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Ukraine: Kyiv Wins, Loses On Russia Deals

The surprising collapse of a $1.4 billion deal to settle Ukraine's gas debt to Russia may come as an embarrassment to gas monopoly Gazprom, which has apparently overlooked its tax obligation for months. But the failure may also leave open the chance that Gazprom will continue to pursue its plan to bypass Ukraine with a pipeline through Poland, despite an agreement on a 10-year transit pact.

Boston, 7 June 2002 (RFE/RL) -- Ukraine says it has won a 10-year natural-gas transit agreement with Russia but has lost a debt deal that has been in the works for over a year.

The development may again unsettle the strategic issue of Russia's gas transit, which has preoccupied both the European Union and the Kremlin, as well as Poland and Ukraine.

Speaking at a press conference in Kyiv on Wednesday, Yuriy Boyko, chairman of the national oil-and-gas company Naftogaz Ukrainy, reported success in reaching a long-term agreement on transporting Russian gas through the country's former Soviet pipelines to Europe from 2003 to 2013. A contract has been initialed and will be signed by Prime Ministers Anatoliy Kinakh and Mikhail Kasyanov in Kharkiv on 21 June, the UNIAN news agency reported.

The deal could take pressure off Ukraine, which has feared a Russian plan to shift much of its European transit north to Poland through a second line that would be built for Siberian gas. Although the idea has been studied by the EU and its major gas companies, Poland has kept putting it off, easing Kyiv's fears that it could lose revenue and access to subsidized supplies of Russian fuel.

But it is unclear whether the bypass plan is dead or merely dormant because of poor economic and investment conditions. The long-term transit deal could push the question further into the future for Ukraine. Russia supplies about one-fourth of the EU's gas.

But if the transit pact was a success, the debt deal was a massive failure. The issue of Ukraine's $1.4 billion in arrears for Russian gas was supposed to be settled with bonds issued by Naftogaz Ukrainy and transferred to Russia's gas monopoly Gazprom. Instead, Boyko said, "The situation over the transfer of bonds to Gazprom is somewhat deadlocked," Reuters reported.

The bond settlement was one of the longest-running issues in current relations between Russia and Ukraine, marked by charges that Ukraine had been diverting gas from the transit lines to Europe and President Leonid Kuchma's admission that indeed it had. Russia tried repeatedly but failed to gain control over Ukraine's pipelines.

Tensions over reform of Ukraine's energy sector led to the ouster of Deputy Prime Minister Yuliya Tymoshenko and the appointment of former Russian Prime Minister Viktor Chernomyrdin as ambassador to Ukraine. But the negotiations and machinations all seemed to come to nothing this week after Boyko and Gazprom revealed that the debt plan had a previously undisclosed tax problem. Before accepting the bonds, Gazprom discovered it would be subject to $700 million in income and excise taxes under Russian law.

In a research comment, United Financial Group analyst Stephen O'Sullivan said, "This is an unfortunate development given that there are no clear alternatives to this securitization, which would have provided Gazprom with a degree of comfort in its attempts to claw back this debt."

Moscow-based UFG is a minority shareholder in Gazprom.

The disclosure may only embarrass Gazprom management, which apparently overlooked the tax problem during all of last year, when the debt deal was negotiated. Gazprom has been refusing to accept the Ukrainian bonds for months, citing vague problems of "documentation" until now.

While Ukraine cannot be blamed for the blunder, it also may not benefit from having the issue left up in the air. The gas-debt and transit deals were long seen as a package affecting the energy security of both Russia and Ukraine, as well as the EU. The unpaid debt may fester as a source of continuing tension. Gazprom is already holding another $1.4 billion in Ukrainian bonds from a similar gas debt in 1994 and 1995.

A closer look at the transit pact also seems to suggest that it is something less than a settled success. According to UNIAN, the agreement does not specify the volumes of transit, the amount of gas to be paid to Ukraine, or the price of supplies. All are subject to protocols, which must be negotiated annually, making it a long-term agreement that has yet to be agreed. A minimum transit volume of 110 billion cubic meters has been specified.

Gazprom exported nearly 127 billion cubic meters outside the CIS last year, according to Interfax. But the Ukrainian system can handle 170 billion cubic meters, leaving the possibility open that Russia could either use Ukraine's extra capacity or turn to Poland again for the growth in its exports to the EU.

That is just the possibility that Ukraine would have liked to foreclose, but there may be little chance of doing so now. Meanwhile, Poland may remain under pressure to accept a bypass plan.

During a visit to Moscow on Thursday, Polish President Aleksander Kwasniewski told Interfax that his country is still trying to reduce the terms of a gas contract with Russia that commits it to buy a fixed volume of gas by 2020.

Demand has been disappointing since the contract was signed in 1996. But Interfax reminded Kwasniewski that the take-or-pay deal "does not allow Poland to refuse to pay for the gas, regardless of its consumption volume."

Taken together, the mistakes in Poland and Russia could still lead to a bypass route around Ukraine.