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Ukraine: Problems Persist In Gas Deal With Russia

Ukraine's reported agreement to buy Russian gas through joint ventures could ease the chronic problem of energy debts. But RFE/RL's Michael Lelyveld reports that many questions remain.

Boston, 27 April 2000 (RFE/RL) -- Ukraine is being pressed to reform its system for buying Russian gas at a time when Russia is suffering with its own conflicts over energy supplies.

The Financial Times reported Tuesday that a reform proposal is being negotiated between Ukrainian President Leonid Kuchma and Itera, a U.S.-based trading company with links to Russia's Gazprom.

Kuchma has reportedly agreed to Itera's plan for creating a series of joint venture enterprises with Naftohaz Ukrayiny, the state-owned oil and gas company.

One apparent purpose is to put more discipline into Ukraine's energy market, which depends on Gazprom. Ukraine and its citizens are chronic energy debtors. The country owes Russia at least $1.4 billion for gas, while it is working to refinance its foreign debt, largely due to unpaid energy bills.

Russia has decreased its gas supplies and halted oil deliveries to Ukraine this year. But Moscow also depends on Ukraine as a transit country for its gas sales to Europe, leading to frequent diversions from Ukrainian pipelines.

The arrangement with Itera could tighten the system because the new joint ventures would be in charge of buying all the gas that Ukraine needs. They would then sell it to regional monopoly suppliers chosen by the government, the Financial Times said. The plan would reduce barter because buyers would be forced to pay cash.

Clearly, one goal is to distance the Ukrainian government from the politically painful burden of collecting debts from consumers and enterprises, or shutting off their gas. The theory is that the regional suppliers and joint ventures will find it easier to say "no."

If it works, the plan could meet at least three long-standing objectives of reform programs. It would make energy use more rational by raising users' real costs. It could force bankruptcies among the most inefficient enterprises that survive only by refusing to pay fuel bills. And it could monetarize the economy by ending barter, helping Ukraine collect its taxes in cash.

Unfortunately, Russia is facing a similar set of problems at the same time.

This week, Anatoly Chubais, head the Russian electricity monopoly UES, said Gazprom may have to reduce supplies to its domestic market until at least 2002. Russian gas production is declining while the country is committed to increasing exports to Europe to raise cash.

In a sense, the situation is similar to the gasoline shortages that plagued Russia last summer. When world oil prices were high, producers chased profits abroad instead of selling gasoline for lower prices at home.

The problem with gas may be worse, and it could last much longer. UES has been feuding with Gazprom over unpaid bills and reduced supplies. Just as in Ukraine, a major cause is that bills are often paid in barter instead of cash. President-elect Vladimir Putin ordered an end to the squabble, but the result was only an agreement to use more coal.

Putin may try to ease the domestic shortage by agreeing to buy more gas from Turkmenistan during a visit to Ashgabat next month. But in the past, Russia has paid only 40 percent in cash for Turkmen gas, with the rest in barter. It seems that the problem of non-cash payments only gets pushed around from one country in the region to another.

Attempts to insulate governments from the tough choices of collecting energy debts have also led to some dramatic failures.

This month, the Belgian energy company Tractebel said it would withdraw from Kazakhstan after several years of trying to run its electricity system at a loss. The venture was based on the premise that it would have a free hand in setting rates and collecting bills. But troubles soon followed. Gazprom is now expected to replace Tractebel.

Gazprom's use of Itera in dealing with countries in the region has not been without difficulties, either. The first such joint venture with Turkmenistan was dissolved after the government accused it of running up $400 million in debts, according to Itar-Tass. Ironically, the deal was to handle Turkmen gas sales to Ukraine.

The ties between Gazprom and Itera have also drawn interest from analysts but few answers. The company, founded in 1992, now delivers gas to 11 countries in the region, according to Itera. But little is known about who controls it.

The Financial Times reported this week that: "While the actual ownership of Itera is a closely guarded secret, the company clearly has a close relationship to Russia's Gazprom. Ukrainian gas traders wishing to buy gas from Gazprom, for example, are always directed to buy from Itera."

While Itera's involvement is said to be reforming Russia's gas trade with neighboring countries, it does not seem to have increased transparency.