Ukraine, russia cut gas middlemen
14 March 2008
Deal Helps Resolve Dispute Over Debt
Responsibility; Tension Over Prices Remains
Published in The Wall Street Journal
By Marc Champion and Gregory L. White
Ukraine's Prime Minister Yulia Tymoshenko took a big step to eliminating shadowy middleman companies from the country's natural-gas trade with Russia, but further conflict between the neighbors seems likely as gas prices for next year remain unresolved.
Ukraine and Russia's state gas monopoly OAO Gazprom yesterday reached an agreement on gas deliveries for the rest of 2008, putting an end to a long dispute that had been watched nervously in Western Europe.
The deal would resolve the debt dispute that led Gazprom last week briefly to cut off half of Ukraine's gas imports, causing concern downstream in the European Union that its supplies could be hit. The EU gets more than 40% of its gas imports from Russia, with 80% of that gas crossing Ukraine.
"For us it is very important the agreement is not only signed but implemented," said the EU's high representative for foreign policy, Javier Solana, in a joint press conference with Ukrainian President Viktor Yushchenko in Brussels. "Security of energy supply is very important to us."
Gazprom said it agreed that its Ukrainian opposite, Naftogaz Ukrainy, will buy gas at the Russian border, instead of via two middleman joint ventures. It also agreed to take a smaller share than it currently has in Ukraine's domestic gas industry.
Published in The Wall Street Journal
By Marc Champion and Gregory L. White
Ukraine's Prime Minister Yulia Tymoshenko took a big step to eliminating shadowy middleman companies from the country's natural-gas trade with Russia, but further conflict between the neighbors seems likely as gas prices for next year remain unresolved.
Ukraine and Russia's state gas monopoly OAO Gazprom yesterday reached an agreement on gas deliveries for the rest of 2008, putting an end to a long dispute that had been watched nervously in Western Europe.
The deal would resolve the debt dispute that led Gazprom last week briefly to cut off half of Ukraine's gas imports, causing concern downstream in the European Union that its supplies could be hit. The EU gets more than 40% of its gas imports from Russia, with 80% of that gas crossing Ukraine.
"For us it is very important the agreement is not only signed but implemented," said the EU's high representative for foreign policy, Javier Solana, in a joint press conference with Ukrainian President Viktor Yushchenko in Brussels. "Security of energy supply is very important to us."
Gazprom said it agreed that its Ukrainian opposite, Naftogaz Ukrainy, will buy gas at the Russian border, instead of via two middleman joint ventures. It also agreed to take a smaller share than it currently has in Ukraine's domestic gas industry.
In exchange, Naftogaz agreed to pay off debts for
Russian gas delivered in January and February at a
premium price -- $315 per thousand cubic meters of
gas -- rather than the $179.50 per thousand cubic
meters it usually pays.
Ms. Tymoshenko blocked a previous deal to resolve the debt issue that Mr. Yushchenko approved last month with Russia's President Vladimir Putin. That deal allowed for UkrGazEnergo and the other middleman company, RosUkrEnergo, to be replaced by new intermediaries. It also gave Gazprom a bigger share in Ukraine's domestic gas market. Ms. Tymoshenko's insistence on eliminating all intermediaries forced last week's renewed showdown.
RosUkrEnergo, or RUE, is 50% owned by Gazprom and 50% by a group of Ukrainian businessmen with alleged connections to Semyon Mogilevich, a Moscow-based businessman arrested on tax-fraud charges in January and long wanted by the U.S. Federal Bureau of Investigation as an alleged organized-crime boss. RUE's Ukrainian shareholders deny the connection. RUE sells Ukraine as much as 55 billion cubic meters of gas annually, more than the total gas consumption of France.
"We consider the issue of removing RosUkrEnergo and UkrGazEnergo to be one of national security," said Deputy Prime Minister Hrihoriy Nemyria, a close adviser to Ms. Tymoshenko, in an interview before yesterday's announcement.
Naftogaz is politically important in Ukraine because it is the source of a huge chunk of tax revenue. Ms. Tymoshenko is relying on that money for popular social programs she promised during her election campaign last year.
"It's a cash cow for the government," said Yuri Boiko, who was Ukraine's energy minister until last year and now sits on the parliament's energy committee. Mr. Boiko is blamed by Ms. Tymoshenko for masterminding the complex intermediary structure in Ukraine's gas trade that caused Naftogaz's troubles.
Officials for Gazprom and Naftogaz said they expected yesterday's deal signals the retreat of RUE, the company that in 2006 was given a monopoly right to sell Central Asian and Russian gas to Ukraine. But exactly who Naftogaz will buy gas from in the future was left to negotiation.
"We will continue to operate," said an RUE official yesterday. "If you look at the agreement that was signed, it doesn't say anywhere that it will be done without RosUkrEnergo." A spokesman for UkrGazEnergo said it was too early to comment on his company's fate.
Within Ukraine, Ms. Tymoshenko is seen as having stood up to Moscow. "She said she'd eliminate intermediaries, and bang they seem to be gone -- plus she kept the same gas price [for this year]," said Ildar Gazizullin, senior economist at the International Center for Policy Studies in Kiev.
All sides, however, agree more troubles are likely later this year when Ukraine and Russia negotiate a new gas price for 2009. Central Asian countries, who supply nearly all of the gas imports Ukraine buys from RUE, have in the past sold their gas at a significant discount to the prices Russia was charging in Europe. That has been changing, however. By next year the price difference is expected to all but disappear.
Mr. Yushchenko cautiously welcomed yesterday's deal, but said he was concerned the $315 price paid for the January and February gas could set a precedent for future price negotiations. Mr. Yushchenko has pushed for a less confrontational policy with Moscow, arguing that what matters is to get the best gas price for Ukraine.
Ms. Tymoshenko has made it clear she is willing to play hardball to get the price she wants. She has threatened to triple the transit price Russia pays to send gas through Ukrainian pipelines to Europe, and to raise the rental price on Russia's lease for the Crimean port of Sevastopol, where Russia keeps its Black Sea fleet. Gazprom also pays below market rates for gas storage.
Ms. Tymoshenko blocked a previous deal to resolve the debt issue that Mr. Yushchenko approved last month with Russia's President Vladimir Putin. That deal allowed for UkrGazEnergo and the other middleman company, RosUkrEnergo, to be replaced by new intermediaries. It also gave Gazprom a bigger share in Ukraine's domestic gas market. Ms. Tymoshenko's insistence on eliminating all intermediaries forced last week's renewed showdown.
RosUkrEnergo, or RUE, is 50% owned by Gazprom and 50% by a group of Ukrainian businessmen with alleged connections to Semyon Mogilevich, a Moscow-based businessman arrested on tax-fraud charges in January and long wanted by the U.S. Federal Bureau of Investigation as an alleged organized-crime boss. RUE's Ukrainian shareholders deny the connection. RUE sells Ukraine as much as 55 billion cubic meters of gas annually, more than the total gas consumption of France.
"We consider the issue of removing RosUkrEnergo and UkrGazEnergo to be one of national security," said Deputy Prime Minister Hrihoriy Nemyria, a close adviser to Ms. Tymoshenko, in an interview before yesterday's announcement.
Naftogaz is politically important in Ukraine because it is the source of a huge chunk of tax revenue. Ms. Tymoshenko is relying on that money for popular social programs she promised during her election campaign last year.
"It's a cash cow for the government," said Yuri Boiko, who was Ukraine's energy minister until last year and now sits on the parliament's energy committee. Mr. Boiko is blamed by Ms. Tymoshenko for masterminding the complex intermediary structure in Ukraine's gas trade that caused Naftogaz's troubles.
Officials for Gazprom and Naftogaz said they expected yesterday's deal signals the retreat of RUE, the company that in 2006 was given a monopoly right to sell Central Asian and Russian gas to Ukraine. But exactly who Naftogaz will buy gas from in the future was left to negotiation.
"We will continue to operate," said an RUE official yesterday. "If you look at the agreement that was signed, it doesn't say anywhere that it will be done without RosUkrEnergo." A spokesman for UkrGazEnergo said it was too early to comment on his company's fate.
Within Ukraine, Ms. Tymoshenko is seen as having stood up to Moscow. "She said she'd eliminate intermediaries, and bang they seem to be gone -- plus she kept the same gas price [for this year]," said Ildar Gazizullin, senior economist at the International Center for Policy Studies in Kiev.
All sides, however, agree more troubles are likely later this year when Ukraine and Russia negotiate a new gas price for 2009. Central Asian countries, who supply nearly all of the gas imports Ukraine buys from RUE, have in the past sold their gas at a significant discount to the prices Russia was charging in Europe. That has been changing, however. By next year the price difference is expected to all but disappear.
Mr. Yushchenko cautiously welcomed yesterday's deal, but said he was concerned the $315 price paid for the January and February gas could set a precedent for future price negotiations. Mr. Yushchenko has pushed for a less confrontational policy with Moscow, arguing that what matters is to get the best gas price for Ukraine.
Ms. Tymoshenko has made it clear she is willing to play hardball to get the price she wants. She has threatened to triple the transit price Russia pays to send gas through Ukrainian pipelines to Europe, and to raise the rental price on Russia's lease for the Crimean port of Sevastopol, where Russia keeps its Black Sea fleet. Gazprom also pays below market rates for gas storage.