Global Insight Perspective

Significance

Yulia Tymoshenko, the incoming Ukrainian prime minister, has signalled her intent to re-negotiate a controversial natural gas agreement signed between Ukraine and Russia in January.

Implications

The elevation of Yulia Tymoshenko and her party to secure control of the Cabinet's fuel and energy posts in addition to nominating the head of Naftogaz Ukrainy raises the prospect of another bitter and protracted dispute between Ukraine and Russia over gas supplies.

Outlook

With Turkmenistan set to raise gas export prices to Russia, which in turn will seek to raise prices for Ukraine, Tymoshenko has little room for manoeuvre in any negotiations and stands little chance of reversing the structure of the current deal which uses a controversial intermediary company to export gas from Russia to Ukraine. The Ukrainian government will struggle to finance any price hike and in the event of another dispute may be forced to turn to the European Union (EU) for aid.

Russia's state-controlled gas behemoth Gazprom wasted no time yesterday in launching the long-awaited smear campaign against incoming Ukrainian Prime Minister Yulia Tymoshenko, accusing the fiery populist premier of pursuing policies that could trigger a repeat of the bitter gas dispute between the two states over the New Year which led Gazprom to temporarily cut off supplies, sending shockwaves throughout Europe (see Ukraine: 22 June 2006: Ukraine's Orange Parties Break Coalition Deadlock, Tensions Linger as Ousted PM Regains Post).

In an address to parliament after the coalition deal was announced, Tymoshenko said that the incoming government would work hard to re-negotiate the controversial gas agreement which was signed between Ukraine and Russia in January. Tymoshenko was quoted by RIA Novosti as saying that "all agreements on gas supplies to Ukraine today call for further profound revision, and for construction in a friendly mode of new contractual relations with Russia and Turkmenistan". The comments immediately sparked an angry reaction from Gazprom and the Kremlin's public relations machine swung into action, attempting to capitalise on the perception that Tymoshenko remains a choleric and unreliable manager of the transit system and, therefore a source of risk to Europe’s energy supply. Sergei Kupriyanov, Gazprom's spokesperson, said that Tymoshenko's comments were "another wake-up call for Europe", while Gleb Pavlovksy, the Kremlin's premier spin-doctor claimed that Tymoshenko was "trying to blackmail Russia and Europe".

Tymoshenko has long been critical of the controversial gas agreement which was signed between Ukraine's state oil and gas company Naftogaz Ukrainy and Gazprom. Under the terms of the agreement, Naftogaz agreed to a 90% hike in Russian gas prices from US$50 per 1,000 cubic metres (cm) to US$95 per 1,000 cm while Gazprom agreed to a 40% hike in the fee for transiting Russian gas through Ukraine from US$1.09 per 1,000 cm/100 km to US$1.60. The agreement also granted RosUkrEnergo, a Swiss-registered trading company, the sole right to be the intermediary company acting as the vehicle through which Ukraine purchased Russian and Central Asian gas. As part of the agreement, Gazprom took a 50% stake in RosUkrEnergo, but the most controversial aspect of the agreement was the fact that initially the details on who owned the remaining 50% were not revealed, which led to a number of questions on who were the real beneficiaries of the deal. The owner of the intermediary was subsequently identified as a murky Ukrainian businessman, Dmytro Firtash but despite this revelation and subsequent attempts on RosUkrEnergo's part to boost its transparency, Tymoshenko capitalised on the complex deal, accusing President Yushchenko and his Our Ukraine (OU) party of failing to fulfil his promises to investigate corrupt practices and institute transparency through the entire state apparatus (see Ukraine: 27 April 2006: Ukrainian President Pressurised After Audit Sheds Light on Opaque Gas Trader). Tymoshenko's opposition to January's gas deal was a significant factor in catapulting her political bloc (BYT) to a second-place finish in the March parliamentary election.

Outlook and Implications

The elevation of Tymoshenko back to the prime ministerial post, allied to the fact that her BYT party will also take control of the Cabinet's fuel and energy posts in addition to nominating the head of the Naftogaz Ukrainy, does raise the prospect of another bitter and protracted dispute between Ukraine and Russia over gas supplies. Nevertheless, another dispute has been on the cards since the implementation of the deal as Gazprom has indicated that it will seek to raise gas export prices from 1 July; BYT's entry into government will only serve to make the negotiations more antagonistic.

While Tymoshenko has indicated that she will seek to renegotiate the current gas deal with the ultimate aim of 'normalising' the Russia-Ukraine gas relationship and removing RosUkrEnergo's controversial role as an intermediary, the fact remains that Ukraine has little room for manoeuvre. Not only did the January deal give Gazprom (through RosUkrEnergo) a monopoly over gas supplies to Ukraine, but it also gave Gazprom (through RosUkrEnergo which owns half of UkrGazEnergo, along with Naftogaz) access to Ukraine's internal market. Moreover, the Ukrainian government is already having difficulties in dealing with the increase in the 2005 gas import prices. The government has taken the long overdue step to increase consumer gas prices, but after Gazprom allowed the Ukrainian government to continue to import gas without payment from January through May, Naftogaz has been forced to seek US$500 million in loans when the bill came in earlier this month. As a result, Ukraine has fallen behind schedule in stocking up on gas which has reverberated around Europe, fearing that Ukraine will resort to siphoning off gas in the event of a repeat of the disruption in Russia's supplies to Europe.

The prospect of another dispute is increased by the Turkmen government's efforts to raise the price of exports to Russia (which are primarily used to supply Ukraine) to US$100 per 1,000 cm of natural gas instead of the current US$65 per 1,000 cm. The Russian government has taken measures to prevent Ukraine from dealing with the Turkmen government directly, forcing Tymoshenko to deal with RosUkrEnergo.

Consequently, Tymoshenko's options are limited. If she moves to cancel the deal quickly, the Ukrainian government runs the risk of inflaming the situation which could lead to disruption in Russian and Central Asian gas exports to Ukraine, and potentially lead to a further interruption in Russian gas exports to Europe via Ukraine. Yesterday's comments from Gazprom are part of an ongoing public relations campaign designed to forewarn European governments that in the event of any disruption to the transit system in the winter, blame should be laid at the door of Ukraine, not Russia. The Russian government came off second best in the gas dispute earlier this year as it shattered its carefully cultivated image as a stable supplier of energy to Europe. Gazprom is determined that in the event of another gas dispute it will shift the blame over to Tymoshenko and Ukraine, which in its current predicament, will be forced to illegally siphon off gas again.

While Tymoshenko will use her position to try to renegotiate the current deal, she is fully aware that should Turkmenistan hike the price of gas exports to Gazprom, which will in turn seek to the price for Ukraine, the government's coffers are in no position to afford the increases. Given European governments' concern about disruption in energy supplies, Tymoshenko may seek to secure subsidies from the European Union (EU) to finance the price hike. However, this will not go any way towards 'normalising' the Russia-Ukraine gas relationship.

Raul Dary

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