Another gas war?

Ukraine’s stated desire to reorganize NAK Naftohaz Ukrainy caused another round of verbal attacks between Russia and Ukraine in the gas sector. It all started with President Viktor Yanukovych instructing his Cabinet on Friday to work out and submit to the board of the Economic Reforms Council a NAK reform action program before October 1.

Several hours later Prime Minister Mykola Azarov explained that the restructuring of this oil-and-gas monopolist would cause transfer to a new format of relations with Gazprom: “Naftohaz will cease to exist as a business entity, there will be the liquidation period, and after going through the required formalities, two new companies will appear on the market.” In view of the emergence of new business entities, he added, all contracts between the two monopolists would be revised. Azarov believes that restructuring is not the only reason behind this revision. The 2009 contract contradicts Ukraine and Russia’s intergovernmental accords, whereas the intergovernmental agreements ratified in the gas sphere supersede the economic agreement signed by Naftohaz and Gazprom. The head of Ukrainian government formulated his arguments in a letter addressed to his Russian counterpart.

Russia responded instantly. Gazprom CEO Aleksei Miller was the first. While greeting Ukraine’s company-restructuring and contract-revising intentions, he stressed this could be done only after a merger of the Russian and Ukrainian monopolists.

Experts waited for further statements after the Dushanbe CIS summit. But then the Russian president’s press secretary, Natalia Timakova, informed that there was no separate working meeting between the Russian and Ukrainian heads of state, and that both merely “exchanged ideas during the summit.” Nor was there any unequivocal comment from Dmitry Medvedev, who, several days earlier, had described Ukraine’s actions as abstantatious and suggested that gas prices be lowered in exchange for Ukraine’s Customs Union membership — or Ukraine selling its gas transportation system. Despite the Russian president’s silence in Dushanbe, Ukraine received a comment on its policy from

Russia’s number-one spokeswoman, as Timkova declared: “We cannot regard any such reorganizational manipulations as acceptable as a justification of a unilateral cancellation of the existing agreement. Any domestic political decisions must not affect Ukraine’s implementation of any intergovernmental commitments. Ukraine would otherwise face grave domestic economic consequences.”

Viktor Yanukovych, while in Dushanbe, didn’t seem to like these statements. He publicly spoke in support of his administration’s efforts, saying Ukraine would not tolerate any pressure while negotiating a revision of Russian gas prices: “First, they drew us into a corner and then started dictating their conditions. Today, this humiliates me personally, as well as my country. I will not let this happen.” After lashing out at Moscow, he said that, although the Kremlin would agree to lower gas prices only after Naftohaz and Gazprom mer-ger, Ukraine would continue a dialog with its strategic partner. Yanukovych believes bringing the gas issue to the courts is the last option. Yanukovych ended saying the gas issue would “resolved at the highest level.”

Will the restructuring of NAK help revise the gas contracts? Are there other options? The Day asked its experts for comment.

Yurii Korolchuk, expert with the Institute for Energy Studies, says Ukraine was supposed to have gas market straightened out (and restructure NAK) by January 1, 2012. He believes Ukraine needs this restructuring, considering that NAK has long been a heavy burden on the central budget. His estimates show that the company’s subsidizing of personal consumer prices will account for 15-20 billion hryvnias’ worth of the company’s budget by the end of 2011, along with two billion dollars’ debt (to the banks in the West that were restructured in 2009). He also believes that a sharp change to the terms and conditions is proof of “a sequel to the undeclared war between Ukraine’s Naftohaz and Russia’s Gazprom, in the context of gas price talks… restructuring is a signal for the Russians that Ukraine is prepared to have a dialog in regard to certain matters.” Korolchuk points to the option of making Ukrtransgaz a separate business entity that will shortly become a joint-stock company. Also, the oil/gas pipeline may shortly be run by Ukraine, the EU, and Russia, although Russia wants to have a 50 percent interest — and more. Therefore, the outcome of these talks remains a question.

Says Roman Marchenko, senior partner, Illiashev&Partners: “Any restructuring of NAK Naftohaz Ukrainy isn’t likely to affect the gas contract with Gazprom. A bilateral contract can’t be terminated unilaterally. In other words, no actions on the part of either of contracting parties can warrant its abrogation… No clauses in this contract will have legal effect without the knowledge and consent of Gazprom.”

Marchenko sees three legal options: “First, bringing the case to a competent court, as laid down in the contract (e.g., Stockholm Arbitration). Second, amicable settlement. Third, bankruptcy or

liquidation of a contracting party — in this case, NAK Naftohaz Ukrainy — and without the right to legal succession. Under this particular contract, Naftohaz Ukrainy is the sole party to this contract, with all attendant rights and responsibilities. In other words, no other legal entities, including the Ukrainian government, are involved and cannot be held legally responsible for any of this company’s liabilities (save for the political ones, of course)… I believe making a political deal would be best under the circumstances. This gas issue shouldn’t be exposed to arbitration, unless NAK lawyers can think of a way of winning this case, because losing it would be the worst option, for then we would have to think of other harder options of achieving a compromise.”

Korolchuk says the best option is bringing the case to the courts: “Ukraine should have done this six months back, so this dispute could be settled calmly, reasonably, without unnecessary emotions, the way this is practiced everywhere,” otherwise Ukraine risks lacking gas supplies during the heating season.