Why not adjust the formula?

After raising the question of global energy security at the G8 summit, Russia did its best to dampen accusations of its tough stance toward Ukraine. Noteworthy in this connection was President Vladimir Putin’s statement that the market sets prices for Russian gas, not directives.

“I want it to be clear that those days are finally gone when we used to fix prices for our partners by means of directives. Now all this is determined by the market, and I cannot imagine a more transparent mechanism,” said Putin at a briefing in Strelna (St. Petersburg). “Prices for natural gas, especially Russian gas, are not set by way of injunctions in the Kremlin. It is the market that sets them,” Putin stressed and again “disclosed” the following formula: “Last year’s average market price plus a small coefficient, and the average price of gasoline plus a small coefficient, and you have the price of fuel oil. “Both gasoline and fuel oil are tied to oil prices on the world markets and do not depend on us,” the Russian president emphasized.

But is he going to deny that gas prices also depend on the behavior of Russia’s partners? The more pliable they are on the question of gas transit across their territory, the better chances they stand of bending the formula.

As political scientists Stanislav Belkovsky and Vladimir Golyshev write in their book Vladimir Putin’s Business, Russia’s Gazprom has drawn up its 2006 financial plan on the basis of the price for gas being supplied to Ukraine as payment for transit of Russian gas to Western Europe, i.e., 145 dollars per 1,000 cubic meters. This means that in reality Russia will soon ease conditions for Ukraine and agree to the final price $140 to 155 per 1,000 cu m as well as to raising its payments to Ukraine for transit to $1.75 per 1,000 cu m per 100 kilometers.

What are the conditions of this favor? In Belkovsky’s view, the Kremlin will need: a) a request from “Ukrainian friends,” which can be both Viktor Yanukovych and Yulia Tymoshenko (experts say there are “confidential agreements” with them), and b) at least a demonstration of Ukraine’s intention to discuss in the medium term the creation of an international consortium for managing Ukraine’s gas transportation system.

Belkovsky seemed to be clairvoyant. Ukraine was recently promised that gas prices will remain unchanged not only in the third-quarter but the fourth. Was this just a sacrifice in the interests of a successful St. Petersburg summit? This cannot be ruled out. But more important for Russia was the subject of the gas transportation consortium, which was raised with the knowledge and consent of the Ukrainian leadership. Oleksandr Bolkisiev, the new chief of Naftohaz Ukrainy, revealed this to journalists a couple of weeks ago-reluctantly but in great detail.

Joy in this connection was apparent in the post-summit speeches of Viktor Khristenko, Russia’s Minister for Industry and Energy. As it turns out, he even hopes for speedy progress of the consortium talks. “We must draw up legislative norms that will govern this consortium,” he says, foisting his viewpoint on Ukraine. (Or has he received some assurances already?) “Now that we are going to know who our negotiating partners are, we will better understand their viewpoint,” Khristenko said, perhaps meaning the formation of a new Ukrainian government.

“It is important for us, as a supplier, to know the condition and capabilities of Ukraine’s gas transportation system in order to ensure uninterrupted supplies of gas to European consumers,” said the Russian industry and energy minister.

But Khristenko seems to have forgotten that in today’s world similar demands are being made of Russia, too. “We will ratify the Energy Charter agreement with pleasure, but only after the successful termination of talks on the transit protocol,” Khristenko promised, adding that the nature of fuel supply contracts, usually concluded on a long-term basis, differs from contracts for fuel transit, which is now “encouraging the development of short-term relations in the transit sphere.”

Meanwhile, on the eve of the St. Petersburg summit Ukraine sent a clear message to him that it rejects the use of energy levers as a tool of political pressure and reiterated its reliability as a state engaged in energy transit. Obviously, Ukraine conveyed a well-considered message to the G8. The only question is whether it was read properly.