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Russia: Moscow Puts Direct Energy Export Route On Hold

Plans to shift Russia's gas transit from Ukraine to Poland have reportedly been shelved due to economic problems. But Gazprom officials have disputed the reports, showing unwillingness to sacrifice one of President Vladimir Putin's pet projects.

Boston, 6 February 2002 (RFE/RL) -- Three weeks after Russian President Vladimir Putin's visit to Poland, the future of gas transit to Europe remains as murky as ever.

Moscow's effort to open a new energy route through Poland was a major goal of the Putin visit on 16-17 January, the first by a Russian president since the Soviet breakup over a decade ago.

Officials hoped the trip would yield a long-term agreement to supply gas to Poland and to build a second pipeline from Russia's arctic fields of the Yamal Peninsula. Moscow sees the Polish route as a needed alternative to Ukraine, which has carried about 90 percent of Russia's transit gas.

But after years of maneuvering, Russia now seems no closer to breaking Ukraine's grip over the westward pipelines that it inherited from the Soviet network.

In the days before Putin's visit, officials conceded that a deal for a Polish alternative was not ready to be signed. Polish President Aleksander Kwasniewski told reporters that an agreement was expected to be reached by the end of February.

On 4 February, Polish Prime Minister Leszek Miller told a news conference in Kyiv that the matter remains far from settled. At the same time, Russia's gas monopoly Gazprom may have put aside its plan for reasons of its own.

Speaking in a telephone conference, Gazprom board member Boris Fedorov said the company had dropped plans for the bypass line due to high costs, Interfax reported. The move was linked to cuts in Gazprom's spending following a government decision to hold back domestic tariff hikes because of rising inflation, Fedorov said.

Instead of building a new line at a cost of over $1 billion, Gazprom will instead work to double the capacity of the existing line through Poland in 2003, according to Fedorov, a former finance minister. But the increase to 33 billion cubic meters of gas annually still pales in comparison with the 105 billion cubic meters that Ukraine carried through its pipelines in 2001.

Ukrainian officials have said that their transit lines can handle up to 170 billion cubic meters, making any new capacity an expensive option. Even with a second line through Poland, Gazprom's bypass plan would have increased transit through Poland to 64 billion cubic meters, about half the amount exported to Eastern and Western Europe in 2001.

But yesterday, confusion reigned over the decision after Interfax reported Gazprom sources as denying Fedorov's account. Deputy Prime Minister Viktor Khristenko was quoted as saying that the Gazprom board had not even taken up the matter.

While it may be some time before the issue is settled, the bypass plan appears to have been at least seriously injured by a collision between the initiatives of President Putin.

On the one hand, Putin has pushed a series of bypass schemes from his first days in power. As prime minister in 1999, he ordered a new Caspian oil line to detour around rebellious Chechnya. In 2001, he opened an oil bypass around Ukraine to reduce its hold over Russian exports.

In December, Putin opened another oil line to the Gulf of Finland to end Russia's dependence on Baltic ports in the north. But the efforts to bypass Ukraine with gas shipments have lasted the longest, including more than a year of negotiating to restructure Kyiv's $1.4 billion in gas debt. Russia's diplomatic offensive on behalf of the plan have made it Putin's pet project.

Yet, despite the importance that Putin places on direct export routes, he has become stuck in an economic trap between investment and inflation. The government promised a 35 percent increase in domestic tariffs in 2002 to monopolies like Gazprom to attract needed finance. But high inflation in January persuaded the government to dampen expectations that the pledge would be fulfilled.

Poland's problems have added complications. Miller's new government has been trying to renegotiate a 1996 gas supply agreement with Russia to reflect weaker demand. Last year's 1.1 percent economic growth rate was the slowest since 1991, according to figures from the International Monetary Fund.

The troubles have forced Poland to rethink its plans to reduce its own dependence on Russian gas. In January, the Polish gas company POGC announced it would push back the date for an underwater pipeline to Denmark for Norwegian gas from 2003 to 2005. But economic weakness has also hurt the gas market in Europe, dimming hopes for Russia's plans for the Polish route.

Despite the tangle, it may still be too soon to pronounce Putin's pipeline dead. Such investments are made for the long term and do not depend on economic performance in any single year.

Yesterday, the chairman of the Federal Energy Commission, Georgii Kotovoi, also revived expectations that the government will allow new tariff increases in July, when inflation is traditionally tame.

Putin's past efforts to find direct routes for Russia's energy exports also suggest that the plan may be dormant rather than dead.