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Russian-Ukrainian gas deal - what's behind it?

by Jerome a Paris Wed Jan 4th, 2006 at 08:33:17 AM EST

A resolution of the recent gas crisis between Russia and Ukraine, which had led to a temporary cut ofgas supplies to Ukraine and then to Europe, has apparently been found:

MOSCOW (Reuters) - Russia and Ukraine reached a face-saving deal on Wednesday in a bitter gas dispute which hit supplies to Europe and cast doubt on Moscow's reliability as a safe supply source.


Details were sketchy, but Miller said the deal was effective from January 1 and based on a price of $230 per 1,000 cubic meters of gas. That is up from the $50 Ukraine had paid under an existing cut-price deal.

But, after mixing in extra supplies from the Central Asian states of Turkmenistan and Kazakhstan, Kiev will pay an average gas import price of $95 per 1,000 cubic meters, both sides said.

There are loads of suspicious things about this deal.

First, the announcement is very suspicious on the price level.

With Gazprom delivering 25 bcm (billion cubic meters) and another 35 bcm coming from Turkmenistan (via Gazprom's pipes), to get an average price at 95$/tcm for the total would require, if 25 bcm are paid 230$/tcm, that the other 35 bcm be delivered for free.

The only way this might make sense is if the transit payment (increased from 1.09$/100km/1000tcm to 1.6$) is taken into account - i.e. the 95$/tcm would be the net price for Ukraine after the deduction of the transit fees. As they are worth about $1.5 bn at the new price, that would put a price of around 45-50$/tcm for Turkmen gas, which could be realistic. If that's the case, this is a very good deal for Russia, as they do get market prices for their gas, and they get cheap transit for their exports.

But what makes this deal even more suspicious if the announcement that the full gas volumes (i.e. 60 bcm) are going to be delivered to Ukraine by RusUkrEnergo, a "Russian-Ukrainian joint venture". Digging stuff on that company is not that difficult, as it was already involved in a "precursor" scandal last summer over the exact same subject (Gazprom wanting to increase its gas prices to Ukraine). Guess what:

RosUkrEnergo was created in summer 2004 to replace Eural TransGas. Its aim is to act as an intermediary between Gazprom and Naftohaz Ukrainy to transit Turkmen gas through Russia into Ukraine. Eural TransGas managers moved over to RosUkrEnergo. Gazprom, through its Swiss-registered ARosgas Holding A.G., owns 50% of RosUkrEnergo. The remaining half is owned by Centragas Holding, an Austrian-registered company 100% owned by Raiffeisen Investment A.G.

There's lots more background on this company, widely thought to be a front for mafia don (wanted by the FBI and  Interpol for money laundering) Mogilevich, in this eerily prescient article from the Jamestown Foundation, or in this article in Kiyv Weekly, also from last summer:

Last year's Russian-Ukrainian agreements stipulated that RosUkrEnergo would be the operator of gas supplies purchased by Ukraine in Turkmenistan until the five-year contract expires and starting from 2007 will become the only supplier and operator of Turkmeni gas transit into Ukraine and further on to other European countries. Moreover, Ukraine would be purchasing natural gas not directly from Turkmenistan, but from RosUkrEnergo, which would buy it from the volumes under contract with GasExport (which, like Gasprombank, is Gasprom's daughter company) until 2028. At the time the price of gas was not declared -- it was likely supposed to be a surprise, regardless of who won the Ukrainian presidential elections in 2004.

Given the persistence with which the Russians protect the inviolability of a structure that does not contribute to the Russian budget, one can draw the conclusion about the personal interest of the Russian government and Gasprom management in this structure. If this is true, RusUkrEnergo is a weak spot of the Russians and it appears that Ukraine plans to capitalize on that.

Again, these are points that I have made myself: Gazprom fully controls that trade (Gazexport is its 100% subsidiary in charge of all exports, and it is the counterparty to ALL contracts with West European buyers), and yet it is only very indirectly a party to the new arrangements. Why the need for an Austrian company 50% owned by a front companyfor persons unknown? Of course, the arrangements announced today are nothing new, it's the same thing which is renegotiated every year, with different shell companies (like Itera, Eural Transgas, and many others in the past 10 years). What is obvious, to me at least, is that these deals are not driven by the best interests of Gazprom or of Russia, but by those of people in power in both.

Which leads to us to the big question: why did Putin actively participate in this "crisis" this time, when earlier episodes were resolved far from the eyes of the West? It has spectacularly backfired: the only apparent result today is to make Russia look foolish (because they backed down on their threat so quickly) and irresponsible (because they used the gas weapon for what appears to be bullying of a smaller country escaping its clutches - Note to my Russian readers: appears is the operative word here).

As the Financial Times writes today in a lenghty article:

Ignominiously, Russia in effect turned the gas back on little over a day later, after a barrage of international criticism. Even if Mr Putin secures a deal with Ukraine - and the two sides were returning to the negotiating table on Tuesday - he may have inflicted broader damage on his energy ambitions. Russia has shown it is prepared to use drastic measures to force a customer to pay higher prices. It has simultaneously drawn uncomfortable attention to the full extent of Europe's reliance on its energy - Germany, for instance, depends on Russia for about one-third of its natural gas supplies.

That in turn may provoke hard questions from Russia's G8 partners about its plans to make political use of its energy wealth - perhaps amplifying existing concerns over its commitment to democracy and human rights.


An energy consultant who asked not to be identified because he has Russian clients went further yesterday. "They've basically shot themselves in the foot," he said. "They think they can cut off Ukraine but they can't - not without cutting off their other customers. And of course it's damaging Russia's reputation as a reliable supplier."

Cliff Kupchan, an analyst at the Eurasia Group consultancy and former state department official in the Clinton administration, says Russia succumbed to the temptation to use its energy power as a stick rather than a carrot. "Petro-power is about diplomacy," he says. "Petro-coercion, using energy as a weapon of foreign policy, is something totally different again."



So why did Putin do it? He must know all of this. The usual motivations are given: punishing an unruly neighbor who wants to turn its back on Russia yet keep on receiving subsidies, taking control of the pipeline network, or signaling Gazprom's power to everybody, after a phase of concentration of the industry under the control of Kremlin bureaucrats. It sounds like a page from the Cheney book of diplomacy "who cares if they hate us so long as they fear us", based on a position of strength. The problem is that Russia is not in a position of strength, even on the gas front, and Putin must know it (the people at Gazprom I knew have always been perfectly aware of this - they know they have no bigger asset than their reputation for reliability, and they know that they cannot cut off gas to Ukraine). So, how was he brought into this?

Simply, there are two possibilities:

  • he is in the scam himself, directly. Far fetched, but not impossible. There have been regular rumors that he would take over the helm at Gazprom when his second term as President expires in 2008, and the suggestion makes nobody laugh because it is objectively a position which is just as powerful, if not even more. But that may reflect only an interest in power, not money;

  • he has been coaxed, or convinced to act this way against Ukraine by the people around him. There are very obvious suspects: the duelling duet at the top of his presidential administration, Medvedev and Sechin, one chairman of Gazprom, one chairman of Rosneft, and bitter rivals over the control of the oil&gas sector. Their rivalry made the attempted takeover of Rosneft by Gazprom, and then of Yukos by Gazprom collapse. Rosneft bagged Yukos (at a ridiculously low price), and remained independent, and its holding company even captured 10% of Gazprom, which, as a consolation prize, grapped Sibneft, but at a full market price. And there's lots more going on below the radar screens.

Again, any deal with Turkmen gas requires the active participation of managers at the very top of Gazprom and of the Kremlin (you don't move 30bcm of gas across its pipeline network, which is inaccessible to third parties on a open basis, without high level complicity, and you don't do international deals without support/complicity in the Kremlin). You don't create a highly public crisis with Ukraine without knowing the international repercussions of it (in the aftermath of the Orange revolution), and you don't cut gas to the West without expecting harsh words in return.

Now, whether that was triggered by Ukrainians moves on their side of the table, or by new impetus on the Russian side, and whether the underlying conflicts have actually been resolved, (things like the real ownership of RusUkrEnergo, the price paid by big metal-bashing factories for their gas in Ukraine, and the price paid for Turkmen gas and for its transit via Russia), I don't know.

Some people obviously thought that their personal advantage in this crisis trumped the consequences for Russia of this diplomatic fiasco. Who are they?

Any thoughts on Edward's admittedly slightly tin-foil-hat thoughts?
by Colman (colman at eurotrib.com) on Wed Jan 4th, 2006 at 08:39:00 AM EST
You mean, in his previous post, suggesting that it's a plot by the global nuclear industry?


(Note however that Gazprom has set a foot in the nuclear industry by taking the control of one of the civil nuclear industrial entities inside Russia, not sure which one right now.)

I may not be around for a while, I actually have some work to do now...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jan 4th, 2006 at 08:53:53 AM EST
[ Parent ]
Well, to be fair, he was noting how convenient it was for the nuclear industry, not suggesting that it was a plot.
by Colman (colman at eurotrib.com) on Wed Jan 4th, 2006 at 08:58:56 AM EST
[ Parent ]
The pro-nuclear lobby is currently pushing very hard through Europe; in UK the debate has been more or less officially reopened a few months ago (and at the moment BBC coverage is quite indulgent, on the verge of being partisan), and it even resurfaced in Italy, as it happens every time the oil prices go up (this time with a peak-oil twist). The awful truth is that nuclear looks like a good solution to Kyoto-induced constraints and oncoming oil scarcity.

So I would excuse "conspiracy-theorist" reactions, they are just picking up the general feeling that the pro-nuclear lobby might have a chance in the next couple of years.

by toyg (g.lacava@gmail.com) on Thu Jan 5th, 2006 at 04:32:08 AM EST
[ Parent ]
Some people obviously thought that their personal advantage in this crisis trumped the consequences for Russia of this diplomatic fiasco.

That's more or less what Illarionov was saying before it happened.

I have to wonder if the fiasco was prompted by an echo chamber effect. Putin did act out a little bit of theater for domestic consumption with the cabinet meeting chatter and his intervention during the talks (in Russian). From what I understand, state TV channels basically put on their tribal feathers and did a little no-gas-for-y'all dance. So far I've seen absolutely no sense of negative international repercussions even in liberal Russian press, which normally enjoys pointing these things out. It's not like Putin has shown a good ear for foreign PR before.


by marcabru (no@spam.com) on Wed Jan 4th, 2006 at 10:55:36 AM EST
"for domestic consumption with the cabinet meeting chatter and his intervention during the talks (in Russian)."

I think that we have more evident resources (in russian and ukrainian) to revial roots of the new Putin's policy. See paper "The Great Gas Crises. Ukraine – as an polygon to convert Russia into “Euro-Asia Nigeria”

It's pity that this ineresting article don't translated  to English yet.

Per aspera ad astra

by olexy on Thu Jan 5th, 2006 at 06:19:05 AM EST
[ Parent ]
Reading your columns on this, the entire ordeal sounds like a mobster movie.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jan 4th, 2006 at 11:17:22 AM EST
well, Russian history of "entrepreneurship" in the last 15 years resembled a bad crime novel...
by toyg (g.lacava@gmail.com) on Thu Jan 5th, 2006 at 04:34:34 AM EST
[ Parent ]
True story, though extremely brief here: during an economic/community development project I steered into Siberia, I was threatened daily for several months.  Pressure was thinly covered, from FSB (KGB.)  The aim was to shake loose US$30K -- extortion, in other words -- on the hypothesis that if I could source a few million US dollars for a development program, $30K was nothing.

Ultimately, a KGB boss showed up with four henchmen with machine guns at my flat and tossed me in jail for refusing to pay.  I refused because it was illegal to pay bribes or extortion monies (I am staunchly, and maybe eventually even fatally, anti-corruption.)  To be clear: I was imprisoned in Russia for refusing to break the law.  That was five year ago.



The best argument against democracy is a five minute conversation with the average voter.
W. Churchill

by US expat Ukraine on Thu Jan 5th, 2006 at 11:17:00 PM EST
[ Parent ]
So, how was he brought into this?

IMHO: The main problem in the post-soviet countries is LEGALIZATION of property owned by new oligarh. Open privatization of Kryvoriz metallurgic factory with about 4,8 billion dollars (6 times more then previous privat) frightened not only ukrainien, but russian oligarhes too. Previous model used by Kuchma (former ukr president) to change rules during president elections was failed. So Putin invent the new one. He is in the scam himself, directly (I thing).

PS: If you read russian, the best sincere methodological journal in Russia is "APOLOGY"http://www.journal-apologia.ru/rnews.html?id=383&id_issue=121
It's authors consider the past and future of the post soviet republics.

Per aspera ad astra

by olexy on Thu Jan 5th, 2006 at 05:59:10 AM EST
Two updates from the Hungarian press - sorry neither came with sources, but maybe someone who knows where to look will discover:

  • The deal doesn't keep the original 25:35 billion cubic metres ratio of 'Russian' and 'Turkmen' gas, instead the Gazprom part (230$/m^3) was reduced to 17 bcm, the 'Turkmen' part ($50-65) increased to 40 bcm.

  • Allegedly, the technicians of the German gas distributor say that their measurements confirm the Gazprom claim that Ukraine branched off gas to sell to Romania.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jan 5th, 2006 at 08:16:40 AM EST

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