At Large

A Severe Case of Gas

The Russian-Ukrainian dispute is mighty complicated -- the only obvious thing is that Moscow sure would like to have  direct control over Ukraine's pipeline.

By 1.16.09

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The story seems so simple. The Russians cut off gas supplies to Ukraine for not paying their gas bill. The European Union depends on Russia for 25% of its gas requirements of which 80% arrives via Ukraine's pipelines. Except, as in everything regarding Russia, it is not quite so simple.

To begin with, the entire history of Russian gas development goes back to the days of the Soviet Union and the broad expanse of the post-revolutionary Russian empire. The gas pipelines, pumping stations and storage facilities of the Ukraine originated with the development of the gas deposits of the Ukraine. As these deposits played out, the source of Soviet gas shifted to Siberian drillings, though their transportation infrastructure remained centered on the Ukraine.

With the breakup of the USSR, the increasing export of Russian and central Asian gas to Western Europe was dependent on the pipeline and storage structure of independent Ukraine through which the product still transited. The Ukrainians made money on their transportation and storage role and the Russians made money from their monopoly on the provision of gas to Ukraine and Western Europe. Here is where things become a bit more complicated.

Gazprom, the giant Russian energy company, controls the production and sale of Siberian gas and the transport of central Asian gas through Russia. Naftogaz is the principal Ukrainian instrument importing gas for their use. The actual supplier of this gas is UkrGazEnergo. This company is a joint venture of Naftogaz and RosUkrEnergo, a Swiss-based middleman that sells gas to UkrGazEnergo. And, just to be clear, RosUkrEnergo is 50% owned by Russia's Gazprom.

Here is where the tricky part comes in. The money said to be owed by Ukraine's Naftogaz to Gazprom must be paid first to RosUkrEnergo and then sent on to Gazprom. Fine, you say, send the money Ukraine (Naftogaz) owes to Russia (Gazprom) via RosUkrEnergo. Not so fast: Naftogaz is said to owe money to UkrGazEnergo -- which as noted earlier is a Swiss company jointly owned by Naftogaz and RosUkrEnergo, the one half Gazprom-owned corporation.

Behind all of this wonderfully complex business arrangement is the fact that Gazprom would like to own the entire pipeline that brings Russian and central Asian gas to Western Europe through Belarus and Ukraine. Moscow has gained a 50% ownership of the Belarus line, but so far has failed in regard to Ukraine. Any debt on gas deliveries to Ukraine therefore puts pressure on Kiev to rethink its stubborn refusal to negotiate the Ukrainian pipeline ownership with Gazprom.

The debt owed Russia by Ukraine for gas deliveries is claimed to be $2.4 billion. Kiev says that amount is incorrect. Anyhow, it says, it doesn't have the money. The International Monetary Fund, however, insists that Ukraine does have the money if it will consider transferring assets such as a portion of ownership of its pipeline. Back to square one.

To add to the complication is the fact that Swiss-registered RosUkrEnergo is a joint venture between Gazprom and the Ukrainian billionaire gas trader, Dmitry Firtash, and his holding company, Group DF. This latter organization is a haven for several of Firtash's high rolling friends. The Ukrainian prime minister, the dynamic Yulia Tymoshenko, has referred to RosUkrEnergo as "one of the corrupt intermediaries" involved in the Russia gas trade.

Ms. Tymoshenko, who before entering politics had made her fortune through ownership of an energy company, wants to cut out RosUkrEnergo and shift its gas supply contract to a more direct agreement between Naftogaz and Gazprom. Presumably this is what she and Vladimir Putin will talk about during their “emergency" meeting on January 17. President Medvedev's invitation for a summit meeting with EU leadership of gas import companies did not bring an enthusiastic reaction, but an EU Commission energy team has agreed to go to Moscow.

The accord to have EU monitors check on Russian gas transiting Ukraine has been frustrated by ill-defined protocols. The Moscow claim that the Ukrainians were pilfering gas destined for Europe has been denied, of course, by Kiev, and the gas spigot remains at "off."

Both sides continue to fling claims of perfidy at each other. The vice chairman of Gazprom stated that U.S. interests are urging on Ukraine. The International Energy Agency says Russia has lost its status as a reliable gas supplier. Meanwhile, the president of the European Commission suggested that the offending Ukrainian and Russian companies should be sued. The Balkans is freezing and the rest of Europe is expecting that it might. No, there's nothing simple in this energy politics brawl.

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About the Author
George H. Wittman writes a weekly column on international affairs for The American Spectator online. He was the founding chairman of the National Institute for Public Policy.