Russia's state-owned gas monopoly Gazpromis insisting that Ukraine pays $230 for 1,000 cubic meters of gas, more than four times the current price; Ukraine's gas-transport company, Naftohaz Ukrayiny, maintains that it has a valid contract with Gazprom until 2009, which would sustain the current price of $50 for 1,000 cubic meters of gas and the current gas transit fees of $1.09 per 1,000 cubic meters per 100 kilometers Ukraine charges Gazprom.
If no agreement is signed by 31 December, there are a number of likely possibilities:
- Russia could reduce the pressure in its main trunk gas pipelines to ensure that only gas earmarked for European customers enters the pipe. Presently, Ukraine takes approximately 20 percent of the gas being pumped through the pipeline. The pressure reduction would not prevent Ukraine from siphoning off gas, but such a scenario could mean European consumers experiencing shortages.
- Ukraine could be forced to use gas stored in its 13 underground storage facilities. The facilities have a capacity of 34.5 billion cubic meters of gas, but, according to Naftohaz Ukrayiny sources, only 60-65 percent of the storage space is filled.This, according to Naftohaz Ukrayiny, is still enough to make up for any shortfalls during the winter. There is also a potential issue regarding the ownership of the stored gas: Ukraine, Russia, Hungary, and RosUkrEnergo, a company involved in the transit of Turkmen gas to Ukraine, all claim to own percentages of this gas. In June, Russia said it owned 7.9 billion cubic meters of the stored gas.
- Ukraine could submit a claim to the Arbitration Institute of the Stockholm Chamber of Commerce. On 23 December, Ukrainian Prime Minister Yuriy Yekhanurov told his cabinet he was ready to prepare documents for the court if "irresponsible statements [from Russia] continue."
Why The Dispute?
Ukraine has been receiving 29.2 billion cubic meters of Russian gas in lieu of transit fees for the 128 billion cubic meters of gas transiting its pipeline to Western Europe. The price for this gas has consistently been far below international levels and has remained steady at $50 per 1,000 cubic meters for years.
Just why Gazprom agreed to sell Ukraine gas at rock-bottom rates has never been fully explained. The earlier negotiations on transit fees were largely opaque and signed contracts were deemed by both sides to be "commercial secrets."
One possible explanation for the present conflict relates to continued Russian attempts to gain control over the Ukrainian gas transportation system -- the Soyuz and Friendship pipelines and the 72 compressor stations.
In 2002, Ukraine and Russia agreed to establish an international consortium to manage the Ukrainian gas network, which is badly in need of repair. Ukraine, however, did not agree to Russian demands that 50 percent of the pipeline system be turned over to Gazprom.
At a October 2003 meeting in Yekaterinburg, President Putin declared that the pipelines carrying oil and natural gas to the West were built by the Soviet Union and it is Russia's prerogative to maintain them in order to protect its national interests and " those parts of the system that are beyond Russia's borders."
During the current negotiations, Gazprom head Aleksei Miller offered to negotiate on the price of gas if Ukraine agreed to turn over 50 percent of its pipelines to his company. The Ukrainian authorities, however, rejected the offer the same day.
This strategy was successful in Belarus, which will continue to pay Gazprom $47 for 1,000 cubic meters of gas in 2006. A Gazprom spokesman told "The New York Times" on 27 December that "the lower price is justified because Belarus has surrendered control of its transit pipeline to Gazprom." The pipeline belongs to Gazprom and the land on which it is built has been leased to Russia on a long-term basis
Gazprom has made Georgia and Armenia similar offers of taking over their pipelines in return for a break on gas prices. Neither country has made a decision on this matter.
Another explanation for the current row is that Russia is attempting to influence the outcome of Ukraine's March parliamentary elections. Putin backed the wrong horse, Viktor Yanukovych, in Ukraine's 2004 presidential election -- an embarrassment at best, a loss of credibility at worst. In light of this, the gas conflict could be seen as Russia reasserting its power and influence over Ukraine.
There are also economic factors in play. Russian energy analysts have suggested that Gazprom could be facing severe production shortages, as it cannot afford to develop new gas fields.Gazprom has denied that it faces shortages, but has signed contracts with Turkmenistan to buy more of its gas beginning in January 2006. If Gazprom charges Ukraine $230 per 1,000 cubic meters it stands to earn some $3 billion a year.
Celeste Wallander directs the Russia and Eurasia Program at the Center for Strategic and International Studies and is a CSIS senior fellow. Before joining CSIS, she was senior fellow at the Council on Foreign Relations in Washington, D.C., and associate professor of government at Harvard University. She is the founder and executive director of the Program on New Approaches to Russian Security. Her recent projects include work on U.S.-Russian security cooperation, the history of Russia and globalization, HIV/AIDS in Russia, and the 2004 Ukrainian presidential election. Among her books are "Swords And Sustenance: The Economics Of Security In Belarus And Ukraine" and "Mortal Friends, Best Enemies: German-Russian Cooperation After The Cold War." She is currently writing "Global Russia: Economics, Politics, And Security."
On November 29, 2005, she spoke with RFE/RL's Ukrainian Service about Russia's energy policies and how Moscow might be seeking to leverage its influence over its neighbors. Listen to the complete interview.
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To read a transcript of the interview,click here.