Saturday, 10 September 2011

Russia puts squeeze on Ukraine over gas

Ukrainian leaders hope to cut use of expensive imports.

Relations between Russia and Ukraine are strained yet again over the price of natural gas.

Ukraine is threatening to challenge the validity of its 2009 contract with Russia’s Gazprom, brokered then by Prime Minister Vladimir Putin and former Prime Minister Yulia Tymoshenko, who is now jailed and on trial for alleged abuse of office in relation to the deal.

The agreement, which Russia says is valid and fair, puts Ukraine in a tough financial position. The price of 1,000 cubic meters of gas could rise to as high as $450 this year – eating up 20 percent of the state budget for the pricey import that fuels Ukraine’s heavy industries, according to President Viktor Yanukovych, Tymoshenko bitter rival.

It’s simply too much for Ukraine’s economy to bear, Yanukovych added.

“Ukraine pays around $200 more [per 1,000 cubic meters] for gas than Germany does,” Yanukovych told Kommersant business daily in a Sept.6 interview.

The president said the nation is ready to appeal to either the international court in Stockholm or The Hague for revocation of the contract.

However, Ukraine’s leverage over the gas deal appeared to weaken as Moscow on Sept. 6 gleefully trumpeted the opening of the Nord Stream gas pipeline, which traverses the Baltic Sea bed connecting Russia and Germany. When the twin pipes are fully operational next year, the lines are expected to carry up to 55 billion cubic meters of gas.

The pipeline potentially threatens Ukraine’s privileged status as the transit nation for 80 percent of Russia’s natural gas supplies to Europe.

Russia supplies about a quarter of Europe’s natural gas needs. Ukraine makes billions of dollars in transit fees each year, transporting about 100 billion cubic meters of Russian gas to Europe.

The current transit fees are $2.89 per 1,000 cubic meters of gas per 100 kilometers.

Russia is also threatening to bypass Ukraine on its southern side by seeking to build the South Stream pipeline on the Black Sea bed.
Russia said that cheaper gas can only come to Ukraine if its smaller neighbor joins the Moscow-led customs union with Kazakhstan and Belarus.

The trade grouping is fundamentally at odds with Ukraine’s desire to clinch a free-trade agreement with the European Union before year’s end.

“It seems to me that we have made a clear offer: if you want a gas discount, you must join the integrated zone…or you must make a business offer that has benefits for Russia, for example, the sale of the gas transport grid,” said Russian President Dmitry Medvedev on Aug. 31.

Penta think tank head Volodymyr Fesenko said that “it is obvious that Russia is not ready for any kind of compromise yet.”

Ukraine says it won’t sell its transit pipelines to Russia, nor will it merge state energy monopoly Naftogaz with Russian behemoth Gazprom. In fact, Ukraine is on the verge of breaking up Naftogaz into separate companies involved in transport, trade and extraction.

The rhetoric is heating up. On Aug. 31, Russia’s Perviy Kanal (First Channel) accused Yanukovych of lobbying the interests of Ukrainian oligarchs, the billionaire owners of Ukraine’s energy-guzzling steel and chemical plants, at the expense of relations with Russia.

Yanukovych appears to be getting the same Kremlin-engineered PR savagery as Belarusian President Alexander Lukashenko did when he showed reluctance to join the customs union. Lukashenko quickly fell in line with Moscow’s aims, even losing control of his nation’s gas transit pipelines to Russia.

During the Sept. 6 launch of Nord Stream, Putin boasted that the Baltic corridor “will deprive Ukraine of its status of exclusive transporter of Russian gas to Europe.” However, analysts say that Nord Stream is not quite the threat to Ukraine that the Kremlin claims it is.

“Ukraine has always transported Russian gas to Central and Southern Europe, but never to Western and Northern EU countries, which would now get gas via Nord Stream.

Russia will not have any alternative to Ukrainian pipelines in foreseeable future,” said Yuriy Korolchuk, an expert at the Kyiv-based Institute of Energy Research.

Warning that it simply can’t afford expensive Russian gas anymore, Ukrainian officials announced days ago that they had asked Gazprom to accept a reduction of annual supplies starting next year from 40 to 27 billion cubic meters.

Kyiv also warned that if Russia does not reduce its prices to reasonable levels, it would in future years cut imports further to about 12 billion cubic meters, compensating with domestic production and imports of liquefied natural gas from Azerbaijan.

“During next 5 years we plan to consume three times less Russian gas and substitute it [partially] with Ukrainian coal,” Ukrainian Prime Minister Mykola Azarov said recently.

Russia’s three-week gas shutoff to Ukraine in January 2009 cut supplies to 18 European countries, raising concerns about the reliability of the Russia-Ukraine-Europe network.

The new conflict is coming at a pivotal time in the Ukraine-EU relationship. Ukraine is seeing an association agreement that includes a free-trade deal and a relaxation of stringent visa rules.

“There will be a lot of arm twisting in the EU about that. Under the Polish presidency Ukraine has strong chances to get associate agreement if Ukraine will be wise and will not fuel a new gas war and give Tymoshenko suspended sentence,” said Edward Lucas, editor at The Economist and author of The New Cold War book.

Political analyst Vadym Karasyov said the “Yanukovych administration faces a very tough situation. On the one side they have Russia which criticizes them and protects Tymoshenko.On the other hand there is Europe which also criticizes and protects Tymoshenko. But to spare Tymoshenko is to free an opponent, who can now get both Russian and European support.”

In the end, Ukraine can come out of the tough period in better shape – if it increases its domestic share of energy supply, attracts investment to upgrade its vast but inefficient transit pipelines and uses energy more efficiently.

“The real point is that Ukraine needs to reform its gas industry. Corruption around Naftogaz and mismanagement in Ukraine give Russia the opportunity to use this situation,” Lucas said.

Vitaliy Bala, director of the Situations Modeling Agency, said a new pragmatism is welcome.

“Myths about brotherhood [with Russia] are not working anymore. We became pragmatic in our attitude towards Russia,” Bala said. “The most important thing for Ukraine now is to be firm and demand to be treated like an equal.”

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