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Associated Press

Ukraine PM claims victory in gas row with Russia even as her economy braces for pain 

21 January 2009

09:09

KIEV, Ukraine (AP) - Ukraine's prime minister Yulia Tymoshenko on Wednesday proclaimed her country the winner in the latest natural gas dispute with Russia, even though higher gas prices are going to badly hurt the Ukrainian economy.

Tymoshenko told a Cabinet session that Ukraine has won "great conditions" under a gas deal that ended Russia's two-week natural gas cutoff to European countries.

Monday's deal doubled the price Ukraine has to pay for Russian gas in the first quarter of 2009. Gas prices are expected to fall later this year, but Ukraine is still expected to pay significantly more this year for Russian gas than it did in 2008.

As part of the deal, the fee Russia pays Ukraine for delivering gas via its pipelines remains unchanged in 2009.

The agreement was hailed by the European Union, but ran into criticism at home.

Ukraine was struggling to pay for Russian gas even at last year's lower price as it faced a currency collapse, falling exports and a shaken banking sector.

Tymoshenko's political rival, President Viktor Yushchenko, has assailed the deal, saying the price was too high and will cripple the country's key metals and chemical industries. Yushchenko's office said, however, that Ukraine is not seeking to reconsider the deal.

Chris Weafer, chief strategist at Moscow-Based Uralsib bank called the Ukrainian economy a "clear loser" in the deal.

The Ukrainian economy was one of hardest hit by the global financial crisis. It is counting on a $16.5 billion emergency loan from the International Monetary Fund to avoid an all-out collapse. An IMF mission was in Kiev on Wednesday to assess how the country was implementing reforms required to receive the aid.

Gas flowed from Russia across Ukraine on Tuesday, reaching European nations for the first time since the Jan. 7 cutoff.

Slovakia, Hungary, Bulgaria and Moldova -- some of the nations hardest hit in the dispute -- saw gas supplies return as did Austria, the Czech Republic, Slovenia and Croatia. Bosnia and Serbia said gas began reaching them Wednesday.

The 27-nation European Union gets about a quarter of its gas from Russia.

Serbia says the gas cutoff cost the country's economy euro50 million ($65 million) a day, and government officials said they are considering legal action against both Russia and Ukraine to seek compensation.

The New York Times

Russia Restores Gas to Ukraine 

By ANDREW E. KRAMER 

688 words

21 January 2009

MOSCOW -- Russia on Tuesday resumed pumping gas through Ukraine to Europe, after nearly two weeks of disruption in a dispute over prices. The shipments were expected to reach energy-starved homes to the west within three days.

Gazprom <javascript:void(0);>  said in a statement that the flow of gas was restarted around 10:30 a.m. Moscow time, and that it planned to pump nearly 350 million cubic meters of gas via Ukraine to Europe on Tuesday.

In Kiev, a spokesman for Naftogaz, the Ukrainian energy company, told Bloomberg News that the gas was flowing along all the major pipelines into Ukraine and that it would reach Ukraine's borders with the European Union within 36 hours.

Impatient European officials have said they wanted to see results after a number of false starts. Officials in Brussels could not immediately be reached for comment.

The E.U. energy commissioner, Andris Piebalgs, was to hold a joint press conference in Kiev later Tuesday with the Ukrainian prime minister, Yulia V. Tymoshenko.

The resumption of gas flows came after Russia and Ukraine signed an agreement Monday to resolve their dispute over the price of natural gas and the terms of its transit. After previous agreements collapsed, officials in Europe had been cautious about the deal negotiated over the weekend between Prime Minister Vladimir V. Putin of Russia and Ms. Tymoshenko, which was made formal in a ceremony here on Monday.

In a hopeful sign, however, Mr. Putin said that Gazprom <javascript:void(0);> , the Russian gas monopoly, had been ordered to turn the gas back on, for Ukraine's internal market and for re-export. ''I hope transit supplies in the European direction will be fully resumed in the nearest future,'' he said.

Ukrainian officials have said that once shipments to the border resumed, restoring pressure in the pipelines for export elsewhere in Europe would require about 36 hours. As it played out over three cold weeks, the gas shutoff left hundreds of thousands of homes in southeastern Europe without heat and shuttered hundreds of factories. Slovakia, alarming its neighbors, had proposed restarting an obsolete nuclear reactor to make up for the gas shortfalls.

Yet tensions remain between Russia and Ukraine. On Monday, Russia's president, Dmitri A. Medvedev, signed an order imposing sanctions on countries that sold weaponry to Georgia, the former Soviet republic that Russia fought in August. The sanctions would halt military and technical cooperation with such countries. Ukraine has sold weaponry to Georgia and could be harmed by the measure, since its military industry is closely entwined with Russia's as a legacy of the Soviet Union.

But in a sign of some softening of disagreement, at least over the gas business, the two prime ministers complimented each other graciously after the signing -- a rarity in their relations. ''I would like to thank the Ukrainian prime minister, Yulia Vladimirovna Tymoshenko,'' Mr. Putin said. ''Faced with one of the hardest situations, she took responsibility for making these important decisions.''

Ms. Tymoshenko said, ''I am very much obliged to Vladimir Vladimirovich and his team for finding the opportunity to grant special terms for Ukraine.''

The contracts will be valid for 10 years but adjusted to current market prices. The contract provides that the price of Russian natural gas in Ukraine will be pegged to prices in Europe, which are linked to international oil prices, but with a 20 percent discount in 2009. The discount will be eliminated next year.

Under that formula, Ukraine could be expected to pay $208 to $240 for 1,000 cubic meters of natural gas. It paid $179.50 last year. Russia had initially asked for $250 but raised that to $450 in the midst of the shutoff.

Ukraine, meanwhile, accepted a transit fee that is about half the average rate in Europe, but with the understanding that it will be raised next year.

Russia halted shipments of gas to Ukraine on Jan. 1 and then, accusing Ukraine of siphoning gas intended for export, suspended shipments intended for export on Jan. 6.

David Jolly contributed reporting from Paris.

The Financial Times

Russia and Ukraine rebuked over gas stand-off

By Joshua Chaffin in Brussels, Isabel Gorst in Moscow and Roman Olearchyk in Kiev 

Published: January 21 2009 

José Manuel Barroso, president of the European Commission, lashed out at Russia and Ukraine yesterday for their conduct in negotiations to end a two-week natural gas crisis, saying he had never witnessed such "really incredible" behaviour before.

As Russian gas flows resumed across Europe, Mr Barroso vented his frustration over the ordeal, accusing both countries of failing to live up to their promises as the European Union worked to broker a truce.

"Let me tell you, frankly, I was very disappointed during these discussions about the way the leadership in these two countries negotiated," Mr Barroso said. "I will not forget that, and I think European citizens should know that."

His comments came as Russian gas flowed into Slovakia for the first time in two weeks. Bulgaria, another of the 20 countries hit by the gas shut-off, was expected to be receiving full supplies by last night.

Mr Barroso's tone reflected the EU's frustration at a crisis that laid bare its over-dependence on Russian gas. "We must not allow ourselves to be placed in this position again in the future," he said.

Alexander Medvedev, the deputy chief executive of Gazprom, the Russian gas company, hit out at the EU for failing to provide adequate support during the crisis and called for the adoption of international legislation to prevent similar disputes.

Mr Barroso vowed to use the crisis to win approval from member states to dedicate some €5bn ($6.5bn, £4.6bn) in unspent EU funds to building energy infrastructure, including grid connections and storage facilities. He also called for speedy implementation of a strategic energy review the Commission published in November.

Mr Medvedev said "very strict" payment clauses included in the 10-year gas deal signed by Gazprom and Naftogaz, Ukraine's state gas company, on Monday would prevent the recurrence of disputes.

He said that, under the deal, Ukraine would pay an average price below $250 per 1,000 cubic metres for Russian gas this year, with prices fluctuating according to a European formula pegged to world oil prices. European gas prices are expected to average $280 per 1,000 cu m this year.

Next year Ukrainian and European gas prices will converge, and Gazprom will increase to market levels the fees it pays for use of Ukrainian pipelines that carry 80 per cent of its exports to Europe. Mr Medvedev said an agreement had been reached on settlement of Ukraine's alleged $650m of gas debts, the initial cause of the dispute.

The Washington Post

A Section

Gas Issue Points to Ukraine's Failures; Nation Weakened By Dispute With Russia, Many Say 

Philip P. Pan 

Washington Post Foreign Service

19 January 2009

FINAL

A15

In the heady months following the Orange Revolution, after the crowds had swept the democratic opposition into power but before the hopes inspired by the movement had begun to fade, Ukraine's new, American-backed leaders decided to renegotiate the terms on which the country purchased natural gas from Russia.

President Viktor Yushchenko, the former banker who defeated the Kremlin's favored candidate, had campaigned on a promise to fight corruption, using the rallying cry, "Put the bandits in jail!" The gas contract with Russia, a notorious source of patronage and cash for the old regime, was a natural target for his new government.

But now, as Ukraine prepares to sign an accord ending an 18-day Russian gas embargo that disrupted energy supplies in much of Europe, the consensus here is that instead of cleaning up the gas trade, Yushchenko's first gas deal left this former Soviet republic more vulnerable to bullying by Russian leaders determined to thwart its turn to the West.

Concessions made three years ago -- under suspicious circumstances, some say -- sharply reduced Ukraine's leverage against Russia in this month's crisis. More broadly, according to a wide spectrum of political figures, journalists, diplomats and analysts, the Orange Revolution's failure to eliminate the corrupting influence of cheap Russian gas poisoned Ukraine's transition to democratic politics, tarnishing its reputation abroad and leaving much of the public here disillusioned.

"There are no reformers left," said Alexander Dubinsky, a business journalist for the Ekonomicheskie Izvestia newspaper. "After a reformer gains power, he becomes corrupt, too. That's what people think now."

In explaining the importance of access to Russian gas in Ukrainian politics, he added: "All the big money here was made in gas. If you control the gas, you can control industries, you can control politicians."

Early Sunday, Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, emerged from late-night talks in Moscow with the outline of a deal to end the midwinter standoff over gas prices that has left large parts of Europe struggling to maintain heat and electricity for 12 days.

Russia said it would grant a 20 percent discount to Ukraine on European gas prices this year, while Ukraine agreed not to raise the low fee it charges Russia to use its pipelines to deliver gas to Europe. Tymoshenko was scheduled to return to Moscow on Monday to sign the contract, but the details, which have derailed previous deals, were still being worked out.

Depending on the fine print, the agreement will probably mean a gas price not far from the final negotiating positions of both sides before talks broke down, suggesting that the standoff has always been less about commercial differences than political ones.

Many in Ukraine and the West have seen it as an attempt by Russia to assert its influence in the region and weaken the pro-Western government of a neighbor, a sort of non-violent sequel to its August war against Georgia.

But the crisis also highlighted much of what has gone wrong with Ukraine's experiment in democracy, including a crippling feud between the Orange Revolution's leaders, Yushchenko and Tymoshenko, and a weak judiciary that has been unable to address pervasive allegations of corruption.

The political disarray has played into the Kremlin's efforts to portray Ukraine to the world as a failed state, unfit for membership in NATO and the European Union, and to convince the Russian people of the superiority of Putin's more authoritarian model of government.

"They simply didn't know what to do, and therefore made many mistakes," said Viktor Yanukovich, the pro-Kremlin politician who was defeated in the Orange Revolution and who now leads the largest party in parliament.

Russia has sold natural gas to Ukraine at below-market prices since the fall of the Soviet Union, a legacy of the communist planned economy. But many scholars say cheap gas has hurt Ukraine more than it has helped, creating opportunities for corruption because billions can be made by those with access to the fuel.

The Orange Revolution raised hopes for reform, with the government launching an investigation into the gas sector.

But in September 2005, Yushchenko dismissed Tymoshenko as prime minister, and in January 2006, after a brief standoff, Ukraine and Russia struck a new gas deal. Yushchenko hailed the contract as a victory because it allowed Ukraine to continue receiving gas at subsidized prices for another year. In exchange, Ukraine agreed to charge Russia a low fee to use its pipelines.

It soon became public, however, that the contract allowed Russia to increase gas prices every year but fixed Ukraine's transit fee for five years, a condition that severely weakened its negotiating position this month.

In addition, the deal gave a shadowy intermediary company, RosUkrEnergo <javascript:void(0);> , full control of gas imports from Russia, as well as access to the Ukrainian domestic market. Gazprom <javascript:void(0);> , the Russian gas monopoly, owns half the firm, and two Ukrainian tycoons say they own the other half. Tymoshenko says the company is a vehicle for corruption benefiting both Russian and Ukrainian officials.

"It was a huge opportunity lost," said Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington, who argues that Ukraine's failure to reform its gas sector continues to "destroy public trust in its politics, and undermine the interests of its European neighbors."

The gas deal came under attack in the newly assertive Ukrainian press. Yushchenko stood by it while his allies accused its most prominent critic, Tymoshenko, of being upset because her own attempts to profit on the deal had been thwarted. No investigation ever sorted through the competing accusations.

Igor Burakovsky, director of the Institute for Economic Research and Policy Consulting in Kiev, said the situation is typical of Ukraine's incomplete democratic transition. There is free speech and wide access to information, he said, but fervent debate rarely leads to action because of the weakness of the courts and other institutions.

"It creates a cloud of cynicism," he said. "People believe everyone is a thief, but nobody is ever punished."

U.S. officials have urged Ukrainian leaders to reform the gas sector by boosting domestic production, improving energy efficiency and eliminating RosUkrEnergo <javascript:void(0);> . But analysts say corruption has worsened because political uncertainty has encouraged short-term thinking. Yushchenko has appointed four prime ministers in as many years.

In 2007, the state energy firm, Naftogaz, tried to determine what it should be charging Russia to use its pipelines. Yuri Vitrenko, the economist who supervised the analysis, concluded Ukraine was getting paid much less than it cost to operate the pipelines and recommended a sharp increase. But the government responded by asking him to justify the lower fee. "They just wanted to keep the old deal," he said.

Yushchenko's failure to bring corruption under control has contributed to a precipitous drop in his approval ratings, from highs near 75 percent after the Orange Revolution to less than 5 percent now.

Bohdan Sokolovsky, Yushchenko's representative on energy security, said the president was not directly involved in the 2006 gas deal and argued it may have been the best contract possible at the time. But he acknowledged that the government needed to do more to reform the gas sector.

"We remain critical ourselves about the too-slow pace," he said, especially "because there were higher expectations" after the Orange Revolution. He added that the government was continuing to work on the problem "step by step."

"The less politics in the energy sector, the more just and open it will be," he said. "This is the position of President Yushchenko."

Tymoshenko, who was appointed prime minister again in late 2007 and is expected to challenge Yushchenko for the presidency this year, told reporters last week that Ukrainian politicians derailed a December deal because she had insisted on cutting out RosUkrEnergo <javascript:void(0);> . She did not accuse Yushchenko directly, but only the president would have the power to overrule her.

An official in the president's office fired back Friday, accusing Tymoshenko of being "hooked by Russian special services" and recalling that she made a fortune in the 1990s as chief of a gas trading firm that was investigated for criminal activity.

"We think it was a crime," Hryhoriy Nemyria, one of her deputy prime ministers, said of the 2006 gas contract. "It basically created a situation of strategic vulnerability for Ukraine."


The Wall Street Journal Europe


The Gas War May Rehabilitate Ukraine's Yushchenko


Here's a chance for the beleaguered president to restore some luster to his faded image by reassuming the role of a unifier and statesman.


By ADRIAN KARATNYCKY | From today's Wall Street Journal Europe


KIEV, Ukraine

The bitter energy dispute between Ukraine and Russia has been resolved in a comprehensive agreement that Kiev and Moscow signed yesterday -- though there have been several false starts over the past three weeks. But if this latest pact holds, then by all accounts it is Russia that blinked first. While Ukraine's leaders will not crow about their success, Ukraine has pretty much gotten what it wanted: below-market rates for its own 2009 gas purchases. Ukraine's leaders also made it abundantly clear that they were not some unimportant factor in Russia-European gas trade. They showed that their gas pipeline system is critical to the continental gas transit system.

The conflict, which has interrupted gas flows to Europe for nearly two weeks, has been waged only in part over economic interests. In far greater measure it has been the expression of a political struggle. Moscow sensed that Ukraine's pro-Western politicians were bitterly divided, and that it could exploit their personal rivalries.

Almost four years ago, Viktor Yushchenko was elected Ukraine's president and widely hailed as the hero of the nonviolent mass civic protests known as the Orange Revolution. Today he is a leader who has lost the support of most Ukrainians; his approval ratings have fallen from well over 60% during the Orange Revolution to less than 5% now. He has even been abandoned by the majority of his own political movement, the Our Ukraine bloc, which last month ignored the president's calls to bring down the government and affirmed its backing for Prime Minister Yulia Tymoshenko.

As Mr. Yushchenko's political star has waned, that of Ms. Tymoshenko, his erstwhile Orange Revolution partner, is ascendant. Still, with Ukraine's economy already in free fall, Ms. Tymoshenko's recent success in withstanding the president's attempt to remove her as prime minister may prove to be a Pyrrhic victory and she, too, may see a steep drop in public support. Amid the gas row with Russia, plummeting industrial production, a fall of more than 50% in Ukraine's currency against the dollar, and massive layoffs on the horizon, Ukraine's president and prime minister need to find a modus vivendi. The political elite needs to consolidate and pass emergency measures to cope with an economic tsunami.

In recent months, neither leader appeared willing to compromise, and both engaged in an escalating campaign of political mudslinging. President Yushchenko and his staff accused Ms. Tymoshenko of "treason" as a result of her efforts to reach accommodation with Russia by taking a softer stance on the Georgia-Russia conflict and her tepid support for joining NATO. On Dec. 23, a top Yushchenko aide denounced Ms. Tymoshenko's ties to George Soros, whom the aide described as "an international currency speculator." Without any credible evidence, the aide called on the State Prosecutor's office to investigate whether Mr. Soros was profiting from speculation on Ukraine's weak currency.

In turn, Ms. Tymoshenko, also on scant evidence, accused the president and the head of the Central Bank of conspiring to bring down the value of the national currency, the hryvnia, and of providing liquidity to a bank allegedly associated with a pro-Yushchenko businessman. These actions, she claimed, enabled the businessman to profit from the currency's decline.

It's no wonder, then, that Ukraine's toxic political atmosphere represented a tantalizing opportunity for Russia to exploit internal divisions. Vladimir Putin has never accepted Ukraine's pro-Western tilt since the Orange Revolution. By provoking internal and international anxieties, the Kremlin sought to promote a change at the top in Ukraine and to reassert its influence in a fellow Slavic country in its geopolitical backyard.

But Russia appears to have miscalculated. First, its efforts to blame Ukraine alone for the gas cutoff were rejected by Europe, which understood that Russia played an important part in provoking and prolonging the crisis. As important, Ukraine had wisely stockpiled several months of gas reserves and proved able to withstand Moscow's pressure to settle on unfavorable terms during the harsh winter months.

Now Russian Prime Minister Vladimir Putin has agreed with Ms. Tymoshenko that Russia will sell gas to Ukraine at a 20% discount to European market rates, in return for below-market transit fees. European market prices for gas in 2009 are expected to be no more than $250 per thousand cubic meters amid the global downturn -- a significant increase over what Ukraine paid in 2008, but far less than Russia had been demanding.

Perhaps most surprisingly, the gas dispute with Russia has unified Ukraine's pro-Western leaders. President Yushchenko and Prime Minister Tymoshenko adopted common positions and made joint statements in the face of the Russian energy cutoff to Ukraine and Europe. Above all, they appear to have quietly called a temporary political truce and stopped their bickering during the gas crisis and Ms. Tymoshenko's skilled negotiating sessions.

As a result, the gas crisis has created a new chance for the beleaguered President Yushchenko to restore some luster to his faded image by reassuming the role of a unifier and statesman. Even with his support slipping and his chances for re-election slight, Mr. Yushchenko has an opportunity to vindicate his term in office. This is because Ukraine's presidency has significant powers, including veto power, control over security and defense forces, and the right to appoint key local and regional officials. In recent months Mr. Yushchenko has used these powers primarily to thwart and undermine Ms. Tymoshenko. If he redirects his energies to constructive dialogue, he can help promote sound fiscal policy and accelerate privatization efforts which the political deadlock had blocked.

He is well-equipped for such a role. As a banker and economist by profession, Mr. Yushchenko has a strong sense of rational economic policy. He can also act as an important, constructive counterweight to the occasional populism of Prime Minister Tymoshenko.

By building on their cooperation and success during the gas crisis, the two leaders can at long last stumble into creating a tandem that can help restore some confidence domestically and abroad in Ukraine's ability to cope with major crises and to get things done.

In the past, both Mr. Yushchenko and Ms. Tymoshenko showed the courage to make tough choices that helped move Ukraine forward. Now, in the face of unrelenting Russian pressure, they have shown that they can restore some measure of cooperation. If they continue on this path, they will meet the severe economic challenges that Ukraine still faces and once again set back Mr. Putin's efforts to establish hegemony in the region -- the same task they accomplished four years ago during the Orange Revolution.

Mr. Karatnycky is a senior fellow with the Atlantic Council of the U.S.

Eurasia Daily Monitor

January 20, 2009

The 18-Day Gas War – Why was it fought? Who Won?


A preliminary, and possibly premature, report of the 18-day Russian-Ukrainian “Gas War” of January 2009 might read as follows:

This war should never have taken place. The conflict had little to do with “commercial disagreements” between Gazprom and Naftohaz Ukrainy—these were resolved by the “Memorandum of Agreement” signed on October 2, 2008, by Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko. For unknown reasons this agreement was never allowed to enter into force until January 19, when Putin and Tymoshenko essentially agreed to abide once again by its provisions. The new contract between Gazprom and Naftohaz Ukrainy is for 10 years; and the price for Russian gas, or more precisely Central Asian gas sold by Gazprom to Ukraine, will be based on the generally accepted formula used throughout Europe which links the price of gas to the price of diesel fuel plus transportation costs. Ukraine will receive a 20 percent discount on this price in 2009 and will pay the full European price in 2010. Russia will continue to pay a discounted price for the transit of gas to Europe until 2010, at which time it will begin paying European gas transit prices (Ukrayinska Pravda, January 18).

The War was instigated by Putin and Russian President Dmitry Medvedev who decided that the time was ripe to discredit Ukraine in the eyes of European leaders by launching a huge public relations and disinformation campaign to convince the EU that Ukraine was an “unreliable transit country.” By turning off the gas spigot to Europe on January7 and blaming this on the Ukrainians, Moscow began systematically blackmailing Europe into supporting Russia’s plans to build the North Stream and South Stream pipelines. This argument became the central theme at press conferences by Putin and Deputy CEO of Gazprom Alexander Medvedev during the Gas War (see www.gazpromukrainefacts.com, the Gazprom website designed to discredit Ukraine).

One major goal of the Russian leadership during the conflict was to discredit and denigrate the freely elected, pro-Western Ukrainian leadership and provide a measure of support for the pro-Russian opposition “Party of the Regions.” The greater gamble was an attempt by Russia to cut off gas supplies to the Eastern and Southern regions of Ukraine by attempting to manipulate the “re-opening of gas supplies to Europe,” using the Potemkin village ploy of opening only one gas entry station to Ukraine. Had the Ukrainian government agreed to this, it would have been forced to stop supplying gas to the highly industrialized and heavily pro-Russian Eastern and Southern regions of the country, thereby leaving itself open to mass discontent (EDM, January 16).

Putin’s outlandishly abusive statements about the Ukrainian leadership throughout the conflict were not overlooked by the European Union. His off-the-cuff derogatory remarks calling Yushchenko a “thief” (Kommersant, October 2, 2008) and his liberal use of disinformation did more to bury the Russian public relations effort than anything else. Putin showed himself to be a vindictive and arrogant leader which forced the EU to unite in its response to the crisis.

The War finally compelled the EU to do what its critics have been urging the organization to do for years—to speak to Moscow with one voice and not allow itself to be outmaneuvered by the Kremlin-Gazprom (“Kremlingaz”) team. In the early stages of the War, the EU made one large mistake—it agreed with Kremlingaz’s version that the dispute was merely “commercial.” Once Gazprom’s spokesmen took to the microphones in London and Brussels and Putin began his “Ukraineophobic” libel campaign, it became abundantly clear that commerce had little to do with the dispute.

In a last ditch effort, Kremlingaz believed that by calling a summit of gas consuming countries in Moscow on January 18, it could once again impose its version of events and continue playing the Europeans off one against the other. This time the EU told its members not to attend and that the EU commission would handle all the talks with Kremlingaz. This stance, along with powerful reprimands of Russian behavior by Angela Merkel and other European leaders made the Russians not only lose face but realize that their game plan was a losing one. Putin and Medvedev had suffered a major blow. Not only did Kremlingaz lose almost $2 billion in revenue (Vedomosti, January 19), Gazprom’s highly touted reputation as a “reliable supplier” vanished in 18 days.

The War once again showed that the Ukrainian leadership had dismally failed to take any steps to improve the country’s enormous energy inefficiency. Moreover, its standard backroom deals with Kremlingaz on gas prices were bizarre and opaque. The Ukrainian leadership had always insisted on buying gas at a set price not linked to the fluctuations of oil prices or to the laws of supply and demand. When Tymoshenko agreed to sign a gas contract based on real prices on January 19, the shock for Ukraine’s oligarchs must have been overwhelming. Their subsidized profiteering had come to an end.

The only winner in the War was RosUkrEnergo (RUE), the Swiss middleman firm created by Putin and former Ukrainian president Leonid Kuchma in 2004. The January 19 contract removed RUE as the intermediary, but this will not lead to its demise. After years of swearing that RUE was absolutely clean, the Kremlin suddenly began denouncing its own creation as a “corrupt” entity, despite the fact that Gazprom owned 50 percent of the company. In fact, by early 2008 Gazprom, the 50 percent owner of RUE, knew that Turkmenistan would begin selling its gas at European prices in 2009 and this would destroy RUE’s profit margin for resale of the gas to its European clients. As a result there was no reason to maintain RUE as a middleman.

In anticipation of this, RUE began buying up lucrative Ukrainian domestic gas distribution companies in 2008. On January 11 RUE co-owner, Dmytro Firtash, told Vedomosti that RUE controlled 75 percent of Ukraine’s highly lucrative domestic gas distribution network, which would make up for the loss of their sales to the EU. Thus the sun kept shining on RUE and it should be able to thrive for years if the Ukrainian and Russian authorities allow it to.

—Roman Kupchinsky

 

 

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