Ukraine gas peace threatens to unravel

Ukraine gas peace threatens to unravel

By Roman Olearchyk in Kiev and Neil Buckley in London

Just months ago, peace seemed to have broken out in the long gas wars between Ukraine and Russia. Yet as autumn turns chillier, the same volatile mix of factors that has sparked two shut-offs of Russian gas to Ukraine since 2006 is creating at least the chance of a new winter stand-off.

The unravelling of the gas peace is a surprise. While warmer relations had been expected, the speed with which Russia-leaning president Viktor Yanukovich tilted Ukraine back towards Moscow after his February election startled western capitals.

Amid a series of economic rapprochements, Mr Yanukovich in April secured a 30 per cent cut in gas prices. In return, he extended by 25 years Russia’s lease on a naval base in Crimea – home to its Black Sea fleet.

That followed last year’s agreement between Yulia Tymoshenko, then Ukrainian prime minister, and Vladimir Putin, her Russian counterpart, regulating other aspects of the gas relationship. The deal cut out of the supply arrangement RosUkrEnergo, a controversial gas trader, which previously made hundreds of millions of dollars of profit a year from a position as middleman between Russia’s Gazprom monopoly and Ukraine.

However, with winter approaching, familiar factors are complicating talks between Moscow and Kiev: new Ukrainian demands for cheaper prices, Moscow’s long desire to take control of the crucial gas export pipeline running across Ukraine and a return to the stage by RosUkrEnergo.

“A clash seems imminent – and not only on the gas issue,” says Oleh Rybachuk, a Ukrainian political pundit and former presidential chief of staff. He notes Russia is pushing hard not only for closer gas industry integration but urging Kiev to join an economic union and merge both nations’ sizeable aviation and nuclear power industries.

Sergei Kupriyanov, a Gazprom spokesman, said he saw “no basis for a new gas crisis”. But Ukraine surprised everyone last month by suggesting it would seek a new price cut.
Even after April’s discount, Kiev’s ruling coalition now says its $10bn annual gas bill is too big a burden on its heavy industrial economy. Ukraine is struggling to recover from a 15 per cent plunge in output last year.
In response, Mr Putin hinted this month lower prices might be possible, but only as part of broader economic reintegration.

“Let’s form a unified economic space, unify our economic legislation ... and then we can extend our internal [energy] prices to our partners,” Mr Putin told foreign journalists.

Along with the price wrangling, RosUkrEnergo – which had been essentially dormant for more than a year – has re-entered the picture.

The Stockholm Arbitration Tribunal, which adjudicates on international business disputes, in June ordered Ukraine to return 11bn cubic metres (bcm) of gas, worth more than $5bn today, to the trader.

Its Ukrainian part-owners had claimed in a lawsuit the gas was illegally expropriated from it when it lost its supply role in last year’s agreement. The Swiss-registered trader is 45 per cent owned by Dmytro Firtash, and 5 per cent by Ivan Fursin, both Ukrainian businessmen; Russia’s Gazprom owns the other half.

The disputed 11bcm of gas was resold by Gazprom to Naftogaz, the Ukrainian state gas company.

The idea of returning it to RosUkrEnergo is contentious. Ms Tymoshenko, now an opposition leader, has repeatedly claimed the gas trader’s Ukrainian shareholders are closely linked to members of Mr Yanukovich’s team.

Addressing foreign diplomats in Kiev this month, she alleged the shareholders were associates of Serhiy Lyovochkin, Mr Yanukovich’s chief of staff, and Yuriy Boyko, Ukrainian energy minister.

Mr Lyovochkin has admitted being friends with RosUkrEnergo’s Mr Firtash and Mr Fursin, but denied being a business partner. Mr Firtash, Mr Fursin and Mr Boyko did not respond to requests for interviews or questions e-mailed to them.

Answering questions in front of a parliament investigatory committee this month, Mr Boyko denied having an interest in RosUkrEnergo.

Nonetheless, the energy minister appears to have personal links with Mr Firtash. Documents seen by the FT show Mr Boyko served as Mr Firtash’s legal representative in a recent divorce.

Ms Tymoshenko has gone as far as suggesting associates of Mr Yanukovich deliberately presented a weak case to the Stockholm tribunal, so helping RosUkrEnergo to win. The Ukrainian administration adamantly denies this.

Transferring $5bn of gas to the trader would be problematic for other reasons, putting huge pressure on Ukraine’s stretched public finances.

Ms Tymoshenko warned the foreign diplomats it could raise questions over Ukraine’s ability to repay a $15.2bn loan from the International Monetary Fund negotiated by Kiev’s new government.

An IMF official played down Ms Tymoshenko’s warning, saying handing over the gas posed no big financial risks for Ukraine.

But analysts warn losing 11bcm of gas would severely stretch the cash-strapped Naftogaz.

Ultimately, either Ukraine’s desire for lower gas prices or a financial squeeze on Naftogaz could be used by Moscow to further its desire to regain control of the trans-Ukraine gas pipeline. That pipeline carries 80 per cent of Russia’s lucrative gas exports to western Europe.

In an apparent gambit aimed at that goal, Mr Putin suddenly proposed in May merging Gazprom and Ukraine’s Naftogaz, which operates the pipeline.


Additional reporting by Catherine Belton in Moscow