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Ukraine: Kyiv May Gain From Russia's Row With Belarus

Russia's row with Belarus over proposed terms of union could help Ukraine as it resists Moscow's pressure on forming a consortium to take over its gas pipelines to Europe. Moscow has held out the alternative of bypassing Ukraine with new lines through Belarus, but the anger in Minsk may show that it is not easier to deal with than Kyiv.

Boston, 23 August 2002 (RFE/RL) -- A spat between Russia and Belarus may be good news for Ukraine as it bargains with Moscow for Europe's most important gas deal.

In the past week, Russia has tried to settle two pieces of unfinished business with its nearest neighbors to the west.

In the case of Belarus, President Vladimir Putin's plan to introduce the ruble as a single currency has sparked anger in Minsk and set back progress on a long-promised union with Russia. In Ukraine, talks on organizing an international consortium to guarantee Russia's gas exports to Europe have produced promises but no progress on a pipeline management deal.

The two efforts may be linked because Russia needs one country or the other to boost its gas exports to Europe. The European Union, which already gets one-fourth of its gas from monopoly Gazprom, plans to double energy imports from Russia by 2020. But problems may now be blocking both of Russia's diplomatic tracks.

Although Ukraine carries about 90 percent of Russia's gas exports through its former Soviet trunk lines, Moscow has considered Belarus as an alternate route for the past two years. Gazprom started pushing the option in 2000 after complaining about Ukrainian diversions from transit pipelines and a $1.4-billion debt for past gas supplies.

In recent months, Gazprom has put off building a second branch of its Yamal Peninsula pipeline and a Ukrainian bypass through Belarus because of cost. But officials have denied dropping the plans, while negotiations continue on giving Russia a role in managing Ukraine's lines instead.

An international consortium including Germany was seen as a solution for the pipeline problem when it was announced last June, but Ukraine has resisted terms that could give Russia control.

On 16 August, Russian Prime Minister Mikhail Kasyanov held out hope for a pact between Presidents Putin and Leonid Kuchma in time for 7 October summit in Moldova, Interfax reported. But Kasyanov said: "To begin with, Russia and Ukraine must reach specific agreements on setting it up step by step. At present, we cannot say we have reached any solid agreements."

The daily "Kommersant" reported that Russia wants a 50-50 split in the consortium, while Ukraine insists on retaining the majority share. Ukrainian Prime Minister Anatoliy Kinakh has also vowed that privatization of the pipelines is out of the question and that the form of ownership will not change. "Kommersant" said that "the Ukrainian leadership is intent on simply emasculating the essence of the political agreement on the international gas consortium."

The sudden worsening of Russian relations with neighboring Belarus now seems likely to give Kuchma an even stronger hand in either stalling or seeking a better pipeline deal.

On 21 August, Belarusian President Alyaksandr Lukashenka called Putin's proposal for adopting the Russian ruble by 2004 "absolutely unacceptable" and "even insulting," the RIA Novosti news agency said. Both Lukashenka and opposition forces see Putin's ideas for the merger as a breach of sovereignty aimed at frustrating a union agreement.

Whatever Putin's motives may have been, the heated responses in Belarus suggest that the option of shifting Russia's export route north from Ukraine could be even riskier than previously thought.

Putin may have acted to ease pressure for a costly union with Belarus, but in the process, he may have found that Minsk is no more compliant than Kyiv with Moscow's plans. Ironically, the trouble in both Belarus and Ukraine has been stirred by simultaneous fears that Russia will infringe on their sovereignty.

Russia already seems to be paying a high price to keep its pipeline options open with Belarus. In January, Kasyanov agreed to lower gas export tariffs for Belarus from $30 to $19.60 per thousand cubic meters, putting them on a par with the cheapest domestic rates and a fraction of the prices for either Ukraine or the EU.

In June, German news agency dpa reported that Putin agreed to accept Belarusian automotive machinery and sugar in payment, granting even cheaper barter terms, even though Russian consumers pay cash.

In the meantime, another key agreement in Russia's settlement with Ukraine also appears at a standstill, as officials acknowledged that bonds to cover the $1.4-billion gas debt still have not been transferred to Gazprom. After months of silence, Ukrainian officials disclosed in June that Gazprom had simply overlooked the fact that the transaction would leave it with a $700-million tax bill to the Russian government.

Also on 16 August, Kasyanov promised that the matter would be cleared up somehow by the end of September, saying, "We have scolded the experts once again because the problem has still not been solved." The delay may mean that Gazprom has already lost nearly a year of interest income.

But the wrangling over the consortium could carry an even higher cost. Officials have indicated that the participation of Germany and France will now take place only in later stages if a deal is reached between Russia and Ukraine. The delay means that modernization of Ukraine's decaying pipelines may be deprived of funds, which would hardly be good news for Kyiv.

In June, Putin said the consortium deal would bring $2.5 billion in investment to the network in the next few years and another $15 billion the following decade. All of that funding could now be at risk.