During the “gas war” between Ukraine and Russia, President Viktor Yushchenko said justly that “this serious test of independence should make us stronger and more independent”. And Prime Minister Yuri Yekhanurov advised journalists to find out who exactly stood behind the agreement between Naftogaz Ukrainy and Russia’s Gazprom [on new terms of supplies and transit of Russian natural gas].

The following is an attempt to analyze how much stronger and more independent the gas deal has made Ukraine; how much further Ukraine has moved to its declared goal of diversified sources of energy; and who has become Ukraine’s partner, and why.

What Was Signed In Moscow On January 4?

The Trilateral Agreement on Relations in the Gas Sphere was signed at 2.30 a.m. January 4 in Moscow. For Ukraine it was signed by Fuel and Energy Minister Ivan Plachkov and Naftogaz Board Chairman Oleksiy Ivchenko.

President Yushchenko called the agreement mutually profitable and stated that the document was drawn up professionally. “I possess all information on each item of this agreement. I have talked several times with Vladimir Putin about nuances of the new policy. I can state that healthy compromise was found at both the political and the economic level.” Prime Minister Yekhanurov, Fuel and Energy Minister Plachkov, and especially Naftogaz Board Chairman Ivchenko called the agreement “Ukraine’s victory” that was won thanks to the Ukrainian negotiators’ good coordination and professionalism: Ukraine would buy Russian natural gas at $95 per 1,000 cubic metres instead of $230 as Gazprom demanded.

However, Russian President Putin stated during his meeting with Yushchenko in Astana, Kazakhstan that Gazprom would sell its gas to Ukraine at $230. The Ukrainian President did not respond…

The agreement consists in the following. The new tariff for transit of Russian natural gas via Ukraine’s territory is $1.60 per 1,000 cubic metres per 100km. This tariff will be effective until January 1, 2011. The Ukrainian side undertakes to transport the natural gas that belongs to Gazprom (its daughter company Gazexport Ltd, to be more exact) and RosUkrEnergo. Gazprom undertakes to transport via Russia the natural gas that belongs to RosUkrEnergo at the same tariff.

From now on, the sole supplier of natural gas to Ukraine is RosUkrEnergo, which means that Gazprom is formally outside the process. Naftogaz, for its part, undertakes “not to export the natural gas supplied from the Russian Federation”.

Moreover, Naftogaz will have to share the national gas market with a joint venture that it is going to establish with RosUkrEnergo. Under the January 4 agreement, the authorized capital of the new joint venture “will be formed by contribution of money and other assets”.

There is a notable detail: the January 4 agreement stipulates “the annual gas balance of the company RosUkrEnergo” but not Ukraine as it was meant initially. The agreement states exactly how much natural gas this intermediary company is supposed to buy and sell annually. The purchase scheme is as follows: RosUkrEnergo will buy 41 billion cubic metres of Turkmen natural gas, up to 7 billion cubic metres of Uzbek natural gas (Gazexport’s quota), and up to 8 billion cubic metres of Kazakh natural gas (also Gazexport’s quota). Another 17 billion cubic metres will be bought from Gazprom at a price calculated on the basis of the reference price ($230 per 1,000 cubic metres).

The selling scheme is simpler. In 2006 RosUkrEnergo plans to sell 34 billion cubic metres at $95 to the newly established joint venture, which will sell it to Ukrainian consumers and will have no right to export it. Importantly, the agreement states that the price $95 is effective only in the first semester of 2006.

Beginning from 2007, RosUkrEnergo will sell up to 58 billion cubic metres of natural gas to Ukraine and will export another 15 billion cubic metres jointly with Gazexport (under the export quota).

The contract also states that the transit tariff and the price of supplied natural gas may only be revised upon the parties’ mutual agreement.

The January 4 agreement was signed by three parties: A. Miller for Gazprom, O. Ivchenko for Naftogaz Ukrainy, and O. Palchikov and K. Chuichenko for Rosukrenergo.

The Ukrainian opposition as well as many pro-government politicians and even members of government assessed the contract with a good deal of criticism. Ex-Prime Minister Yulia Tymoshenko opposed it very vigorously, demanding to abrogate it in court and calling it “high treason against national interests”. “You’ve got to be at least Zhirinovsky to sign an agreement like that on behalf of Ukraine. You’ve got to be having a bad hangover after a heavy New Year’s drinking spree to call this agreement successful.”

Oleksandr Chaliy, the former Deputy Foreign Minister, called it “catastrophic”, saying that January 4 was “Pearl Harbor for Ukrainian diplomacy”. When Prime Minister Yekhanurov tried to explain the agreement to lawmakers on January 10, he heard many unpleasant remarks. Passions have not abated since. On the contrary, there is even a higher wave coming up: by January 16 Ukraine is supposed to offer its version of an intergovernmental agreement on supplies and transit of natural gas and to prepare relevant commercial contracts for signing.

What Directives Did The Sides Follow?

Actually, this outcome was programmed by the Russian side back in October when Gazprom President Alexei Miller approved the company’s balance for 2006. Ukraine was supposed to receive 55 billion cubic metres: 15 billion cubic metres from Gazprom (Gazexport) and 40 billion cubic metres from RosUkrEnergo. The terms of the January 4 agreement reserve 17 billion cubic metres for RosUkrEnergo to sell it to Ukraine at $230 per 1,000 cubic metres. Irrespective of its tactical goals in negotiations, the Russian side definitely and evidently achieved its strategic goal.

The Ukrainian negotiators followed the directive signed by Prime Minister Yekhanurov and First Deputy Foreign Minister Ogryzko. According to available information, the directive set the highest limit of $80 per 1,000 cubic metres of supplied natural gas and at least $1.75 per 1,000 cubic metres per 100km for transit of natural gas via Ukraine. The Ukrainian side evidently failed to cope with its task and exceeded their authority, having agreed to a higher price and a lower transit tariff.

How Dangerous Is The Gas Deal For Ukraine?

Many experts point to the fact that the January 4 agreement (and all further intergovernmental agreements and commercial contracts to be concluded on its basis) will deprive Ukraine of alternative sources of supplies. Now Ukraine will depend on a monopoly: the obscure company RosUkrEnergo with unknown stakeholders, indefinite guarantees and obligations, an authorized capital of $37,000, and billion-dollar contracts. And no one can guarantee that one day the company will not refuse to supply natural gas to Ukraine. This monopoly can not be forced to abide, because there are no interstate agreements. Moreover, the company is beyond Ukraine’s control, as it is under Swiss jurisdiction.

Besides, now the Russian Federation is not bound by the active legal guarantees of supplies of natural gas to Ukraine or any other terms of the 2001 agreement. Nor is Gazprom bound to pay in full for the transit of natural gas via Ukraine. And Ukraine is left without access to any other transit but that through its own territory.

Moreover, the Ukrainian industrial consumers will depend on a joint venture that will set its own prices. The housing, communal, and government-funded sectors will receive natural gas from Naftogaz. It is unknown how much the joint venture will charge, especially in the second half of the year. Besides, the profit will have to be shared among the co-founders (which will eventually make a big hole in the state’s coffers). And it is unknown who exactly will found that joint venture and on what terms. The Prime Minister says that Ukraine will not cede its gas transportation system as a contribution to the authorized fund. It would be good if it were so.

The January 4 agreement rigidly sets the tariff for transit of Russian natural gas via Ukraine at $1.6 per 1,000 cubic metres per 100km until 2011, and breaks the “supply-transit” price correlation, which would otherwise be Ukraine’s trump card in further negotiations. It means that the transit tariff will remain unchanged for five years even if Russia raises the price of supplied natural gas.

The agreement does not contain a complete formula for calculating the price of natural gas. It means that the current $230 may as well be changed at any time and without any economic substantiation. In fact, Ukraine has surrendered the $50 price that would otherwise remain legally valid until 2009.

Experts point to another fact. When Ukraine bought Russian natural gas at $50 and pumped 110 billion cubic metres annually, charging $1.093 for transit, it received about 29 billion cubic metres as payment for the transit services. Now, with the $1.6 transit tariff and $95 per 1,000 cubic metres, Naftogaz can receive less than 22 billion cubic metres as payment for pumping the same annual volume of natural gas. The Russian side promises, however, to export 10 billion cubic metres more than the initially planned amounts, so Ukraine may receive more natural gas for its transit services. But under the new contract Ukraine loses 7 billion cubic metres, which it has to buy elsewhere, spending $700M (at the present prices). In order to preserve the existent proportion and receive the same 29 billion cubic metres, the transit tariff should be around $2.1 instead of $1.6.

Apart from that, Naftogaz has to subtract 5 billion cubic metres from this 22 billion, clearing its outstanding debt to Gazprom until 2009. As a result, Ukraine will receive a mere 17 billion cubic metres.

And most surprisingly, the January 4 agreement does not envision any procedure of settling disputes between the parties. This means that should any dispute arise, either party will have to seek arbitration in Moscow - the place where the agreement was concluded.

Even if we regard this agreement as a framework one, it poses serious risks, because such documents normally serve as a basis for further specifying documents. And if they are signed on such terms, Ukraine is sure to lose the last vestiges of its economic independence. In fact, this country began to lose ground long before January 4.

A History Of Errors

(2000 - 2004)

Russo-Ukrainian relations were far from good in 2000, and yet it was one of the most successful years. On December 22, the two governments signed a document that was very advantageous for Ukraine: The Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on Guarantees of Transit of Russian Natural Gas through the Territory of Ukraine. Gazprom undertook to transport 124.6 billion cubic metres of natural gas via Ukraine in 2001. 30 billion cubic metres of that amount would go to Naftogaz Ukrainy as payment for the transit services. The Russian Federation also guaranteed transit of Turkmen natural gas via its territory to Ukraine in the annual amount of 30 billion cubic metres . The agreement even stated exactly how much natural gas Gazprom was to supply per quarter. The year was successful and not very cold, and Naftogaz even managed to accumulate a reserve of 7 billion cubic metres of natural gas in underground storage.

The history of Ukraine’s capitulation began in 2001. Having two sources of gas supply (Russia and Turkmenistan) and controlling 95% of Russia’s gas exports, Ukraine stood in the way of Gazprom’s plans of expansion to Europe. That is why Moscow changed its tactics. To begin with, it claimed Ukraine’s $1.4-billion debt.

In September 2001 the Ukrainian government signed an intergovernmental agreement with Russia On Additional Measures for Ensuring Transit of Russian Natural Gas through Ukraine’s Territory, in which it acknowledged the debt and undertook to clear it by 2009.

The new agreement actually emasculated the previous one and did not even mention the volumes of transit and terms of barter payment for transit services. Nor did it mention Russia’s obligations to transport 30 billion cubic metres of Turkmen natural gas to Ukraine. Having untied its hands, Gazprom grabbed at the entire transit of natural gas from Central Asia.

The bottleneck in the Central Asia - Center main pipeline was Uzbekistan, with its annual transit capacity barely reaching 30 billion cubic metres . But back in 1998 Ukraine and Uzbekistan concluded an agreement of unlimited duration on transit of Turkmen natural gas to Ukraine.

Gazprom tried hard to persuade Uzbek President Karimov to let the Russians “into the pipeline”, but Karimov stood his ground. Instead of supporting him, Kyiv began to demand $800,000 for repairs to an Antonov 70 plane. In response, Tashkent reminded Kyiv about a $20M debt to Uzbekistan. Later, when the Ukrainian leadership openly accused Karimov of unfair elections, relations between the two countries became even worse.

While Gazprom was coaxing Karimov, Russian customs detained a plane with a huge cargo of gold jewelry meant for the chain of shops that belonged to Karimov’s daughter. As a last resort, the Uzbek President turned to Vladimir Putin for help. He got it and in December 2003 the Uzbek government concluded a contract with Gazprom, which gave the latter access to the Uzbek gas transportation system. Gazprom did not invest much, but it got its foot in the door: now the Russians stood firmly on the Uzbek pipeline.

Ukraine did not worry much. No one even tried to do anything about it, forgetting about the active agreement with Uzbekistan on transit of Turkmen natural gas to Ukraine.

It did not take Moscow long to agree with the Turkmen President. When the masterminds of an attempt at his life fled to Russia, he demanded that Russia ban double citizenship. Putin agreed. In gratitude, Niyazov agreed to sign a contract for supplies of Turkmen natural gas to Gazprom. Naftogaz was not alerted and, instead of negotiating, concentrated on transit schemes.

Naftogaz decided to make some money on exporting the 7 billion cubic metres of natural gas that was “saved” in Ukrainian underground storage. Pursuing their momentary commercial interests, the Naftogaz management began to build up corporate relationships with Gazprom and a Hungary-based company named UralsTransGaz.

In the meantime, Putin embarked on replacing the Gazprom management and on ousting the US-registered Itera Corporation from the gas business. Before early 2003, Itera was the authorized operator of supplies of Turkmen natural gas to Ukraine and its transit up to the Russia-Ukraine borderline. For its services, Itera received a certain amount of natural gas from the Ukrainian side, but it was bound to sell it exclusively in Ukraine. Besides, Naftogaz remained the actual owner of the natural gas transported by Itera. And if the corporation had ever ventured to sell it elsewhere than Ukraine, it would have had a hard brush with the law.

In 2002, the Russo-Ukrainian governmental-commercial alliance replaced Itera with a new operator - the private firm UralsTransGaz. The firm was registered in Hungary on December 5 (while tax privileges were still available in Hungary). It was founded by several private individuals, but the media hinted at Seva Mogilevich - an authoritative criminal.

It was Ukrainian officials who told the Turkmen and Kazakh Presidents that UralsTransGaz would take over as the operator. Neither Niyazov nor Nazarbayev was happy, but the Ukrainian side agreed to the terms offered by the Russians. Now UralsTransGaz was authorized to transport the natural gas that Ukraine bought from Turkmenistan but was not bound to sell it in Ukraine. The road to export was open. Itera never disagreed with the newly appointed top managers of Gazprom, but it was a US resident and Gazprom needed total control. When UralsTransGaz stained its reputation with a criminal case of gas contraband, it was succeeded by RosUkrEnergo.

The Price Formula

Yuri Boiko, the new board chairman of Naftogaz Ukrainy, and his deputy Igor Voronin were so deeply drenched in export deals that they simply had no time to correct the mistakes made in relations with Kazakhstan, Turkmenistan, or Uzbekistan. On July 16, 2004 Voronin signed a contract with Zarubezhgaz Management und Beteiligungsgesellschaft mbH for supplies of natural gas in 2005-2009. The company is known to be directly linked to Gazprom. Naftogaz undertook to hand 3.5 billion cubic metres of natural gas over to ZMB at the Ukraine-Slovakia border from January 2005 to December 2009. The contract was tentatively estimated at $1,575M. In August the planned volume of supplies was increased to 4 billion cubic metres and the sum approached $2 billion. The most interesting about this contract is that for the first time it contained a formula of price calculation. The price was calculated on the basis of the sum of fuels alternative to natural gas (fuel oil and gas oil) with mutually acceptable coefficients. By this formula, the German company supplied natural gas in 2005 at $93.16 per 1,000 cubic metres (at 20 C°) as of January 1; at $99.25 as of April 1; at $105.76 as of July 1.

The January 4 agreement between Naftogaz and Gazprom does not even mention any formula of pricing. This means that the Ukrainian party agrees a priori to the Russian monopolist’s unmotivated price dictates.

Why Gazprom and Russia Need RosUkrEnergo

Both pro-government and opposition politicians call into question the transparency of RosUkrEnergo and its business. In fact, very little is known about its founders. According to available information, it was co-founded by Gazprombank (which means the same as Gazprom) and Raiffeisen Investment AG. The latter transferred its stakes in RosUkrEnergo to Arosgas Holding Aktiengesellschaft and Centragas Holding Aktiengesellschaft. The ex-Chief of the SBU [Security Service of Ukraine], Alexander Turchinov, maintains that Arosgas is controlled by the Gazprom President’s deputies A. Komarov, I. Akimov, and A. Ryazanov, who make up Gazprom’s “St. Petersburg branch”. Centragas, according to Turchinov, is represented by Yuri Boiko (the former head of Naftogaz) and his deputy Igor Voronin, who is still in control of transit schemes in Naftogaz and who was involved in talks with RosUkrEnergo. But the real owners and managers of these companies remain in the shade. According to our sources, one of them may be Dmytro Firtash, who lent a helping hand to Yushchenko during the 2004 presidential elections. (On December 28, 2005 Firtash had a meeting with Yushchenko.)

RosUkrEnergo should be regarded from two angles: as a private commercial project of Russian and Ukrainian high-ranking businessmen and as the Kremlin’s tool in its expansion strategy in the CIS and European markets.

As a private commercial project, the company yields ten-digit profits to its owners. Besides, the Russian federal budget gets nothing as the company pays taxes in Switzerland. In the canton of Zug, taxes are fixed upon agreement with local authorities and do not depend on the size of income. No one knows where the profit goes.

As a tool in the hands of Gazprom (which is the Kremlin’s tool), RosUkrEnergo kills several birds with one stone. It blocks free access to the gas transportation infrastructures of Central Asia. It buys up Central-Asian natural gas and sells it as Russian, thus keeping Gazprom’s competitors out of the European market. It keeps Asian sources of natural gas supply closed to Ukraine - the last of the former USSR countries whose gas transportation system Gazprom has not seized yet. Being monopoly suppliers, Gazprom and RosUkrEnergo can dictate prices. And that amounts to direct influence on economies. For the sake of such a tremendous strategic goal Gazprom is ready to sell low for a few months.

Simple calculations lead to interesting conclusions. Under the January 4 agreement, RosUkrEnergo will purchase 41 billion cubic metres of natural gas from Turkmenistan at $50 per 1,000 cubic metres and 17 billion cubic metres from Gazprom at $230 per 1,000 cubic metres . So the “mixed” price ought to be $103, and not $95 at which RosUkrEnergo will sell the mixture to Ukraine. The operator loses $8 on every 1,000 cubic metres and all-in-all, $464 million. Half a billion dollars in losses may seem a big sum, but it is not too high a price for the main goal: monopoly on transit and the right to export natural gas to Western Europe (where 1,000 cubic metres costs up to $250).

Under the January 4 agreement, RosUkrEnergo will also buy 7 billion cubic metres from Uzbekistan and 8 billion cubic metres from Kazakhstan. Certainly, this amount is not only meant for the Caucasian countries - they are simply unable to consume so much natural gas. Therefore, a part of it is meant to be exported to Western Europe (at much higher prices). If RosUkrEnergo sells 10 billion cubic metres of that gas at $120, it will earn $1,200M. And if it sells at $230, then the contract will yield $2,300M! Even if RosUkrEnergo sells natural gas to Ukraine at $95, its net profit does make this “charity” worthwhile.

Parallel to that, RosUkrEnergo helps Russia to increase its quota on the European market. According to EU directives, one EU member country must not receive more than 30 percent of energy resources from one source. Last year Russia’s quota reached 29 percent…

Using RosUkrEnergo, Gazprom tries to artificially increase its presence in the European market. According to the latest information, Gazprom has already ceded its quota for export to Hungary to RosUkrEnergo, thus increasing its own. Now it is difficult to prove that it is one and the same quota of Russian natural gas…

Mistakes of 2005-2006

By 2005, the National Joint Stock Company NAFTOGAS UKRAINY had turned into a monopoly admitting a closed group of privileged insiders. The new administration headed by Viktor Yushchenko has not changed the company’s non-transparent and dubious personnel policy. The dismissal of NAFTOGAS CEO Yuriy Boiko, one of the former regime’s pillars and a RosUkrEnergo protege, has not transformed the company’s nature. The only difference was that the new Chairman of the Board was good at following directions rather than generating commercial ideas. A bright example is a contract for USD 6.4 million that O.Ivchenko signed on 31 March 2005: a PetroGas FZE Company registered in the United Arab Emirates (sic!) undertakes to supply NAFTOGAS UKRAINY with Turkmen (sic!) gas at USD 28 per 1000 cubic meters. The money was immediately transferred to the “Emirate” company. Yet this is a digression. So a person who replaced Boiko is directly subordinated and personally accountable to Viktor Yushchenko. This was the essence of the President’s special edict forbidding any other authority to give instructions to or otherwise interfere with NAFTOGAS. Neither the government, nor the then Prime Minister Yuliya Tymoshenko, nor even Security Service Chief Olexander Turchynov could do anything about NAFTOGAS or RosUkrEnergo. Amazingly, the presidential “non-interference” edict has not been countermanded yet…

However, Yuriy Boiko’s discharge from office did not deter his deputy, I.Voronin, from being re-appointed, after a short break, to the same position in the company run by O.Ivchenko. He was also one of the three Ukrainian delegation members at the negotiations to conclude the 2006 gas agreement. Perhaps, I.Voronin owes his return to the company to Olexander Tretiakov, the President’s ex-Aide, with whom he has been on friendly terms since the early 1990s.

The latest talks with GASPROM (and some other participants) were the closest and least-transparent in Ukraine’s history. It was closed both to the uninitiated and to those who are supposed, in their line of duty, to participate in preparing comprehensive decisions and developing negotiation strategy.

In late 2000, relations between Ukraine and Russia were also strained. At that time Ukraine (with Viktor Yushchenko as the Prime Minister) took its gas talks with its northern neighbour very seriously. A special working group was established from deputy ministers and department heads from practically every concerned ministry - the Ministry of Foreign Affairs, the Ministry of Fuel and Energy, the Ministry of the Economy, the Ministry of Finance, the Ministry of Justice, the Ministry of Industrial Policy. In the final analysis, the delegation managed effectively to safeguard Ukraine’s national interests in the gas sector.

Ukraine’s key gas negotiators this time were Ivchenko, Voronin and Plachkov. The Vasiunyk brothers were also actively involved in the process. These people were the President’s only sources of information about the developments in gas talks. When an alternative source loomed on the horizon - Vitaliy Hayduk being nominated for the position of Vice Prime Minister for Fuel and Energy - they made sure the decree on his appointment was shelved. Of course, the two Presidents talk on the phone regularly… Yet nobody even pretends to observe formalities and meet legal requirements of taking a coordinated Cabinet decision, of convening a thoroughly prepared session of the National Security and Defence Council and acting on its recommendations.

As a result, Ukraine made a series of glaring legal errors in the agreement failed to focus, in the course of negotiations, on a realistic chance to assert its lawful right to the Central Asian gas transit to Ukraine and to direct purchase of Turkmen gas.

Could it have done so? It, certainly could! The Ukrainian-Turkmen intergovernmental agreement on gas supplies to our country was signed. Yet for want of a strategic vision of the country’s energy security, Ukraine ceded its right to purchase gas to the GASEXPORT Company. Starting in 2007, we will have to buy Turkmen gas from this Russian intermediary.

Minister I.Plachkov keeps saying as a mantra that he has a gas agreement with Turkmenistan in his attache-case, but it does not make the situation any better. Today, anyone can strike a gas deal with Niyazov: he signed such contracts with both Russians and NAFTOGAS. Yet entering into a contract for purchasing Turkmen gas today is like buying a plot of land on the Moon or Mars - one cannot get there without a spacecraft. No country can use Turkmen gas without access to transit facilities in Uzbekistan, Kazakhstan and Russia. Therefore Niyazov sells Turkmen gas to all interested buyers at the Turkmen-Uzbek border and never cares what happens to it afterwards. A gas-transporting infrastructure is Ukraine’s spacecraft.

In order to get access to the gas transporting infrastructure in Uzbekistan, Ukrainian officials should have restored friendly relations with that country, instead of reminding them about a petty debt for the AN-70 airplane repairs. Ukrainian leaders should have supported Karimov, instead of pushing him into Putin’s open arms. And, when informed of GASPROM’s attempts to take over the Uzbek gas pipeline, they should have reminded the interest groups involved, tactfully but firmly, about the 1998 Ukrainian-Uzbek intergovernmental agreement that is still in force. Being a signatory to the European Energy Charter of 17 December 1991 and having ratified it, Uzbekistan, as well as Kazakhstan, undertook to give the third parties unlimited access to its transit gas pipeline. Otherwise they will face a cumbersome and unpleasant disciplinary procedure foreseen in the European Energy Charter and Supplementing Agreement, including penalties, fines, etc.

Russia has not ratified the European Energy Convention and takes advantage of its non-allied status to restrict access to its gas transportation infrastructure to undesirable clients. Whereas, under the 2001 Intergovernmental Agreement and annual protocols, GASPROM was obliged to guarantee Turkmen gas transit to Ukraine, the agreement of 4 January 2006 discharges it from this obligation. In the same vein, the agreement relieves GASPROM from the obligation to provide enough gas not only for its transit but also for maintaining gas balance in Ukraine.

Besides, vague provisions concerning the gas price for Ukraine in the second part of 2006 allow Vladimir Putin to use the gas price as a tool in blackmailing Victor Yushchenko - through GASPROM and RosUkrEnergo - when a new Ukrainian government is being formed after the parliamentary elections. It may so happen that the Russian, rather than Ukrainian, President will appoint the Cabinet to his liking in the post-reform Ukraine.

Mistakes that can be avoided

We are being told that the gas agreement of 4 January 2006 is a framework document resulting from a compromise; that it is neither an intergovernmental protocol (with a Swiss closed commercial structure?), nor a contract wit GASPROM. Nevertheless, it contains terms unacceptable for Ukraine, such as: transit dues fixed for five years, a monopolist gas supplier thrust onto Ukraine, and an economically unmotivated gas price. It would be an egregious error to remain within this agreement framework and sign an intergovernmental protocol and contract on the terms stipulated in it. Yekhanurov promised to have drafted the Ukrainian version of the protocol by 16 January.

The Russian draft of intergovernmental protocol, which ZN had a chance to read, confirms our concerns. Unlike the previously signed annual protocols, this document does not set the price of gas supplied to Ukraine. Nor does it establish the transit dues. De facto and de jure, it dilutes international legal guarantees envisioned in the 2001 Intergovernmental Agreement. It means that the Russian party wants to downgrade all specific provisions from the interstate to the contractual level.

The draft protocol provides for a mediated settlement of transit terms for the next eight years, exclusively by the contractual parties (business entities), although a common practice is to regulate such significant norms through annual intergovernmental protocols. The draft suggests fixing the terms of transiting Russian gas via Ukraine’s territory for seven years, while defining the terms of transiting Turkmen gas to Ukraine for only a year.

According to the draft, Russia guarantees to supply 17 billion cubic meters of gas to Ukraine in 2006, but it does not designate the entity responsible for the supplies. Nor does the draft make any provisions describing responsibility of the Russian Federation. It says nothing specific about the joint venture incorporated to distribute gas in Ukraine.

All of the above weakens Ukraine’s standing in bilateral negotiations and makes it totally dependent on the Russian Federation and its monopolist intermediary.

Therefore the best solution for Ukraine would be to denounce the agreement as soon as possible. It should revoke O.Ivchenko’s signature under the agreement of 4 January 2006 on the grounds of his exceeding his mandate. Ukraine should continue its talks with the Russian Federation and insist on the terms stipulated in the previous intergovernmental agreement. It should turn to the Stockholm Chamber of Commerce for arbitration. The issue will not be resolved overnight, but Ukraine needs time to look back and realize how far it is from the desired diversification of sources and ways of power supplies. Then it will understand that it did not need RosUkrEnergo in the first place, and that Turkmen, Uzbek, Kazakh and Russian gas can be supplied under direct contracts. It will understand that by mixing it we could get an affordable price and (attention, Viktor Yushchenko!) a transparent system of payments and providing gas to consumers. NAFTOGAS is capable of doing it on its own, provided, of curse, that its top management cares about national, rather than corporate commercial, interests.