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13 July, 2011  ▪  Oksana Kushnir

Ukraine Must Change Its Position In Gas Talks

Recent events in the center of Europe proof again that he who controls the infrastructure has the best chance of success

The interests of the leading players in the energy sector have clashed over Ukraine's pipelines and control over the resource. The main diplomatic and media battles in the region are being waged today not so much about gas volumes as over distances the gas is pumped. Gazprom CEO Aleksey Miller said Ukraine will receive a discount only if Naftohaz and Ukraine’s gas transportation systems are merged with the Russian monopolist. His statement is totally in line with the logic of this struggle.

Gazprom has incurred palpable losses in Europe. The European Commission is actively supporting the actions of its members to push the company out of domestic markets after more than a dozen years of Gazprom’s penetration. The Russian company has managed, directly and via small structures, to gain control of some trunk pipelines and their branches in EU countries. The Third Energy Package recently adopted by the EU prohibits a company to be both a supplier of gas and at the same time the owner of the pipeline through which it is delivered. This renders Gazprom’s strategy illegal.

Thus, East European countries, which, like Ukraine, are heavily dependent on Russian gas, have tackled the issue of forcing Gazprom out. In 2010, Poland needed every bit of the European Commission’s diplomatic power to prevent the Russians from laying their hands on one of its major pipelines – Yamal-Europe. Bulgaria and other regional powers are working on Nabucco in a bid to enable gas deliveries from Azerbaijan and Iran. Guided by the Third Energy Package, Lithuania took a radical step in announcing that its Lietuvos dujos company in which Gazprom had a stake would be split up and shareholders would be changed. This blocking move with regard to strategic objects has already evoked a nervous reaction from the Kremlin – Prime Minister Vladimir Putin called the Third Energy Package “discrimination of Russia” and “confiscation” of its property in Europe.

Denied opportunities to getting a foothold inside the EU, Russia is trying to maintain its presence in countries directly adjacent to it. The best scenario for it is to have all gas pipelines leading to the EU under Gazprom’s control. The Nord Stream and the South Stream are being constructed for this purpose and are funded as much as possible from the budgets of EU and European companies, thus preventing money from being channeled into alternative projects. Belarus’ gas transportation system is essentially Gazprom’s property now. In early July, the Belarusian government submitted a package of proposals on transferring the remaining 51% of its GTS to Gazprom in exchange for an “anti-crisis” credit. (The Russians already have a 49% stake in Beltransgas). Hence the attention has now turned to Ukraine’s gas transport system.

Russia’s offer to Ukraine – a merger in exchange for a gas price discount – is classical fraud scheme which the Belarusians have already suffered from. Under this scenario, the Russians give a country six months to enjoy the new status quo and then lay a claim to another strategic object, threatening to raise the gas price again, and so on until the entire profit-making share of its energy-sector ends up in Russia’s hands.

Our government so far intends to keep the GTS in the state’s possession, but the first alarming signals can already be heard. The draft law “On Government Guarantees Regarding Court Decision Execution” of January 14, 2011, in particular grants the Cabinet of Ministers the right to decide which gas transportation enterprises fall under the sale ban. In other words, the government would be able to decide the future of Ukraine’s GTS on its own. This gives hope to the Russians as they step up pressure on Ukrainian officials in gas talks. At the same time, this weakens the position of the latter as they can no longer point to the legislative ban on the sale of the GTS.

In general, the Ukrainian government is currently unable to mount sufficient resistance to the Russians. A real counterargument can be seen perhaps only in the threat to raise its gas transit fee, which is now at USD 2.84 per 1,000 cubic meters of gas per 100 km. This is less than in the EU, and the government threatens to raise it 50%. However, unlike the Kremlin, which sets gas prices as an ultimatum, our leadership is using transit fees only as a hypothetical argument and may never venture to take the step, hoping for an amicable agreement.

However, both Ukrainian and European experience proves that attempts to strike a deal with the Russians in a closed format and without “making noise” are doomed to failure. In this area, Russia has traditionally been stronger and will always find a way to impose a scheme it benefits from. In contrast, Ukraine would have to equip itself with methods that proved to be efficient in the EU: open and transparent negotiations and lawsuits, of course, complemented with powerful diplomatic and media support. In this case, Ukraine may stand a chance in its talks with Russia.

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