Transaction with crippling terms

In time of crisis, when most Ukrainians have to tighten their belts and cut down on their expenditures, Ukraine continues to live beyond its means. The Ukrainian cabinet appears to have found the money for having Russian gas pumped into Ukraine‘s underground storage facilities. Russia has agreed to give Ukraine a several-billion-dollar loan. However, the advance payment for Russian gas transit to Europe, which Ukraine plans to use for pumping gas into its storage facilities, means that the old gas transit rate of $1.7 per 100 km, which is not beneficial for Ukraine, will be preserved. “It’s best to get loans from European gas buyers; this would allow Ukraine to purpsue a more independent [gas] transit policy with regard to Moscow,” says Oleksandr Todiichuk, president of Q-Club.

After signing the gas supply and advance payment agreements with Russia in January 2009, Ukraine has been transiting Russian gas at a lower rate ($1.094), thus paying in advance for gas supplies. The new advance payments from Russia mean that Ukraine will retain lower, disadvantageous gas transit rates (in Europe they are, on average, three to four times higher) while having a mere 20 percent discount (compared to the European average) on Russia’s gas.

Ukraine’s lamentable budget situation allows Russia to impose its terms and conditions. By pulling the financial levers Moscow may try to derail the Brussels accords under which Ukraine is to receive $2.5-billion loan to upgrade its gas transportation system. If Ukraine continues receiving loans from Russia, the latter’s involvement in the GTS upgrading project will be practically fait accompli.

In other words, the previous disproportion between gas supply prices and transit prices will be retained. Ukraine will not be able to change the price of gas supplied by Russia. In contrast, Moscow, being an investor in the GTS upgrading project, will obtain certain rights with regard to the transit policy. “If our government could negotiate gas and transit prices comparable to the prices in the Czech Republic, Slovakia, and other countries, we wouldn’t be faced with the current pressing problem of finding money to have gas pumped into our storage facilities,” says Bohdan Sokolovsky, authorized representative of the president of Ukraine for energy safety.

Ukraine seems to have broken free of Russia’s information blockade in Brussels and proven to all of Europe that Russia was cutting off gas supplies to Europe, not to Ukraine. Moscow, however, does not seem to have abandoned its plans of political and information pressure on Kyiv. The stakes in this gas supplier–transit country–consumer game are too high. Russia has spent too much on its information war against Ukraine.

The Kremlin wants Europe to negotiate gas transit with Russia, not Ukraine, for this would mean mind-boggling profits for Russia. That’s why Moscow has no intention to discard its accusations against Ukraine, blaming it for wrecking gas supplies to Europe. Proof of this is Russian President Dmitry Medvedev’s recent statement at a press conference in Khabarovsk at which he said that Russia will not guarantee stable gas supplies to Europe, because Russia has no problems with its gas supplies. The Russian president believes that such guarantees must be provided by those who can’t pay for the gas supplied to them, clearly pointing to Ukraine.

According to Svitlana Holikova, director of Transenergoconsulting, Moscow expects Europe to start consuming 38 percent of gas supplied from Russia in the next couple of years. The question is which pipelines will used to transport this gas (and at what prices).

Ukraine has found itself in the center of a gas row between Europe and Russia. Moscow wants to strip Kyiv of its gas transit monopoly status or, at least, minimize it. Brussels wants to get rid of Moscow’s gas supplier monopoly status and Ukraine’s gas transit monopoly status. Once Europe started building a pipeline bypassing Russia (Nabucco Project), Russia promptly bought the blocking shareholding in an Eastern European company involved in the project. Moscow tries to retain the levers of economic influence with regard to alternative gas transportation projects (the Nabucco Project will carry Caspian gas to Austria, bypassing Ukraine and Russia).

Sokolovsky believes that Russia’s aggressively negative attitude to the Brussels accords is explained by Moscow’s undisguised desire to take possession of Ukraine’s GTS. Ukraine, of course, doesn’t want this to happen, which Kyiv makes absolutely clear to Moscow.