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Russia/Ukraine: Questions Linger About Gas Consortium

The presidents of Russia and Ukraine say their plans for joint management of gas pipelines to Europe will soon move ahead, although the question of control has been left intentionally vague. Russia might have gained the upper hand in attempts to take over the transit by pursuing alternate routes and reclaiming its power over Ukraine's gas trade with Turkmenistan.

Boston, 4 February 2003 (RFE/RL) -- Statements by Russia and Ukraine on a new gas consortium were less notable for what was said than what was left unsaid last week, as the big question of who would control the new entity remained unresolved.

Appearing in Kyiv with President Leonid Kuchma on 28 January, President Vladimir Putin declared himself satisfied with the "very fast pace" of establishing the consortium to manage the bundle of Soviet-built pipelines that run through Ukraine to supply one-fourth of Europe's gas.

Russia has been struggling with the problems of Ukrainian transit for its vital gas exports ever since independence. The presidents first agreed to the consortium arrangement during a visit by German Chancellor Gerhard Schroeder to St. Petersburg last June.

On its face, the consortium is a masterful compromise that would solve the problems of the rusting gas corridor through Ukraine by attracting funds to rebuild it. The deal could also end the threat of Ukrainian diversions and nonpayment for gas that plagued the route's dependability for a seven-year period until 2001.

Speaking to reporters, Putin said the consortium would be registered soon, stressing that it would be "a Ukrainian legal entity with its headquarters in Kyiv," Russia's official RIA-Novosti news agency reported.

The formula has been repeated many times to calm fears in Ukraine that it is surrendering sovereignty over the lines, which have been its only guarantee of getting subsidized Russian gas at less than European rates.

After months of Ukrainian resistance to Russian pressure on the control issue, Kuchma seems to have accepted the plan to give the two countries equal shares rather than insisting on keeping a slim majority. By establishing the entity under Ukrainian law, Kuchma may believe that he can settle any dispute in Kyiv's favor, should the need arise. So far, the two sides have put up token amounts of $500,000 each.

In an interview with RBC News, Russian Deputy Prime Minister Viktor Khristenko said the first meeting of the supervisory council of the so-called Russian-Ukrainian Gas Transportation Consortium would take place this month in Kyiv, using a title that puts Russia first. A trilateral meeting to include Germany as a possible member is set for March.

Council members include Khristenko and Aleksei Miller, the chief executive of Russia's Gazprom gas monopoly, as well as Yuriy Boyko, who heads the Naftohaz Ukrayiny state petroleum company. Gazprom is 38 percent government-owned.

Details of the consortium have been studiously vague, but Khristenko told the Prime-TASS news agency that new members like Germany's Ruhrgas would join by buying equal shares from Russia and Ukraine to perpetuate their parity. Italy is also said to be interested in taking part. Gazprom's exports to Europe rose 2.9 percent to 130 billion cubic meters last year, Interfax reported. Two-thirds of the exports went to West European countries.

Kuchma said a third country like Germany should be included before the consortium starts operations, perhaps thinking that it would dilute Russian influence. Kuchma may be clinging to the hope that no one will be able to control the consortium. But it is hard to see how he can ensure that Ukraine will not be outvoted in the event of a dispute, since Ruhrgas is a Gazprom shareholder, as well as a customer.

The consortium plan emerged only after Gazprom announced two years ago that it was negotiating with Ruhrgas and other European gas companies to build bypass routes around Ukraine. In fact, Gazprom's multiplicity of strategies may be the reason that Kuchma has gradually agreed to accept the consortium solution on increasingly Russian terms.

While Russia has occasionally downplayed its bypass strategy, it has never abandoned it, pursuing new pipelines through Belarus, Poland, and Slovakia to erode Ukraine's transit share. When those routes have hit roadblocks, it has pushed farther north with a plan for a "North European Gas Pipeline." On 24 January, Miller held talks in Brussels on building a line across the Baltic Sea to Germany, the Netherlands, and eventually Britain.

Gazprom also used last month's pact with Poland on easing Warsaw's contract commitment to buy Russian gas as a chance to advance plans for more gas transit across its territory.

But Gazprom may have used an even stronger lever by reclaiming the gas trade between Turkmenistan and Ukraine from the private company Itera, starting in November. Turkmenistan has provided a cheap alternative to Russian gas for several years by asking for only half of payments in cash and the rest in bartered goods and services.

Gazprom has also been negotiating to buy Turkmen gas for itself, offering to make all payments in cash. The two moves may require more brinkmanship from Ukraine as it tries to deal with Gazprom in its many different roles as a partner, customer, supplier, and now possibly, a competitor.

The Russian gas giant is also still a creditor following the apparent failure of a 2001 deal for Ukraine to pay off its $1.4 billion in debt to Gazprom by issuing bonds. The company realized belatedly that it would have to pay $700 million in tax if it accepted them. Nothing has been said about the problem for months, raising questions about whether Gazprom hopes to collect by seeking more interest in the consortium.