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Russian authorities think that politics of Ukrainian President Victor Yushenko (right) does not deserve any more discounted gas supply.
Photo: Dmitry Azarov
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Dec. 16, 2005
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Dear Price for Attitude
// Unfriendly regimes were fined for disloyalty
Yesterday, Ukraine proposed its own way of settling the natural gas crises with Russia. Kiev offered Gasprom control over half of the Ukrainian gas market if Moscow would agree to raise prices gradually and not at once. Gasprom rejected this offer. This is another proof that Russia does not intend to refuse from its new external policy principle. Already in the summer Moscow announced a decision to fully reconsider its attitude towards CIS countries by denying unfriendly regimes discount gas prices. It is not the Russian Foreign Ministry that stands behind the realization of the Russian external policy in post-Soviet space it is Gasprom.
Victims of the Pipe

Yesterday, Ivan Plachkov, Minister of Fuel and Energy of Ukraine, offered Gasprom control over half the republics internal market in exchange for gradual price increase up to 2010. According to him, he and the Minister of Industry and Energy Victor Khristenko reached preliminary agreement to create next year a joint-venture for selling gas in the internal Ukrainian market. Right now, all necessary documents are already in Gasprom.

Gasprom responded with a refusal, maintaining the position, which it expressed a day ago: from Jan. 1, 2006, natural gas for Ukraine will cost $220-$230 for 1,000 cubic meters. The profit from these two projects is not comparable by any scale, Sergey Kupriyanov, representative of Gasprom, told Kommersant.

Also yesterday, Kiev announced about what type of measures intends to respond with against Moscow. According to the Minister of Fuel and Energy Ivan Plachkov, if the price for gas will increase, Ukraine will raise the cost of the transit of the gas to the point that the volume of Russian gas, which is coming as a payment for transit through Ukraine will stay the same.

In the mean time, the average European tariff is $2.6. Even if Ukraine will increase the charge for transit of the gas to this level, it would not be able to cover the expense for buying gas for Gasproms asking price. To compensate the price growth of at least $160 per 1,000 cubic meters, Ukraine would have to charge $3.48 for pumping through 1,000 cubic meters-- or even $5.01 if the price would be $230.

Yesterday, Plachkov also announced Ukraine will argue the price increase in court, because Russia and Ukraine signed the protocol about the gas supply up to 2009. Finally, Anatoly Matvienko, Deputy Chief of Ukrainian Administration, said that in case of reconsideration of the prices for gas prices for Ukraine, Kiev will reconsider the cost of leasing a naval base to the Russian Black Sea Fleet in Sevastopol.

President of Ukraine Victor Yushenko said several times that the gas relationship between Moscow and Kiev is strictly a political question and he can resolve it after a telephone conversation with Russian President Vladimir Putin. However, he was not able to do so. Many Ukrainian politicians agreed yesterday that Gasproms demand is political one this way Moscow is preparing for coming parliamentary elections. No doubts, it is connected with elections, Levko Lukyanenko, Radas deputy from Yulia Timoshenko bloc, told Kommersant yesterday. It is designed to make Yushenkos government make concessions to Moscow by agreeing with the number $230. That will lead to an increase in cost of manufacturing in Ukraine, budget deficit, and inflation. Then, Russia would say: Your authorities cannot govern. You need other people. We have good candidate for you Yanukovich. People, support him, and then, Russia will decrease price for the gas. This way Russia is trying to bring Ukraine under its control.

Ukraine is not the only object for the gas attack. The second target of new Russian external gas policy is Georgia, which would have to pay $110 for 1,000 cubic meters instead of the previous $63. The price increase for gas is nothing more than politics, Kaha Bendukidze, State Minister of Economics, told Kommersants yesterday. What so important has happened with Russian economy that starting from Jan.1 Baltic countries, Georgia, Ukraine and Moldavia would have to face higher gas prices? If there was such economic necessity before, that means that earlier the politics were preventing the price increase. And now, everything is in reverse. According to Bendukidze, Tbilisi will be trying to decrease dependency from Russian gas and could partially switch to coal. Georgia also has gas deposits. In three years they would be able to produce gas. We also have an opportunity to receive gas from Central Asia. In October-November were planning to launch gas pipeline, which will go through Georgian territory to Turkey, the minister told Kommersant. I dont see obvious advantages for Russia in increasing gas prices. But there are some minuses. First of all, is it decreases gas sales in the long term.

Moldavia should also suffer from the higher prices. Gasprom stated several times in the last half a year that Chisinau would have to pay an average European price for the gas. Moldavian authorities, as well as Ukrainian ones, were trying to persuade Moscow not increase gas prices at once but rather to do so gradually. However, Gasprom did not accept this plan. We are ready to freeze without Russian gas, but we will not give up our sovereignty, Moldavian President Vladimir Voronin said several months ago. Last week, Romanian President Trojan Besesku pointed out that his country will not leave Moldavia on its own and will help it through the winter if Moscow will drastically raise gas prices.

Yesterday in Moscow, there were negotiations between the Moldavian government delegation and Gasprom leadership, which lasted into the night. So far, we didnt reach any final agreements, Valery Lazer, Moldavian Economic Minister, told Kommersant.

Gas Ties

The announcement that external Russian policy is changing priorities was sounded this summer. Then, before the historical summit of CIS in Kazan, Sergey Lavrov, Russian Foreign Minister, suddenly announced that the countries of the Confederation should start to build their relationships on the basis of the world practice. And high ranking Kremlin representative stated to news agency RIA Novosti that Moscow is drastically changing its policy towards CIS countries it is not happy with a situation where it is practically subsidizing economies of several countries by supplying energy resources for unprofitable prices, and in the same time the rulers of these countries getting a salary from Americans.

Right after the summit the Kremlin policy totally changed. From that moment, all the conversations about some cultural, political and historical ties were left behind. The CIS, as it was designed, stopped to exist, because Russia split the members on ours and not ours. It announced simultaneous war to three of its partners in Confederation. Kremlin increased prices for natural gas for Georgia and Moldavia by two times, and for Ukraine first by three, and then by four times. Regimes loyal to Moscow learned that they will avoid total price increases for Russian gas.

The most loyal allies in post-Soviet space Vladimir Putin was receiving one after another in his dacha in Sochi within one week. Yesterday, the presidential residence Bocharov Creek was visited by another ally -- President of Byelorussia Alexander Lukashenko. Both leaders met with one goal to reaffirm agreements for supplies of Russian energy sources.

During the summit in Kazan, Putin and Lukashenko agreed that in 2006 the gas supply for Byelorussia will not be more expensive. It will still cost $46.68 per 1,000 cubic meters. Moreover, Moscow already decided to give Minsk a credit for $146 million. Such care from the Kremlin side can be explained by presidential elections coming next year in Byelorussia. A year after the orange revolution in Ukraine the Kremlin is afraid that something similar might happen in Minsk. For that reason, despite all the problems with Lukashenko, Russian authorities are ready to provide him with any support. Yesterday Putin assured his counterpart: We talked about possibilities to support our Byelorussian partners and to find a balanced solution for energy sources. The Russian government prepared all necessary documents, and I hope, they will be approved before the end of this year. Byelorussian president left happy with the meeting. He thanked Putin for understanding and said that the relations of two allied states never had tensions on such issues.

Today, Vladimir Putin will receive in Sochi another president of an allied country Armenia. The meeting with Robert Kocharyan, just like yesterdays conversation with Lukashenko, will be about natural gas. Besides the president, the meeting will be also attended by Anatoly Chubais, Chairman of United Energy Systems of Russia, and Alexei Miller, Chairman of Gasprom. The sides will discuss conditions of supply of Russian gas and prices for energy sources. Moscow had developed personal package of discount payments for electricity and gas for Yerevan - just like for Minsk. Armenia deserved discounts because it never complained about a Russian military base in Gyumri. Beside, Robert Kocharyan gave agreement to relocate another Russian military base from Georgia to Armenia. According to Kommersants information, the presidents will discuss how to secure supplies of energy sources from Russia to Armenia if Georgia, which unhappy with price increases, would try to block them.

Gas in Exchange for Volunteering

Current Russian total gas attack on all fronts means that not only the policy has changed the organs responsible for execution are also being changed. Until recently, the scheme of relationship between Russia and CIS was developed in presidential administration. The Foreign Ministry was the Kremlin tool for that purpose. Now, it looks like Gasprom is replacing the ministry. Most likely, the Kremlin came to a conclusion that gas is the only leverage for influencing the neighbors. And it is logical that Gasprom managers and not the Foreign Ministry officials are responsible for use of this leverage.

Moscow already was able to master the use of this playing card. During the recent session in the Foreign Ministry in Moscow of Organization of Treaty of Collective Security (OTCS), the Russian side announced that it was for this organization to become effective military-political bloc similar to NATO. The rest of the countries did not show much enthusiasm. Moscow pulled out the gas trump card and promised to the most loyal some gas discounts. That made Byelorussia and Armenia look at OTCS with more enthusiasm. Current visits of Lukashenko and Kocharyan prove that the gas men accomplished their task successfully.

What Is Gas Transportation System of Ukraine

The total length of Ukrainian gas pipelines is 283.2 thousands kilometers. From them 246.1 thousand kilometers are transit pipelines, including 14,000 kilometers of large diameter pipelines (1020-1420mm). The system unites 72 compression stations (122 compressor rooms) and 13 underground storages with largest after Russia active volume of gas more that 32 billion cubic meters and 21.3 percent from total European volume. The network of underground storage includes four complexes: West Ukrainian, Kiev, Donetsk, and South Ukrainian.

Ukrainian gas pipelines are connected with transit networks of all neighboring states: Russia, Byelorussia, Moldavia, Rumania, Poland, Hungary, and Slovakia. Moreover, a gas from Turkmenia and Uzbekistan goes through Russia to Ukraine. The passing capacity of the system on the entrance is 290 billion cubic meters a year, and on exit 175 billion. The systems transports through Russian gas to European countries and also in southern regions of Russia. In 2004 Europe got 120 billion cubic meters of Russian gas through Ukrainian pipelines. The first attempt to create a Russian-Ukrainian joint venture for exploitation of transit gas pipelines was made in 1995.The agreement was signed about equal participation of the sides in gas transportation system (GTS) of Ukraine, but Gasprom was not allowed access to Ukrainian networks and gas storages. On June 9, 2002 Gasprom and Naftogas of Ukraine signed an agreement about creation of International consortium for development and management of GTS of Ukraine. There were two ways of doing the project: to give the GTS into the concession or to the ownership of the consortium. However, both sides could not agree about the shares in consortium (Ukraine wanted to keep the control share), and Supreme Rada did not adopt necessary amendments to the law about concessions. In the fall of 2003 both sides, without waiting for Kievs decision about the form of the concessions, started to develop a project of new gas pipeline Novopskov Uzhgorod. Currently, this project is canceled, because Gasprom was interested in it only as the first stage of the project for further acquisition of whole GTS by the consortium.

Statistics of Ukrainian Gas Market

Internal gas consumption of the gas in Ukraine is 75 billion cubic meters a year. The gas balance of the country for 2005, according to Naftogas of Ukraine, is made from 20.1 billion cubic meters of its own production, more than 36 billion cubic meters from the supply from Central Asia (mostly Turkmenia) and about 23 billion cubic meters supplied by Gasprom. The overall cost of import in 2004 was about $3.6 billion. Ukraine exports 5 billion cubic meters of gas.

In countrys energy balance gas occupies 41 percent. From total volume of consumption industrial objects take 60 percent. The rest 40 percent is consumed by population and residential enterprises. There are 85,000 enterprises and organizations in the country that use natural gas. Also 16.1 million apartments are heated by gas as well.

The largest portion of the internal gas market is controlled by Naftogas of Ukraine. Private gas traders (about 40 companies and 10 of them are large-sized) occupy 11-12 percent. The internal price for the gas in Ukraine is one of the lowest in Europe. For population it is $36.6 for 1,000 of cubic meters, for state budget organizations -- $45.7, for residential enterprises -- $41.6, for industrial companies -- $71.4. The gas prices for the population was not changed since 1999 and subsidized for cost of tariff increase for the industrial users.

Mikhail Zygar, Vladimir Soloviev, Nagiz Asadova, Natalia Grib

All the Article in Russian as of Dec. 16, 2005

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