Ukrainian President Viktor Yushchenko (left) reached a new natural gas agreement with Russian President Vladimir Putin on Feb. 12 in his second visit to Moscow during his presidency. AP Russian and Ukrainian leaders resolved the latest natural gas row on Feb. 12, agreeing to keep prices stable, restructure relations and eliminate $1.5 billion in debt.

gy monopolies and eliminate about $1.5 billion in debt Ukraine owes to Gazprom, Russia’s state-owned supplier.

RosUkrEnergo, a controversial middleman highly criticized by Western governments, will be eventually eliminated to allow for Gazprom and Naftogaz to deal directly with each other through new structures owned on a 50-50 basis.

“A new structure of gas supply importation to Ukraine is being developed,” said Aleksey Miller, the chief executive officer of Gazprom. “The scheme foresees the creation of a new sale company.”

A final agreement detailing the restructured gas supply scheme will reportedly be signed by the end of the week.

What is certain is the new rearrangement boots two Ukrainian businessmen, notably billionaire Dmytro Firtash, out of the Russian-Ukrainian-Central Asian gas trade.

Gazprom will increase its market share in Ukraine to 50 percent from 25 percent through a new distribution intermediary, said Kostiantyn Borodin of the Center for Energy Research in Kyiv. Naftogaz secured 50 percent in another intermediary’s profit share, which experts said may allow the company to re-export to European customers.

In his second trip to Moscow since becoming president, Viktor Yushchenko said Ukraine will pay the first installment of $1 billion immediately, representing debt accumulated in the fourth quarter of 2007.

The remaining outstanding debt of $500 million, representing this January’s deliveries, will be paid by the end of the month. Ukraine will pay $179 per 1,000 thousand cubic meters in 2008, unchanged from previous agreements, the presidents agreed.

“Gazprom is satisfied with proposals made by the Ukrainian side,” said Russian President Vladimir Putin.

Such satisfaction is well justified, Borodin said, as Gazprom will be able to expand its influence on Ukraine’s domestic market and infrastructure.

Russia and Ukraine were not be able to eliminate RosUkrEnergo immediately and it will likely remain a player through the end of 2008, he said.

It will be difficult, if not impossible, to transfer existing Naftogaz debt to the new companies, Borodin said.

As a result, final agreements between RosUkrEnergo and Naftogaz will be necessary, said Naftogaz Chief Executive Officer Oleh Dubyna, but for an unknown duration to be decided in talks between Naftogaz and Gazprom.

Gazprom didn’t object to removing RosUkrEnergo and UkrGazEnergo, a distribution intermediary, because of the opportunity to expand into Ukraine’s domestic market and a desire to improve its international standing, experts said.

“Gazprom will likely exchange its non-transparent schemes, a target of Western criticism, for more comprehensive forms of agreements, like those with Western European countries,” said Ildar Gazizullin, senior economist at the International Centre for Policy Studies (ICPS), a Kyiv-based think tank.

Eliminating RosUkrEnergo was a priority for Prime Minister Yulia Tymoshenko, a consistent critic of the intermediary who wanted to clean up Ukraine’s gas trade corruption.

Yushchenko in turn argued that the arrangement provided Ukraine with the cheapest gas in Europe. For comparison, Germany pays more than $350 per 1000 cubic meters – $120 more than Ukraine.

Both Yushchenko and Tymoshenko wanted to resolve the gas impasse in their own way, experts said. A visit to Moscow was perceived as the best chance to settle the dispute and gain political dividends in the country.

“Yushchenko needed to go there,” said Vadym Karasiov, director of the Kyiv-based Institute of Global Strategy. “He wanted to be the one who would bring the good news.”

Upon hearing about the agreement, Tymoshenko said the bilateral decision to eliminate intermediaries was a large victory for the democratic team, referring to the coalition government.

Ukraine’s complicated gas relations with Russian Gazprom, which supplies 71 percent of country’s gas, escalated into international prominence in January 2006 when Gazprom turned off all gas deliveries through Ukraine for three consecutive days.

As a result, gas volumes fell in the European Union, causing serious concern throughout the region. 80 percent of Europe’s Russian supplied gas passes through Ukraine.

The gas accord was met with a sigh of relief in Europe’s capitals.

“The commission expects this solution will establish the basis for a stable and solid bilateral energy relationship,” EU Energy Commissioner Andris Piebalgs said in a statement.

The prospect of a repeat of the January 2006 gas shutdown sent shivers down Europe’s collective spine and prompted many European leaders to caution the two presidents against acting precipitously.