ANALYSIS: By Anders Åslund
The Action Ukraine Report (AUR), #640, Article 5
Washington, D.C., Thursday, January 12, 2006

The originally secret Russian-Ukrainian gas agreement that was concluded on January 4 was published on January 6 by former Ukrainian PrimeMinister Yulia Tymoshenko. It appears very different from the originalpresentation of the agreement, and it seems totally rudimentary, with major aspects missing. Admittedly, secret appendices and additional agreements are possible, but the salient features of the now publicized agreement are:

• This is not a five-year agreement but a half-year agreement. The key paragraph says that in 2006 Rosukrenergo will sell gas at the price of $95 per mcm during the first half of 2006. For the second half of 2006, the gas price is regulated

• The agreement only specifies the sale of 34 bcm to Ukraine in 2006, while Ukraine will need at least 21 bcm more (a total gas need of 75 mcm of which 20 mcm is domestically produced). Naftohaz and Prime Minister Yuriy Yekhanurov have stated that Ukraine will buy the rest from Turkmenistan for $50 per mcm during the first half and $60 per mcm during the second half. The transit fee of this gas through Russia might remain an open issue.

• No other binding price specification for gas is given. The only statement is that Rosukrenergo will buy up to 17 bcm of Russian gas at the price $230 per mcm and export (to the West) 15 bcm. Thus, it appears as if the Russian gas is to be exported by Rosukrenergo to the West and that Ukraine will hardly import any Russian gas, only Central Asian gas.

• The main feature of this trilateral agreement between Gazprom, Rosukrenergo and Naftohaz Ukrainy is that Gazprom's export arm Gazexport (headed by the decent Alexander Medvedev) is giving up lots of commercial interest to Rosukrenergo. Gazexport is to provide Rosukrenergo this year with: 41 bcm of Turkmen gas, up to 7 bcm of Uzbek gas and up to 8 bcm of Kazakh gas, that is a total of 56 bcm.

• Turkmenistan produces enough gas to supply Ukraine with an additional 20 bcm or so. Rosukrenergo shall be the sole seller of Gazprom-owned gas to Ukraine, but it is not stated that Central Asian states cannot sell directly to Ukraine.

• Oddly, the transit fee through Ukraine is fixed in dollar terms till the end of 2010, which is the only long-term commitment. The agreement does not specify that it shall be paid in cash, but Alexei Miller's statement makes that clear, which means the abolition of barter.

• Importantly, Russia has not gained any control over the Ukrainian pipeline system, which was a major Russian objective.

The conclusions of this reading are rather curious. Very little has been resolved, only the price of 60 percent of Ukraine's gas import during the first half of 2006 and the transit fee through Ukraine.

The main substance of the agreement is that the relatively transparent and decent Gazprom has given up substantial commercial interests to the shady intermediary Rosukrenergo. Tymoshenko, who might know, claims that Rosukrenergo has been taken over entirely by Russian interests, which would make sense.

The main fight thus appears to have taken place between Gazprom's public management and Rosukrenergo's unknown owners. According to plausible rumors, Rosukrenergo is controlled by the Igor Sechin circle, which may thus have won over Dmitri Medvedev and Alexei Miller, while Putin is likely present on both sides.

Ukraine rather appears an onlooker, and it has been given gas for half a year at a better price than anybody but Belarus for minimal concessions - the fixed transit fee for five years. One little noticed aspect is that Ukraine appears to have utilized the low prices last year to fill its huge underground storage of up to 20 mcm.

Yulia Tymoshenko is claiming that this agreement is criminal because it replaces the agreement of summer 2004, which set the price of Ukrainian purchase of gas at $50 per mcm and tied it to the transit tariff. Formally, she has a good point, but it is difficult to believe that such an absurdly agreement would be honored, even if it is supposed to be subject to international arbitration in Stockholm.

The ouster of the Ukrainian government does not mean that the agreement was bad for Ukraine but that a group of party factions in Ukraine has found it a good excuse to oust the government, and thus weaken it, before the elections.

One of the most important outcomes of this vote might be that Tymoshenko managed to line up with Victor Yanukovich, Victor Medvedchuk and the Communists. A change of political alliances in Ukraine might be under way.

To sum up, the key results of the gas agreement appear to be:

1. Rosukrenergo has taken control over more of Gazprom's and Central Asia's gas export. This can only benefit the owners of Rosukrenergo, and to the disadvantage of Gazprom's minority shareholders.

2. Ukraine has got low gas prices, but only for half a year.

3. Gazprom has achieved somewhat higher prices and stabilized its access to the European markets in the long run.

4. Russia has lost the international beauty contest and shaken its credibility in Europe as a reliable energy supplier, tilting the energy debate toward nuclear energy and LNG rather than gas through pipelines.

NOTE: Dr. Anders Åslund is a Senior Fellow at the Institute for
International Economics (IIE) in Washington, D.C. Contact:
aaslund@iie.com; website: www.iie.com.

Aslund is one of the most notorious Western advisors that pushed for "shock therapy" in the early 90s, and thus his writings on Russia must be interpreted through that lense, but what he writes here makes sense to me.

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