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Russia: Moscow, Berlin, And Kyiv To Cooperate On Gas Deal

Russia, Ukraine, and Germany have declared their cooperation on gas transport to Europe this week, raising hopes for an end to supply fears and maneuvers over European routes. The plan could lead to billions of dollars in new investment for Ukraine, but doubts remain about whether all disputes with Russia have been put to rest.

Boston, 12 June 2002 (RFE/RL) -- Germany has pledged with Russia and Ukraine to cooperate on natural-gas transit to Europe, but the deal continued to leave questions about what was concluded and what was not. Reports differed on the nature of the document signed Monday by Presidents Vladimir Putin of Russia and Leonid Kuchma of Ukraine with German Chancellor Gerhard Schroeder near St. Petersburg.

Agence-France Presse said the three countries had created a consortium to manage Ukraine's gas-pipeline network. Other reports said the leaders had agreed only on a statement, calling on their governments to work out details for the group. A consortium could be formed in August, Ukrainian television said.

Though the accord seems to be no more than a protocol, it could have far-reaching consequences. "In a first phase, the consortium will attract investments worth $2.5 billion for the renovation of Ukrainian gas pipelines, and over the following 10 years, it will attract further investments worth $15 billion for the development of the pipeline network," Putin said.

The main partners are expected to be the Russian gas monopoly Gazprom and Ukraine's state-owned oil-and-gas firm Naftohaz Ukrayiny.

The investment is expected to modernize and maintain the Ukrainian transit system, which carries nearly 90 percent of Russia's gas to the European Union. The plan is seen as benefiting countries from Europe to Central Asia, as well as Russia and Ukraine.

Interfax quoted President Putin as saying that, "Russia and our partners in Central Asia can be sure that they will have a sales market for their gas, and those who have the gas-distribution system will be sure that they will receive the product at the right prices, at the right time, which cannot but yield positive results."

Schroeder said, "The project will ensure economic stability in the region -- in Europe, Ukraine, and Russia -- and economic stability will produce political stability."

Schroeder said Germany's Ruhrgas may join the consortium. The company is both a 5 percent shareholder in Gazprom and a major customer for its gas.

Security of supplies is a major motivator for Europe, which has suffered from periodic drops in gas pressure since 1994 due to diversions of Russian fuel in Ukraine. Government authorities stopped the practice in 2001, but the country has been left with a $1.4 billion debt to Gazprom.

While the cooperation drew high praise, there were also notes of caution. Ukrainian Deputy Prime Minister Oleh Dubina stressed that the pipelines would not be privatized, saying, "It will be a matter of administration, not property."

The reason for this is that Russia has tried for years to use the debt and privatization proposals as a way to gain control over the former Soviet network, which has been a lifeline for Ukraine's subsidized and gas-dependent economy. The consortium still requires legislative approval in Ukraine.

Russian Deputy Prime Minister Viktor Khristenko's statement suggested a compromise formula, but one that raises Moscow's role. He said, "We shall manage, develop, and control the operation of this gas-transport system together."

A long-awaited debt restructuring has been thrown into doubt by disclosures in the past week that Gazprom has refused to accept bonds issued by Naftohaz Ukrayiny after discovering that the deal would saddle it with a $700 million Russian tax bill.

Ukraine has offered to pay Russia back with some of its own gas, which Kyiv gets as a transit fee. But it is hard to see how such a scheme would work, since Russia is not likely to accept the same rate of $50 per 1,000 cubic meters that it nominally charges Ukraine, considering that it would only be taking its own gas back.

Both sides still expect to sign a somewhat vague 10-year contract on gas transport at the end of this month, although the volumes and prices of gas for Ukraine will reportedly remain to be settled from year to year.

Two investment banks in Moscow took opposite views of the cooperation deal. In a daily research note, Troika Dialog called it "very good news for Gazprom." Troika argued it would enhance transit security and bring major players closer together. It could also mean the end of costly attempts to build bypass pipelines around Ukraine through Poland, said Troika.

United Financial Group was more skeptical. UFG said: "All previous Russian-Ukrainian agreements on gas have got stuck in the fine print, and this one may be no exception. The fee that the Ukrainian government hopes to charge for the concession may kill the project at birth, as the deputy head of the Ukrainian presidential administration mentioned is $1.5 billion."

At least two key questions seem to emerge from the cooperation pact. First, is this the outcome of the initiative announced in October 2000 by European Commission President Romano Prodi to double EU imports of Russian energy over 20 years? Or is it only a temporary formula to ease EU doubts and Russian difficulties in Ukraine?

The second question is whether the cooperation spells the end of Russia's many plans to build bypass pipelines, which were sparked by the Prodi announcement. Ukraine's Dubina made clear that he believes so.

But Putin did not say where the money would come from for investment in Ukraine's pipelines, and he made no commitment to abandon bypass plans. Gazprom has studied bypass investments with its European partners, also costing billions of dollars. As quoted by the RIA-Novosti news agency, Khristenko said only that "new capacities may be built" in Ukraine. Either way, both countries can gain from cooperation. But it is unclear that the deal marks the end of all disputes.