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Russia/Ukraine: Energy Talks May Have Risks

Russian negotiations with Ukraine on its energy debts may lead to new ownership of Ukrainian assets and infrastructure. But such a solution may be filled with risks, as RFE/RL correspondent Michael Lelyveld reports.

Washington, 25 February 2000 (RFE/RL) -- Ukraine and Russia are again going through their cycle of debt talks and demands as a new Russian government tries to solve the security problem that has plagued Moscow since the Soviet collapse.

In the past week, the two countries achieved a modest breakthrough on the issue of Ukrainian debts for Russian gas by agreeing that Kyiv owes at least $1.4 billion. Its total energy debt to Russia has yet to be determined. Its ability to pay for past or future costs is also up in the air.

But it now seems that Russia would like to take advantage of both the energy debts and Ukraine's planned privatization to gain control of key assets like the country's giant Nikolaev Alumina Plant.

Russian First Deputy Prime Minister Mikhail Kasyanov has presented a list of properties that Moscow might accept. It is believed to be similar to a list of some 200 enterprises prepared last October that could be offered to Russia out of 900 to be privatized.

Among them are prizes such as Odesa's port facilities, as well as refineries and perhaps pipelines. A settlement may include refinancing of gas bonds issued five years ago to cover earlier debts. Ukraine has already delivered 11 surplus strategic bombers to reduce its bills by $285 million.

But the privatization and debt-for-equity schemes may have a basic problem. It seems hard to separate ordinary investments by private Russian companies from government-sponsored acquisitions driven by strategic concerns.

Russia has been trying to take control of former Soviet oil and gas pipelines on Ukrainian territory since at least 1994, along with facilities such as underground reservoirs and distribution systems.

Russia's reasons have been twofold. By controlling pipelines within Ukraine, it can cut off gas to debtor enterprises and private customers. Ukraine's government has denied responsibility for their arrears. By controlling the pipelines crossing Ukraine, Russia can also halt thefts that disrupt service to paying customers in countries including Germany and Turkey.

Attempts at settling the debt issue have become a springtime ritual following winters when Ukraine has simply taken as much gas as it needs, in addition to the 32 billion cubic meters it gets from Russia's Gazprom as a transit fee.

As recently as February 9, Gazprom chief executive Rem Vyakhirev threatened to build a bypass pipeline through Belarus to curb Ukraine's thefts. It is unclear whether the announcement had much effect, considering that Gazprom is already building a Belarus pipeline as part of its Yamal Peninsula gas project.

But analysts see few savings for Russia from supporting Belarus with subsidized oil and gas to avoid a similar fate in Ukraine. The bypass solution has now become a cure-all for Russian strategists, who have been unable to solve the problems of transit territories.

Russia is spending precious resources to build an oil bypass around Chechnya. It is working on a similar oil bypass around Ukraine to the Black Sea. It is threatening a gas bypass through Belarus. And earlier this month, it announced a costly plan to build a bypass oil line around the Baltics to the Gulf of Finland.

In the case of Ukraine, the alternative of taking over Ukrainian assets and pipelines could also have downsides.

Trading debt for equity could make Ukraine little more than a wholly-owned Russian subsidiary. It is also unclear who would provide security for pipelines to prevent diversions once they are Russian-owned. If the answer is Russian security forces, it could mean compromising Ukraine's sovereignty.

Two failings have brought Ukraine and Russia to this sensitive state of affairs. The first was the failure of then-President Boris Yeltsin to plan for the future when he started the "war of laws" with the Soviet government in 1991. It was not enough for Russia to own its resources. Yeltsin would soon realize that it needed to export them, as well.

The second fault was the inability of either country to restructure their economies or end their dependence on subsidized energy over the past eight years. Ukraine's gas diversions are only a symptom of its long-delayed reforms. Russia's reliance on a system of Ukrainian transit and free gas has only compounded the weaknesses of both countries.

Russian ownership of Ukrainian infrastructure is unlikely to solve the problems. The Russian government has been painfully slow to address the issue of unpaid energy bills and subsidies on its own soil.

But the risk to Ukraine's sovereignty may be rising with its debts. Until it can base its economy on rational energy pricing, it will continue to be trapped in a cycle of debt and Russian demands.