Andriy PorokhnenkoBoth the Ukrainian prime minister and the country’s fuel and energy minister have visited Russia in the last week to hold talks with Russian leaders and officials of state-owned Gazprom. It was Viktor Yanukovych’s first foreign visit as the new premier and, naturally, the price at which Russia sells gas to Ukraine topped the agenda.
Though pro-Russian in many respects, Yanukovych returned after two days of meetings in Sochi with no firm guarantees that the price will not rise dramatically as Ukraine approaches another winter season. He told journalists Aug. 16 that he and Russian counterpart Mikhail Fradkov had reached an agreement to boost Ukraine’s natural gas reserves and “had roughly determined the price parameters for the rest of this year and next year.”
In addition, Fuel and Energy Minister Yuriy Boyko headed to Moscow for talks with Gazprom CEO Alexei Miller on Aug. 22, just days before the 15th anniversary of Ukrainian Independence.
Russian news agency ITAR-TASS reported that day that a source in the Ukrainian delegation had said that “the attention is focused on finalizing Ukraine’s gas balance, on measures to build up gas reserves, and on preparations for the autumn-winter season,” adding that “no epoch-making decisions at this meeting will be made, because the talks are purely technical.”
Nonetheless, Dragon Capital, a Kyiv-based investment bank, reported on Aug. 21 that Yanukovych had “expressed readiness to accept a 16 percent gas price hike to $110 per 1,000 cubic meters,” but added that that this estimate is preliminary because both sides cannot establish firm bids until negotiations with Turkmenistan are over.
In January 2006, the government of Yuriy Yekhanurov accepted a twofold increase in the price of gas imported from or through Russia after a bitter dispute with Gazprom, which prompted the company to shut off natural gas supplies for several days in the dead of winter.
A deal was eventually struck whereby Ukraine agreed to pay $95 per 1,000 cubic meters for a mixture of Russian, Uzbek and Turkmen gas, rather than the $230 initially proposed by Gazprom from the intermediary company RosUkrEnergo – a joint venture between Gazprom and two Ukrainian owners whose shady identity was finally disclosed earlier this year.
The question remains how high Gazprom will further raise the price paid by Ukraine for natural gas this winter, and what the Ukrainian government may have to give up to keep it low.
Industry experts have noted the fact that Yanukovych’s return from Moscow with no confirmed figures, and only estimates for the price Ukraine could pay for gas in 2007, is a sign that while he may be pro-Russian in terms of support for Russian language or Ukraine’s closer integration into the Single Economic Space (a Moscow sponsored economic bloc), he is not ready to cede control over Ukraine’s pipelines as a tradeoff for lower gas prices.
But Hryhoriy Nemyria, deputy head of the opposition Yulia Tymoshenko Bloc, cautioned that “We know the name of the game and it’s not about market prices per se, it’s about leverage that Russia still wants to preserve, namely energy, as an instrument of foreign policy, globally and especially in the near abroad.”
Nemyria has serious reservations as to whether Boyko will act in the interests of Ukrainian energy security, pointing to unanswered questions regarding the role played by Boyko (then former chairman of state oil and gas company Naftogaz Ukrayiny) in brokering the controversial Jan. 2006 gas deal that introduced RosUkrEnergo as the single intermediary supplier to Ukraine of gas coming from or through Russia. Nemyria also questioned Boyko’s instrumental role in reversing the flow of oil through the Odessa-Brody pipeline “from Brody to Odessa, a politically motivated decision strongly pressured by the Russian Federation.” The pipeline was originally intended to pump Caspian oil to Europe around Russia.
A report entitled “It’s a Gas” by the NGO Global Witness said Boyko had a role in RosUkrEnergo’s operations in 2004 whilst occupying the post of chair of Naftogaz Ukrayiny, which it called a “blatant conflict of interest.”
Energy Minister Boyko did publicly rule out on Aug. 21 the option of ceding any managerial control over Ukraine’s gas transportation system to Russia because the issue is “so politicized.”
Ilya Bourtman, Eurasia specialist at the Washington-based consultancy firm PFC Energy, said that although Ukraine has averted a crisis with Russia in the short-term there are larger underlying structural problems that indicate that “The period we are in now can best be described as a ceasefire, rather than a long-term cessation to the fighting.”
The January 2006 agreement fixed the price of natural gas at $95 dollars for the first six months of this year, and Russia did not increase the price on July 1.
Bourtman said that the fact that state-owned Naftogaz Ukrayiny is struggling to pay its debts (it only paid back $49.6 million of the $372 million it owes to RosUkrEnergo) “is of course a worrying signal.”
Indeed, even though Boyko has underscored that control over Ukraine’s pipelines is at the moment non-negotiable, the “pay or pump” solution proposed by Gazprom is one where Ukraine either cedes control over the pipelines or pays market prices for gas.
Analysts stress that this year we’ll see Russia move to secure a monopoly over the pipelines transporting gas to Western Europe.
Julia Nanay, Senior Director of the Russia and Caspian Service at PFC Energy, said that "Russia wants Ukraine to cede control of its natural gas pipelines and will raise Ukraine's gas price to a level this winter that will eventually achieve this." Her colleague Bourtman agreed, adding “it's clear that Russia is making a play at Ukraine's 38,000 km pipeline network. Expect Ukraine to fight tooth-and-nail to retain control.”
Nemyria concluded that “Gazprom has acquired a monopoly over gas, and what they are now lacking is a monopoly on the routes.”
“In the context of the January 2006 gas crisis, the Russians pressed Ukraine to cede control over its pipelines in exchange for lower natural gas prices… they said the Belarusians did this, and asked why Ukraine does not do the same. That was their offer,” he said, adding that nothing has changed since then. This search for what Nemyria referred to as a “double monopoly” could mean Ukrainian consumers pay more for natural gas this winter.
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