Who needs the middlemen?

Just three months ago PM Tymoshenko met her Russian counterpart, Vladimir Putin, at his Novo-Ogaryovo dacha. The leaders agreed an inter-governmental memorandum on gas deliveries. "After a very substantial talk, we managed to co-ordinate an inter-governmental memorandum on co-operation in gas issues, which could later serve as a basis for a future gas treaty between Gazprom and Naftohaz Ukrainy," said Putin.

By all accounts their meeting was cordial. It looked as if just a few details needed to be ironed out, and as long as accounts were paid on time, Ukrainian and European consumers would not have to worry yet again about the reliability of their gas supplies. Significantly, they also agreed on the removal of intermediaries in the Russia-Ukraine gas trade.

Today, even though there is still a dispute over late-payment penalties, it seems that Ukraine has paid its gas bills for 2008. But terms for 2009 are a long way from being agreed.

Under normal circumstances, if such disputes occur between utility suppliers and consumers, status-quo-ante terms could be briefly maintained until such time that fresh agreements were achieved. Then any balance, one way or another, could be repaid. Any inconvenience to suppliers, consumers, and other third parties would be minimised.

So why do Russia and Ukraine find themselves yet again, in a dispute over gas?

After the resolution of the 2006 dispute many experts tried to pick apart and explain the details of the hastily-made agreement which included 'cocktails' of Russian and Turkmen gas, make-weight deliveries and so on. None of their explantions were convincing. Today, in one sentence, the FT, in their write-up on the current dispute, let the cat out of the bag: "Legal experts could not verify the rival claims because Russian-Ukrainian gas contracts are secret." In other words, officially publicised contracts are merely 'ochkovtiratyelstvo'.

It is this opaqueness that provides cover for continuing wide-scale fraud benefiting the two country's elites. These disputes have never been about gas prices and storage and transit rates, but about 'whose hands are in the middle-man's trouser pockets'. [See link to Jerome de Paris article my previous blog.]

Almost exactly a year ago I posted a blog on how the Tymoshenko government had put the squeeze on one intermediary, 'UkrGazEnerho', to the benefit of consumers, but also to the benefit of other independent traders, and some of her sponsors.

Tymoshenko's mid-90's involvement in the huge gas importer and distributor United Energy Systems of Ukraine is well known. UESU's dominance at that time forced major 'businessmen' in Donbas to stop blowing one another up and shooting one another, and to work together and form powerful alliances to counter the UESU threat in this field.

Just a few months after the 2004 Orange Revolution president Yushchenko sacked the-then PM Tymoshenko because her boys at the security service had spectacularly accused the president of hindering their attempts to tackle corruption in the Russia-Ukraine gas business, to the incredulity and dismay of millions of OR supporters.

In January 2006, Yuriy Yekhanurov, who had replaced Tymoshenko as PM, received a vote of no-confidence in the Ukrainian parliament after the secret details of a fresh deal he'd clinched with Russia to solve that winter's gas crisis in which new intermediaries entered the frame, had been exposed.

And in recent months parliamentary speaker Arseniy Yatsenyuk was dismissed from his post, according to some, for his staunch opposition to the existence of energy intermediaries. Also, a major group inside PoR led by RosUkrEnergo head Dmytro Firtash, former 'NaftoHaz Ukrainy' CEO Yuriy Boyko, and head of former PM Yanukovych's office and RUE lobbyist, Serhiy Lyovochkin, worked hard to prevent the formation of a PoR-BYuT coalition. Such a parliamentary coalition, at one time unthinkable, could, in principle, have provided the stability the country desperately needs.

So the Russian-Ukrainian gas business, and in particular its intermediaries, certainly are a continuous major bone of contention between Ukraine's rival politicians.

Your blogger would suggest that it is not unreasonable to consider the current dispute is about elites both in Ukraine and Russia, fighting amongst themselves to maintain their piece of the action via these intermediaries, rather than the price of gas for Ukrainian consumers and its westward transit through the country which, as the Putin-Tymoshenko meeting illustrated, perhaps could be resolved without too many problems.

"All the rich people in Ukraine made their money on Russian Gas" - Ihor Bakai, 1998

p.s. There is detailed analysis of these matters in this 16-page paper from the latest 'The Washington Quarterly' entitled "Where East meets West: European Gas and Ukrainian Reality"

p.p.s. There are reports that Russia could face problems of storage of surplus gas if a contract with 'NaftoHaz Ukrainy' is not signed, something I hinted at in a previous blog.