Tuesday, January 10, 2006

The contract

We have been entranced by the fact that a contract has been signed between Russia and Ukraine solving the gas crisis. I have been as much as anyone. It looked like that contract solved everything.

But now the contract has been made public and there isn’t much “there” there. It turns out that the price is set for six months only, a point LEvko picked up on early. And there is not much there on delivery terms or anything else for that matter. Ukraine says it has to sign a contract with Russia—this was only between Gazprom and Ukraine—for what is, I guess, the delivery of the gas to Ukraine. This seems to mean that the deficiencies would be solved in that next contract. But they might not be.

And it doesn’t really make that much difference anyway. The problem is that these contracts are not really enforceable in any court that could make a difference. And that is true even if the contract complied with all the legal requirements law students learn in the first year course on contracts. In other words, they may have a contract but it doesn’t really solve much of anything.

Why is this the case? Look at it this way: Suppose Russia didn’t comply with some provision in the contract—say they turned the valves again and stopped the gas-- what court could Ukraine take it the case to for the contract to be enforced? Some mentioned early on that Ukraine could take the original contract to arbitration—in The Hague was it?-- and that they would win. I am sure they could have. But winning would mean getting a verdict and that verdict would be from an arbitrator in The Hague. The gas however is in Russia. To get the verdict to have any effect on gas in Russia would require a Russian court to enforce that verdict. So Ukraine files to enforce that verdict in Russia. What happens? It is not impossible that the court would enforce it, but with the interest of the Kremlin in this and with the power the Kremlin has over the courts in Russia, it would make it highly unlikely that any Russian court would enforce it. So judgment for Ukraine in Europe but victory for Gasprom in Russia. And no gas would flow.

To be fair the same sort of thing applies to courts in Ukraine. This area is known to have the rule of law—except when it matters. For anyone really interested, that doesn’t mean you can’t get justice when going up against powerful interests. It’s just that you probably won’t get that kind of justice from a court of law. Our company works on these issues from a number of directions and we have success with it. But the legal option is only one of these.

So the upshot of this all is that having a contract, Ukraine really doesn’t have a contract. This whole thing is not settled at all. It still remains in the political sphere where it has been all along and will continue to come up when the Kremlin sees it in its interests to bring it up again. And being that the Kremlin sees its interests rather narrowly, it is bound to see it in its interests again.

The only limit right now on the Kremlin is either that they are afraid of riling the Europeans or that the players actually profiting from this are satisfied, at least for now. If the former, there might be some long-term peace even though the gas price is set for only a six month period. Making noises about Ukrainian gas might set the Europeans off again. But if it is the latter, though they might be satisfied now, they may not be for long.

Correction: It's the Stockholm Arbitration Court not anything from The Hague.

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