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Russia: Gazprom Hones Its Strategy On Ukraine

Valery Golubev (ITAR-TASS) May 30, 2007 (RFE/RL) -- Valery Golubev, the deputy chairman of Russia's state-controlled gas monopoly Gazprom's Management Committee, said in April that the price of gas charged by Gazprom to Ukraine will depend on how closely the economies of both countries are prepared to cooperate, the Ukrainian website reported.

"If politicians make a decision to establish closer economic ties between our countries, this will guarantee lower gas prices. However, if the politicians decide to separate these ties, then the price of gas for Ukraine will be same as for Germany. Does Ukraine really want this? I want to stress that Russia does not need this," Golubev said.

This explanation of pricing for gas sold to Ukraine is different from previous explanations provided by Gazprom managers and by Russian President Vladimir Putin. Such explanations have emphasized that Russia is striving to stop subsidizing gas sales to Ukraine.

"We have subsidized the Ukrainian economy with low gas prices for a decade and we intend to end this practice," Putin said in January 2007. Putin didn't mention, however, that Ukraine buys mostly Turkmen, rather than Russian gas.

Gas Basket

The present price Ukraine pays for gas was negotiated in early 2007 and was based upon the January 2006 agreement whereby Gazprom agreed to a price for a "basket" of Turkmen, Kazakh, and Russian gas.

Ukraine wound up paying $95 per 1,000 cubic meters of gas in 2006 and $130 in 2007, when Turkmenistan raised the gas price for Gazprom to $100 per 1,000 cubic meters.

Does Golubev's statement reflect the future of energy relations between Ukraine and Russia?

As of 2007, Ukraine does not buy any Russian gas -- it only imports 50 billion cubic meters of Turkmen gas.

Turkmenistan sells this gas to a Gazprom subsidiary company, Gazeksport, for $100 per 1,000 cubic meters. Gazeksport then resells it to RosUkrEnergo, a middleman with headquarters in Switzerland, which resells it to a joint-venture company, UkrGazEnergo, at the Russian-Ukrainian border. It is then sold on to Ukrainian domestic and industrial consumers.

If Gazprom should suddenly determine that the economies of the two countries are not "close enough," it could raise prices. But buying Turkmen gas for $100 and reselling it to Ukraine at the market price of $250-270 could be risky.

Such price speculation could upset the Turkmen leadership, which traditionally has insisted that Gazprom not engage in such deals. Turkmenistan would then most likely be forced to raise the price it charges Gazprom to world market levels.

Trunk Pipelines

Golubev's comments raise another question: who is empowered to decide when "closer economic ties" between Ukraine and Russia reach the point of closeness that qualifies Ukraine for a substantial gas-price reduction?

Any price reduction that Russia might give to Ukraine would be, in effect, a very expensive subsidy. Russian politicians and the Finance Ministry might be hard-pressed to accept such an arrangement.

Golubev could well be disguising Gazprom's long-standing efforts to obtain a controlling share in the Ukrainian trunk gas pipeline by talking about "economic closeness" in return for cheap gas. This was the tactic used in Belarus and in Armenia, where Moscow was intent on initially gaining a partial stake and, ultimately, a controlling stake in the pipelines.

The question remains: Is Gazprom willing to sacrifice billions of dollars in subsidies in return for control over the pipeline?

During his visit to Moscow in April, according to the RIA Novosti news agency, Turkmen President Gurbanguly Berdymukhammedov said he would honor the 25-year contract signed with Gazprom in 2003 to supply Russia with the lion's share of Turkmen gas. At the same time, however, Berdymukhammedov was very vague about the price he would charge Gazprom for this gas. Why, many ask, should Turkmenistan sell its gas to Gazprom at prices far below world rates?

At this time Kazakhstan, according to RIA Novosti, began threatening to raise its price for gas from $100 to $160 per 1,000 cubic meters and the Turkmen leadership was reportedly contemplating a similar price increase. Central Asian gas producers have said that in two years they plan to charge world prices for their gas.

If this were to take place, it would definitely increase the price Ukraine pays for gas -- unless Golubev's formula for cheap gas is implemented.

In mid-May when Putin signed the agreement with Central Asian leaders to build a new Caspian gas pipeline to export Central Asian gas to the West, the price Turkmenistan would charge for its gas was not mentioned.

"The price [for Turkmen gas] is to remain unchanged until the end of 2009, but talks are to be carried through before July 1, 2009, on changing it under long-term deals by bringing it into line with European prices," Interfax reported on May 14.

Ukraine Crisis

Golubev's remarks were by and large ignored by the Ukrainian media, which was consumed with the current confrontation between President Viktor Yushchenko and Prime Minister Viktor Yanukovych.

Yanukovych, who favors close political and economic ties with Russia, is seen as the beneficiary of Golubev's remarks. But does his business constituency agree with this?

The Industrial Union of Donbas, one of the most powerful business groupings in Ukraine, has had a separate gas-purchasing agreement with Kazakhstan for many years.

Golubev has not been a visible participant in the Ukrainian-Russian gas discussions till now, but given his background he seems to enjoy powerful support from the Kremlin. A former KGB officer, Golubev worked in the St. Petersburg mayor's office when Vladimir Putin and Aleksei Miller, the present head of Gazprom, worked there. In February 2003, he became a member of Gazprom's management committee and in November 2006 became its deputy chairman replacing Aleksandr Ryazanov who had been fired.

Golubev's responsibility at Gazprom is the CIS market for Russian gas sales, one of the most sensitive jobs in Gazprom.

His pronouncements about a vague gas-pricing scheme for Ukraine could be an indication that the Kremlin is intent on trying to use a scare tactic in order to bring Ukraine closer into the Russian fold at the same time helping to further Putin's long-standing support for Yanukovych.

Golubev's attempt to promote this new "carrot-stick" scheme, despite his unrealistic arguments, could mean that Gazprom is trying to both influence Ukrainians to support Yanukovych in return for cheap gas and maneuver Ukraine into abandoning or sharing its control over the largest single gas pipeline for Russian gas to the EU.

Central Asia Gas Pipelines

Central Asia Gas Pipelines

Click on the map for an enlarged image.

Russia's rising appetite for Central Asian gas is a direct result of the shifting fortunes of Gazprom, the state-run Russian company that controls lucrative exports. The company's total gas production has flatlined at around 550 billion cubic meters (bcm) a year. With major fields yielding less as they age, Gazprom has chosen to maintain its all-important gas balance by purchasing gas on the side -- from independent producers in Russia and from Russia's Central Asian neighbors -- instead of investing in the lengthy and costly development of untapped Arctic fields...(more)

See also:

Who's Afraid Of Gazprom? Controlling Gas Pipelines

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