian strategic bomber and they were manning the air defenses or some of the air defenses of Ukraine, so there’s a feeling in this country that Russia … owes Ukraine nothing and has every right to pursue this really tough policy.

On the other hand, you see that just by looking at how the president, the prime minister, the foreign minister – presenting that to the public, you can get the feeling that they’re not enjoying it very much. They see that they are walking straight into a situation that will not do Russia any good. They will have to exercise that press, they think, otherwise they will be showing Russia’s weakness. But once Russia cuts Ukraine off, the onus is very likely to be on Russia. There was … an interview with the foreign minister broadcast this morning, in which he was asked this question: What do you think the reaction of the Western public will be to the cutoff, should it come to that? And he said well, we’re not fully responsible for the reaction of the Western public, which basically means that Russia will suffer as the result of – in exercising what it cannot fail to exercise.

ANDERS ASLUND, senior fellow at the Peterson Institute for International Economics in Washington, D.C.:

The first question if you have a dispute over the payment is, who are the parties? And the parties in this case are RosUkrEnergo, which has not been paid by UkrGazEnergo. This is the issue. So RosUkrEnergo is a private company; it’s owned by essentially two parties. One is Gazprombank, which is essentially privatized by its managers although it’s still attached to Gazprom. Gazprom or the state don’t own anything of RosUkrEnergo. And on the other side it’s two Ukrainian businessmen, essentially Dimitrov Firtash.

So I don’t understand how this can be a Ukrainian-Russian conflict; this is a conflict between very shady businessmen. And the strange thing is that the Russian state and Gazprom argue that they are party to it – they are not. And who has not paid? Well, it is UkrGazEnergo, which is half-owned by RosUkrEnergo and controlled by RosUkrEnergo, which has not paid RosUkrEnergo. Admittedly, Naftogaz Ukrainy, which is actually state-owned, owns a half of UkrGazEnergo. … Naftogaz Ukrainy has seemed to have been used – to be exploited and therefore the Ukrainian state has been losing a lot of money. Naftogaz Ukrainy has received no dividends from UkrGazEnergo as it should have. So this is the shady deal and there’s no reason for any state to accept this.

And where does the gas come from? Turkmenistan. So Gazprom has not produced the gas, it hasn’t sold the gas; it has only transported the gas. And this has been done through a contract with RosUkrEnergo, which is a well-known management company. So in order to understand this we have to understand that Gazprom is effectively an economic crime syndicate and the money’s not due to Gazprom; then you wonder why does Gazprom and indeed Prime Minister Putin insist that Ukraine, in a very vague sense, should pay? And then we have to go back to the Russian government objectives and let me start with the overall one. The fundamental thing is to take money from Gazprom, which is selling things at low prices to an intermediary. First we have a tariff and Eural Trans Gas [a predecessor to RosUkrEnergo] and then RosUkrEnergo – all of them have been inspired and controlled by people in the Kremlin.

And the second objective is to squeeze as much money as possible out of Ukrainian state – that is Naftogaz Ukrainy – for private gain. And this is primarily done through mobilization of UkrGazEnergo for industrial sales. And the third objective is to buy top Ukrainian politicians with slush funds partly for political purposes … and here we have the top region politicians, in particular former Minister of Energy Yuri Boyko as the top person who’s very much the one who controls it, but it’s also a few others. And also members of the presidential secretariat have been involved and there are persistent rumors of payoffs to other people. …

And of course, the main objective here is to destabilize Ukrainian politics, to show how bad democracy is in this part of the world so that it shouldn’t be tried in Russia. And I think particularly the timing now is that the Kremlin is very worried about social unrest in Russia after the New Year holidays. And then they want to whip up some patriotism. So in short, the Kremlin’s gain is corruption and political destabilization of Ukraine, and there’s no state economic objective in this – there’s not even a Gazprom objective. I just received a report on Gazprom today, which said wonderful profits but no cash flow -- this is how Gazprom functions.

So what should be done? Take out RosUkrEnergo from the domestic Ukrainian gas trade that has been agreed between Naftogaz Ukrainy and Gazprom and I think that’s an additional objective, that Gazprom officials now want to block that agreement that has already been reached; and secondly, take RosUkrEnergo out of – it should not be involved in the Ukrainian domestic gas trade, which Yulia Tymoshenko more or less has accomplished; and then, third, provide transparent accounts of gas deliveries to Ukraine, which has not been done. This is all controlled by Gazprom and RosUkrEnergo people and I think that Gazprom’s bluff should be called.

And the amazing thing here is that the EU countries do nothing to secure their energy supplies. Here they allow themselves to be vulnerable because of some shady organized-crime deals and of course this is an amazing tolerance of such activity. So I think that the timing – so I guess that Putin thinks that it’s good to whip up some patriotism against Ukraine. It has worked before, so why not try it again?

MARTHA OLCOTT, a senior associate with the Carnegie Russia and Eurasia Program:

I think that both sides have their positions staked out in terms of the debt. I mean, both sides recognize the existence of this debt, for all their disagreements on what the shape of Ukrainian gas trade should be and who should be the partners in it. This debt is on the table and that is what is stopping the agreement from moving forward, at least formally. And it seems to me there is still space between the minimally acceptable payment that Russia will take and the maximally acceptable payment that Ukraine will give and the pieces that Anders described are sort of the chess pieces that they’re all using to close that gap, because what they will agree to at the very end – the formal agreement – will only be part of the story.

[The] really important parts will be all the pieces that Anders alluded to that will still be hidden under the table. I suspect that at this point in time the commercial factors are impeding or shaping the negotiations more than the picture given in the Russian press. Gazprom does need this purchase agreement, they do need to keep gas flowing to Europe; they are locked in to high pricing in Central Asia for both Uzbek and Turkmen gas for the first half of 2009, and if there is any disruption in the flow of gas to Europe and any grounds for Europeans renegotiating their agreements with Russia or ill-will on the part of the Europeans, that’s going to damage the shape of Gazprom’s trade for the year even worse than would have been the case in 2006.

I do think, though, that the European position is different than it was in 2006. The Europeans have also warned the Ukrainians this time. There was a pretty strongly worded statement that came out a week or so ago saying that Ukraine had no right to disrupt – that they had to meet their obligations as well to allow gas to flow. I think, unlike 2006, the Europeans have tried unsuccessfully to spur these negotiations on and, again unlike 2006, they’ve really stored a great deal of gas – they are prepared for this crisis. So in a sense the theater doesn’t have to end on January 1st; it can continue for another week or two without there being serious disruption to European supply, unlike 2006.

DT: I do not spy any jingoism this time related to this event in Moscow. [I]t’s given prominence, but this is not something that comes at the top of the news agenda. It’s treated more as a money issue: They owe us money and in this time of crisis – we’re in an unfolding crisis, we’re in need of money. …

The Russian leadership is totally – and I agree with what Anders said – is totally immersed in this economic crisis, which is getting a social dimension, with a political dimension not far behind. It’s a very, very uncertain situation in Russia. It’s a situation in which people have pretty bad expectations as far as the New Year is concerned. And Gazprom is strapped for cash; they want every dollar they can lay their hands on and that gives the situation an aura of urgency, which, again, after having fought in the Caucasus, Russia does not need to have more showdowns in its neighborhood. I think that the message that the Russian leadership wants to send is slightly different these days; they’re toning down considerably on a number of issues, so this is not a crisis that they’re looking forward to.


AA: First, on the debt: The debts are not cleared and the debt issue came up immediately [when] Yuri Boyko was ousted as minister of energy [in 2007]. Previously it was presumed that there were no debts and then all of the sudden there were massive debts and the new government couldn’t get a handle on it because it was Boyko together with the head of RosUkrEnergo, who’s working together with Gazprom who controls it all together with a few people. So really the Ukrainian government does not have historical records of it; the Ukrainian gas sector is extremely murky for this reason. …

So this is considerable corruption in alliance with Gazprom. And Boyko has been there 2002 to 2004 and again 2006, 2007, so he has been there much of the time and made sure that there are no proper historic accounts. And then the whole time there has been an argument who owes what and RosUkrEnergo demands – Gazprom demands money from Naftogaz Ukrainy although there are two parties in between and this is not clarified and it was very good, as [Dmitri Trenin] said, they owe us money. And if you look up on Gazprom’s statement now they are not clarifying in any way exactly when who was owing what, and if you’re not more serious about it you can’t be taken seriously. So the debt issue is not clear, the Ukrainian – now president of Naftogaz Ukrainy, Oleg Dubina, who is a former deputy prime minister for energy and is on Tymoshenko’s side. He made a big interview in Zerkalo Nedeli this summer where he said that we don’t control the accounts on what is delivered and what is held in our reservoirs in Ukraine. So the accounts are not there.

Second – on is this commercial? Hardly. And I’ll give you the summaries as to why I don’t think that it’s commercial. This of course means that Gazprom sales will fall. Gazprom’s production fell by 10.6 percent in November over November last year and the reason is that in particular the Central Europeans don’t want to buy Gazprom gas at all if they … can avoid it. An additional reason here is that – Dmitri mentioned here that Russia has now lowered the price – and in that case it’s actually Gazprom – to Belarus. And at the same time and if I remember right they lowered from $200 dollars to something less.

And here Gazprom wants now to increase from $179.50 to $418. … Clearly this is not serious. At a time of falling prices, you don’t push it through with these massive price increases. So this price is then what they relate to as the European price; the European prices have never been applied in trade between Russia and Ukraine. Why should they when the – for a short period, for a quarter or so, will be very high and then they will fall sharply since the European prices are based on a formula which is connected to the oil prices with a certain lag of about a half a year. So this is just a way of saying we don’t want an agreement – that’s what we are really interested in.

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