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Russia: Gazprom Seeks Turkmenistan-Ukraine Gas Trade

Gazprom of Russia is trying to take over the gas trade between Turkmenistan and Ukraine after years of allowing private operator Itera to profit from using its pipelines. The move may spell the end of a special and secretive relationship with Itera as the government presses Gazprom to reclaim assets before it seeks more tariff hikes.

Washington, 17 December 2002 (RFE/RL) -- Russia's gas monopoly Gazprom has stepped back into the business of shipping gas from Turkmenistan to Ukraine in a deal that may raise doubts about why it ever gave up a trade worth many millions of dollars.

Last week, Gazprom signed agreements with Ukraine's state petroleum company, Naftohaz Ukrayiny, making it the operator for gas transit from distant Turkmenistan next year. The deal means that Gazprom will replace the private gas trader Itera, which has served for years as the middleman between Ashgabat and Kyiv, using Gazprom's pipelines. Gazprom wants to reclaim the business from Itera, handling the transit on its own.

The agreement is important because Turkmenistan's gas represents Central Asia's biggest trade after Kazakhstan's oil. Turkmenistan has also become Ukraine's largest gas source, assuming a role that was once the exclusive province of Gazprom.

The Gazprom move may also be significant because of its long and questionable relations with Itera, which critics would like to see ended. For years, Gazprom has opened its pipeline network to the U.S.-registered company, allowing it to capture Russia's gas trade with CIS countries, although independent oil firms have been kept from using the lines.

The new Gazprom deal with Ukraine may shut Itera out, as the monopoly tries to reform its murky business under government pressure. But the outcome is uncertain.

Yesterday, the London-based "Financial Times" quoted an unnamed Itera official as saying that the Gazprom deal could be illegal because Turkmenistan was not consulted. Itera has already signed contracts for this year's transit between Turkmenistan and Ukraine, the Interfax news agency reported in October, citing a source in Turkmenistan's presidential administration.

The three-way dealings have a long and troubled history. Initially, Moscow forced Turkmenistan and Ukraine together in the 1990s to limit its exposure to Kyiv's fuel appetite and poor credit record. The Gazprom-orchestrated relationship also kept Turkmenistan from competing in the rich European markets, which Russia reserved for itself.

Despite its huge gas reserves, isolated Turkmenistan had little choice but to accept its brokered marriage with Ukraine, since its pipeline routes run through Russia. Gazprom has been nearly as reliant on Ukraine, since up to 90 percent of its exports pass through former Soviet pipelines on Ukrainian territory. Russia has kept Ukraine happy by feeding it Turkmen gas, rather than more of its own.

But the puzzling part of the triangular tie has been Gazprom's willingness to turn over its transit business to Itera for the past four years. The trade started in 1994 when Itera first traded food to Turkmenistan for gas. But the business blossomed in 1999 when Itera began serving as the "financial and technical operator" for a transit deal with Gazprom to sell 20 billion cubic meters of Turkmen gas to Ukraine.

Within a few years, tiny Itera had taken over much of the gas traffic with CIS countries, while Gazprom continued to handle its own exports to Europe. Spurred by shareholder suspicions, auditors searched for ownership links between Gazprom and Itera but failed to find any. Analysts have since argued that Gazprom brought Itera into the business to reduce the risk of nonpayment and the diplomatic fallout from tougher collection measures in the CIS. Gazprom is 38 percent government-owned.

But that explanation has never been easy, since Ukraine has paid Itera for transit with a large part of the Turkmen gas instead of cash. The terms reduce Itera's risk, while Ukraine is supposed to pay Turkmenistan directly for the gas itself, half in cash and half in goods and services. As a result, it appears that Gazprom has given up well over $1 billion worth of Turkmen gas to Itera for the use of its own lines.

Last week, Gazprom pushed Itera aside by offering to take less of the Turkmen gas as a transit fee. Interfax reported that Naftohaz Ukrayiny will pay 38 percent of the value of the gas to Gazprom for transit, compared with the 41 percent paid to Itera this year.

Although Turkmenistan is due to raise both the volume and price of its exports to Ukraine next year, the cost to Naftohaz Ukrayiny will stay the same because of the better deal, the Ukrainian newspaper "Den" said in a report relayed by the BBC.

Gazprom also sweetened its offer by allowing Naftohaz Ukrayiny to increase its gas re-exports to Europe tenfold next year, using a $200 million credit line from a Gazprom-owned bank.

The Russian monopoly may have three reasons for offering the accommodating terms. First, it is trying to reach final agreement with Ukraine on a consortium to manage its transit lines, capping a long campaign to get control over its European routes. The new incentives make it clear that Gazprom is still intent on keeping Ukraine as its main export corridor, despite moves to build alternate pipelines through Belarus and across the Baltic Sea.

Second, Russia wants more direct engagement with Turkmenistan, which can offer ready gas supplies, although it has wrangled with Moscow over the price. Ashgabat also holds a key vote on the formula for dividing the Caspian Sea as Russia pursues its quest for an accord with neighboring Iran.

Last, Gazprom seems to be reacting to pressure from the Russian government to recapture lost assets before it raises rates on hard-pressed consumers. Gazprom may now be treating the business it shifted to Itera as one of those assets for the first time. In recent weeks, Gazprom has cut supplies to Itera for sales to Lithuania, Azerbaijan, and Kazakhstan, as well as Ukraine, citing overdue bills. It restored service only after Itera paid Gazprom millions of dollars in debt.

It is unclear whether the new treatment spells the end of Itera's special relations with Gazprom, or whether the private company will take its case to court. If Itera backs down, it may be a measure of the many favors it has enjoyed over the years or the hope that there may be more to come.