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Ukraine: Kyiv Asserts Pipeline Control, Despite Deal With Moscow

  • Michael Lelyveld

Russia and Ukraine signed an agreement this week on an international consortium to manage the gas pipelines that form one of the region's main energy routes to Europe. But Kyiv remains adamant that it will continue to control the pipelines even after the consortium is formed, leaving a decade-long standoff with Moscow unchanged.

Boston, 9 October 2002 (RFE/RL) -- After years of struggling for control of former Soviet gas-export routes, Russia and Ukraine reached an agreement on 7 October that could lead either to a settlement or further discord.

At a ceremony on 7 October during the CIS summit in Chisinau, Presidents Vladimir Putin and Leonid Kuchma signed a pact to create an international consortium for managing Ukraine's 35,000 kilometers of gas pipelines. The network includes the transit lines that carry about 90 percent of Russian gas exports to Europe, accounting for Moscow's biggest source of hard currency after sales of crude oil.

Putin called the agreement "far from a final solution to the matter, but a very important step."

Speaking yesterday in Kyiv, Kuchma said, "We should have done it earlier, since Ukraine's gas-transport system was constructed long ago, and it needs investments now."

The delays have been part of the contentious history over the strategic energy route, which supplies one-fourth of Europe's gas. Russia has complained since the Soviet breakup about diversions from the trunk lines that run through Ukraine. But despite its huge debts for gas, Kyiv has resisted Moscow's efforts to gain control of the transit system, fearing a loss of both fuel sources and sovereignty. Russia pays Ukraine 30 billion cubic meters of gas per year as a transit fee, the official Russian news agency RIA-Novosti reported.

At a June meeting in St. Petersburg, Putin and Kuchma committed themselves to a compromise with the cooperation of German Chancellor Gerhard Schroeder. Germany's Ruhrgas is the biggest European customer of the Russian gas monopoly Gazprom.

The deal was to turn the network over to an international consortium including European gas companies to attract $2.5 billion in investment for the decaying lines in the next few years. Putin said the consortium could raise another $15 billion over the next decade.

On Monday, Ukrainian Prime Minister Anatoliy Kinakh portrayed the accord as a realization of the goal set in June. Kinakh said, "The agreement provides for the involvement of leading European companies in the establishment of the consortium and its activities," Interfax reported.

But the strength of the agreement may also prove to be its undoing, since no final decision was made on the distribution of shares.

Russia has argued for months that the consortium should be split evenly between Gazprom and the Ukrainian oil-and-gas company Naftohaz Ukrayiny, but Kyiv has insisted on maintaining control of the pipelines with "50 percent plus one share."

In the struggle over the division, the original idea of bringing in European partners to ease the standoff and raise funds seems to have been all but lost. Despite Schroeder's role at the ceremony in June, there has been no discussion of Germany's joining the consortium as a founding member for months.

The reason is that there is ultimately no clear way to disguise or compromise the control issue. Either Ukraine will retain control of the pipelines on its territory, or it will not. The agreement signed on 7 October suggests that officials are still trying to have it both ways.

"The Moscow Times" reported yesterday that "the final draft of the agreement envisages a joint venture that would give Gazprom and Naftohaz 50 percent stakes." But Kinakh said no decision on shares had been made, adding: "That will be done next. Yet the position of Ukraine is invariable. Ukraine must keep the controlling stock."

Kinakh said, "It is essential for us that the draft agreement stipulates the establishment of the consortium on the basis of Ukrainian laws and the location of its administration in Kyiv, on Ukrainian territory." Kinakh has made clear that Kyiv will not reduce its holding to less than 50 percent plus one share, making it irrelevant to the control issue whether European companies join the consortium or not.

Ukraine apparently fears that Gazprom's customers in Germany, France, and Italy would side with the Russian gas giant in any dispute involving a voting of shares.

Putin and other Russian officials seem to have pressed the control issue down to the last minute before the signing ceremony. On Sunday, Putin said the talks on the consortium were "not advancing easily." He added, "If Russia stays out of this project, we will search for other options by building other pipelines, but doing so without taking into account Ukraine's national interests would be absolutely foolish."

In the end, Putin seems to have been satisfied with having created a framework in which the control issue may be raised at a later date. But for the time being, it has simply been put off again. Yesterday, the Russian investment bank Troika Dialog called the accords between the governments and the companies "inconclusive." The bank's "Russia Business Daily" wrote, "Unfortunately, both agreements are, despite the official optimism, lacking in the kind of detail critical for settling the long-running debate on management of this network."

A Gazprom feasibility study for upgrading the pipelines is scheduled along with a working group including Germany to consider consortium members, but no findings are expected before next year. The term of the agreement is 30 years, but it could be canceled in as little as three years if either Russia or Ukraine decides to pull out.

In the meantime, Kinakh has sworn that the system will stay under state control, giving Russia no chance to buy up more shares. Interfax-Ukraine quoted him as saying: "There is no talk about privatizing the gas-transport network. Ukraine will see to it that [the] ownership form should not be changed when the consortium is established." Kinakh also said: "The gas transport network is our strategic facility. It is one of the factors making it possible for Ukraine to influence developments both on the European continent and in the world in general."

That stance may severely limit the incentives for foreign investment in the network. But the consortium pact has become a target for Kuchma opponents like opposition leader Yuliya Tymoshenko, who has argued that it will lead to a loss of transit fees. Yesterday, Oleksandr Hudyma, the chairman of a parliamentary subcommittee on gas, agreed that the consortium could cost Ukraine budget revenue, Interfax reported. The objections could make ratification difficult.

Negotiators also apparently made no progress on the problem of how to settle the $1.4 billion Ukrainian debt for Russian gas. A carefully crafted deal to issue bonds last October fell apart after Gazprom discovered belatedly that it would have to pay $700 million in taxes to the Russian government if it took the paper as payment. No new ideas were announced in Chisinau on a way out of the debt and tax trap.

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