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East/West: Debt Problems Link Russia, Ukraine, And Germany

Russia, Ukraine, and Germany have been linked by the problems of gas supplies and debts. As talks over equity swaps and investment continue, the situation may call for a solution that serves the interests of all three countries. Our correspondent Michael Lelyveld reports.

Boston, 15 February 2001 (RFE/RL) -- The twin problems of Russia's debt to Germany and Ukraine's gas debt to Russia suggest the possibility of a solution that could keep Russian fuel flowing through Ukraine without raising fears for its sovereignty.

The two debt problems involving the three countries seem to be coming together because of a sequence of events since last summer.

Last July, Russia announced plans to build a bypass pipeline around Ukraine for its gas exports to Europe. Moscow's decision followed years of complaints about Ukraine's diversions of Russian transit gas and at least $1.4 billion in overdue bills for gas supplies.

The bypass scheme was widely seen as a tactic to make Kyiv turn over its transit pipelines to Russia. Since 1994, Russia's Gazprom has sought to gain a controlling interest in the lines which carry 90 percent of its exports to Germany and other countries of the European Union.

But the bypass plan gained ground last fall as EU officials announced talks to double energy imports from Russia over the next 20 years. Gazprom has been meeting with its European partners in Germany, France, and Italy to pursue the bypass project through Poland and Slovakia.

The threat of losing Russia's gas drove Ukraine to reform its energy sector. It tried to collect more bills for debt payment and proposed trading shares in its pipelines to Gazprom in exchange for its debts. Those plans were dropped because of concerns for Ukrainian sovereignty and fears that Russia might try to recreate Soviet borders by controlling Kyiv's strategic assets.

On Monday, Russia extended its role in Ukraine with agreements to cooperate in the space, aviation, and electricity sectors. Russia's Unified Energy System has also voiced interest in acquiring Ukrainian power producers, which currently owe debts for Russian gas.

The growing Russian involvement recently prompted the U.S. ambassador to Ukraine, Carlos Pascual, to call for greater international competition for the country's privatized industries. In an interview reported Tuesday by "The New York Times," Pascual said, "If you don't want to do it on a competitive basis, the conclusions are obvious."

But last week, Ukraine appeared to be seeking a new solution involving Europe instead of Russia. The state-owned energy company Naftogaz Ukrayiny proposed that Europe should lease Ukraine's huge underground storage tanks to ensure a steady supply of gas. Russia sought control of the same reservoirs in 1994 before sovereignty issues were raised. The tanks can hold about one-fourth of all the gas that Russia exported to Europe last year.

But the appeal to Europe may suggest another way out of Ukraine's problems. While Russia is trying to collect debts from Ukraine, Germany is also seeking debt payments from Russia. An exchange of debts could give Germany an interest in Ukraine's pipelines, a move that might ease concerns about Russian dominance and control.

Germany is Europe's biggest consumer of Russian gas and a major investor in both Russia and Ukraine. Russia owes Germany over $21 billion, or about 40 percent of Moscow's debt to the Paris Club of official creditors. The Russian government agreed Monday to make payments on the debt this year after weeks of delay, but the source of the funds has yet to be identified.

In addition, Russia has been negotiating separately with Germany over some $6.9 billion in barter debts owed to the former East Germany. Moscow has offered equity stakes in some Russian enterprises, although it remains uncertain that a deal will go through.

But a three-way debt swap might serve the interests of all three countries, allowing Russia to trade some of its debt to Germany for Ukraine's debt to Russia. Instead of taking equity stakes in Russian enterprises, Germany could gain an interest in Ukraine's privatized pipelines.

Although Ukraine might still be tempted to divert gas, it would no longer have a clear conflict of interest as both a gas consumer and a provider of transit. German investment might also assure a steady gas flow to Europe and save Ukraine from the threat of a bypass or fears of Russian control.

Currently, the German gas companies Ruhrgas and Wintershall are working with Gazprom on a bypass plan. But if Germany were to play a role in gas transit through Ukraine, it would ease concerns that Gazprom's pipeline plans are part of a Russian political design. For Ukraine, German involvement could mean a major step toward the West.

It is unclear that such an idea could be made to work, but the search for solutions to gas and debt problems in all three countries may present an opportunity.