Saturday, February 04, 2006

Gas gas gas..jumping jack flash..

On 1st January 2006 Russia turned off gas valves supplying Ukraine with its gas - in the next days, Ukraine's Ministry of Foreign Affairs, then President Yushchenko, issued strongly worded statements talking of "blackmail,” and “attempts to destabilize the Ukrainian economy.” Ukraine at the same time significantly reduced flows of Russian gas passing via Ukraine to European customers.

By 4th January after a storm in western media, truce was declared and an agreement hastily cobbled together and signed in Moscow by Gazprom, and just a few top men from Naftogaz Ukrainy. The agreement was leaked to the press by Yulia Tymoshenko, and it became apparent that its signatories had been "economical with the truth" - there were many loose ends that hadn't been nailed down, and murky middlemen would become sole providers of gas for the Ukrainian market. Though President Yushchenko described the agreement as a success, even crediting Putin for this, the ensuing scandal was used by the political opposition to ‘ouster’ the Cabinet in Ukraine's parliament.

The agreement stipulated that a JV be formed by 1st February 2006 between Ukraine's state gas company Naftogaz and the shady intermediary RosUkrEnergo, to supply gas to Ukraine's internal market. [RosUkrEnergo, is the sole provider of gas which it purchases from Turkmenistan, Russia's Gazprom, and elsewhere and delivers to the Ukrainian borders. It is itself jointly owned by Gazprom and name-plate companies with secret beneficiaries.]

On 2nd February the new JV, the rather clumsily named UkrGazEnergo, was offically launched, and RosUkrEnergo and UkrGazEnergo signed a contract whereby gas was to be supplied to the Ukrainian market at one of the lowest rates in Europe - $95/ for the next five years.

But later, a RosUkrEnergo representative stated the the price was subject to variation. Finally a spokesman for President Yushchenko added to the confusion, saying: "the President expects that inter-governmental Russian-Ukrainian agreement will confirm a stable price for five years."

After the furtive way the 4th January agreement was presented and the scandals this caused, one would think that all parties would have learned their lesson and would be completely 'up front' with the 2nd February contracts. But hey, but this is Ukraine..

Today the highly respected Kyiv weekly, 'Dzerkalo Tyzhnya' [and others] have published a further six secret and previously undisclosed documents which had been signed on 4th January in addition to the original agreement. These will be closely scrutinized by opposition parties, but it is already clear that the deal is even more convoluted and murky than anyone thought.

Many including 'NY Times' have commented on the doubious nature of these shenanigans, but it seems that Russian and Ukrainian leaders have no problem brazenly continuing arranging gas business in this manner despite the furore it is all causing.

Domestic Ukrainian households, whose gas is supplied at well under the $95 price mainly from gas fields inside Ukrainian territory, may not be particularly affected by all of this. But a sceptical observer may conclude:

[1] The continued use of the secretive intermediate operator RosUkrEnergo provides possibility for Russian/Ukrainian ruling power elites to continue skimming off vasts amounts of cash annually.
[2] Gazprom and these power elites will have greater say in Ukraine’s internal gas pricing structure, and, as the newly-revealed documents seem to indicate, greater control of Ukraine's gas transit system and its vast storage facilities, in particular.
[3] Because Ukrainian political parties are controlled to a greater or lesser extent by oligarchic industrial groupings, the intermediate operator and its secret benefactors will be able to apply pressure and damage any oligarchic adversaries seen posing a commercial or political threat.
[4] The 4th January volte-face, and the opaque manner in which dealings have been arranged so far indicates that there are still many unanswered questions in the Ukraine/Russia gas saga.

An afterthought. Several years ago in Great Britain the country was almost brought to a standstill in just a few days by several hundred striking gasoline delivery-truck drivers. So who, ultimately, has control of fuel deliveries?

Rumors are circulating that Oleksandr Tretyakov is being proposed for CEO of the newly launched UkrGazEnergo. The current acting head is Ihor Voronin. Gazprom Deputy Chairman of the Board of Trustees Alexandr Ryazanov has been appointed head of its supervisory council.

Tretyakov was a close aide to President Yushchenko until he was accused by former SBU chief Olexander Turchinov of covering up for the “transnational criminal system” that he claimed RosUkrEnergo to be. Tuchinov is one of Yulia Tymoshenko’s closest confidants, and resigned when Tymoshenko was sacked by the President. Voronin also featured in Turchinov’s investigations.

It seems that most of the Ukrainian cabinet were unaware of details of the 4th January 2006 Gazprom/Naftogaz documents until 31st January. PM Yekhanurov suggested on 2nd February that if any of them wants to resign, then they should go. Some suggest there may be legal reasons for the agreements to be invalidated on the grounds that representatives of the Ukrainian side exceeded their authority in signing the documents.

Today, in an interview Ukrainian Minister of Finance Viktor Pynzenyk called the agreement by RosUkrEnergo and Naftogaz Ukrainy to form the JV UkrGazEnergo as being ‘not particularly reliable... We do not have command of accurate information on what conditions the JV is to be created… The agreement is insufficiently reliable to enable the country to feel at ease about the gas supply balance, and of its price.’

Pynzenyk raises an interesting and obvious point that others have missed. He claims that about 7.5 Bn.c.m. of gas are used to drive the pumps and compressors that help transit gas bound for European countries via Ukraine. The cost of this gas should be directly linked to the value of the gas being transported. Yet this link has now been broken.

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