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Poland, Belarus & Ukraine Report: October 12, 2006

October 12, 2006, Volume 8, Number 34
TWO VIKTORS, BUT NO CLEAR WINNER. The appointment in August of Viktor Yanukovych as Ukrainian prime minister left many speculating how he and his onetime rival, President Viktor Yushchenko, would work together. If recent developments are any indication, the relationship still needs some work.

The trouble began in earnest in September, when Yanukovych refused to implement seven presidential decrees, arguing that they were issued without his cosignature. Yanukovych, in return, demanded that President Viktor Yushchenko sack five regional governors loyal to the president.

Yushchenko later declined a recent invitation by Yanukovych to participate in a cabinet ministers meeting. Most recently, of course, the president's Our Ukraine bloc appeared to dismiss the possibility of joining the ruling coalition led by Yanukovych's Party of Regions.

Both politicians have apparently entered a period of argument over who is to play the leading role in Ukraine's constitutionally remodeled political system, which went into effect this year.

The constitutional amendments were hastily adopted in December 2004 to resolve the presidential-election standoff between Yushchenko and Yanukovych against the backdrop of the Orange Revolution. They now seem to have backfired, devolving into an institutional row between the two leaders.

The constitutional requirement that some presidential decrees should be cosigned by the prime minister and the ministers directly responsible for their implementation existed even before the 2004 reform.

But in the era of former President Leonid Kuchma, no prime minister -- including both Yushchenko and Yanukovych -- ever invoked the attendant provision to question the legality of presidential decisions.

Now, however, the situation is different.

The constitutional reform, which took effect on January 1, 2006, has shifted the center of political power from the president toward the prime minister and parliament, making the president and the prime minister top executive officials with more or less equal authority.

President Yushchenko and Prime Minister Yanukovych are from different political camps, so it is hardly surprising they are now competing for recognition as the uppermost politician in Ukraine.

But since both politicians personify opposing sides of Ukraine's deeply felt East-West divide, their rivalry, if continued, will no doubt contribute to widening this troublesome gap.

Yushchenko proposed a solution two months ago when he persuaded the Our Ukraine bloc to enter a government run by Yanukovych's Party of Regions jointly with the Socialist and Communist parties.

Even more significantly, Yushchenko succeeded in convincing all major political parties -- except for the Communists -- to sign the so-called declaration of national unity on basic foreign and domestic policies. With that, the signatories pledged to continue Ukraine's course toward integration with NATO and the EU.

This solution, however, proved to be short-lived.

Last month in Brussels, much to Yushchenko's surprise and chagrin, Yanukovych announced that Ukraine was not ready to join NATO's Membership Action Plan because of low public support for NATO entry.

Yushchenko condemned this announcement as "wrong" and being at variance with national interests.

And on October 4, following a failed round of talks on a new coalition agreement, Our Ukraine leader Roman Bezsmertnyy announced the bloc was switching to the opposition and asking its ministers to quit Yanukovych's cabinet or to renounce their party affiliations if they want to stay.

"Today the negotiating process was concluded," he said. "I don't know whether it is a happy or unhappy piece of news, but -- thank God -- all participants in this dialogue have made a decision. There is a government coalition, and there is Our Ukraine, which is in opposition to the government coalition."

Our Ukraine has four ministers in the current cabinet: Justice Minister Roman Zvarych, Family and Sports Minister Yuriy Pavlenko, Culture Minister Ihor Likhovyy, and Health Minister Yuriy Polyachenko. If they resign, President Yushchenko will lose further control of a government that has already started to oppose his policies.

And there may be even more unpleasant developments in store for the president.

Apart from the Our Ukraine ministers, two other Yushchenko men are in Yanukovych's cabinet -- Foreign Minister Borys Tarasyuk and Defense Minister Anatoliy Hrytsenko. The president is legally required to appoint both those posts.

But with Our Ukraine bloc members joining the opposition -- including the People's Rukh of Ukraine, which is headed by Tarasyuk -- it stands to reason that Tarasyuk may quit the cabinet.

That would be a major loss for Yushchenko; Tarasyuk is a staunch promoter of Ukraine's integration with Europe.

Hrytsenko, who has no formal party affiliation, is likely to retain his job.

Our Ukraine's failure to strike a deal on a grand coalition could potentially turn into a serious setback for Yushchenko's policy of rapprochement with the West.

But Yanukovych also has reason to be concerned. His cabinet is critically dependent on the parliamentary support of Marxist-oriented Socialists and Communists. They may ultimately force the prime minister to make his agenda "more leftist," abandon his liberal economic course, and slow down pro-market transformations in the country -- policies that Our Ukraine, by contrast, might be likely to support.

This is perhaps why Yanukovych tried to play down the failure of the grand coalition talks and suggested that not everything had been lost in this regard.

"I'm sure that we have not yet completed this process" of building a broader coalition, Yanukovych said on October 5. "President Yushchenko, with whom we reached agreements, remains and will continue to be Our Ukraine's leader, and that the de facto representatives of Our Ukraine in the government are working in accordance with our agreements."

The same day, in a press release, Yushchenko met Yanukovych halfway, emphasizing his belief that participants in the grand coalition talks "still have a chance of reaching agreement on key issues."

It seems therefore that despite their evident rivalry, Yushchenko and Yanukovych will be forced to cooperate with each other in the future, regardless of what happens with the current ministers from Our Ukraine.

Yushchenko possesses a power of veto over legislation, while the Yanukovych-led coalition falls 60 votes short of the 300 votes required to override it.

On the other hand, Yushchenko cannot take any meaningful steps toward bringing Ukraine closer to the EU and NATO without the consent of Yanukovych's Party of Regions.

For purely practical reasons, such a situation should push both politicians toward forging a modus vivendi based on political compromise. Otherwise, Ukraine will be left with two sets of policies and two separate centers of authority -- one applauded in the west of Ukraine, the other in the east. (Jan Maksymiuk)

NEW GAS AGREEMENT WITH RUSSIA. Ukrainian Fuel and Energy Minister Yuriy Boyko raised more than a few eyebrows when he told journalists in Kyiv on October 6 that Ukraine will not import Russian gas for domestic consumption next year.

His statement that "there will not be any Russian gas in Ukraine's balance" was clear enough. How he calculated that meeting Ukraine's gas needs was possible without a Russian contribution was not.

Boyko's had announced two days earlier that Ukraine has signed contracts to purchase 42 billion cubic meters of Turkmen gas, 7 billion cubic meters of Uzbek gas, and 8.5 billion cubic meters of Kazakh gas in 2007.

That would add up to 57.5 bcm, sufficient in Boyko's opinion to fulfill Ukraine's prodigious appetite for natural gas. A curious conclusion considering that the forecast for 2006 is 76-77 bcm and Ukraine imported 73 bcm under a gas-purchasing agreement with Russia in which it received a "mixed basket" of gas from Russia, Turkmenistan, Uzbekistan, and Kazakhstan.

That agreement, under which Ukraine paid $95 per 1,000 cubic meters of gas, was apparently scrapped in late September during secretive discussions with Russia on gas supplies.

Despite Boyko's statement regarding the replacement contract, it is a stretch to say that Ukraine will be free from the Russian gas yoke. After all, while it will be purchasing gas under the new contract via RosUkrEnergo and not from Gazprom directly, the Russian gas giant remains the owner of 50 percent of the shares in RosUkrEnergo.

According to the new agreement, which is to go into effect in January 2007, Gazprom will not sell Russian gas to Ukraine, but will resell the 50 bcm of gas it buys from Turkmenistan for $100 per 1,000 cubic meters to Ukraine.

This after Ukraine's failed negotiations with Turkmenistan led to Russia making a play for Turkmen gas in October at the $100 rate. Seeing that in 2006 Ukraine is paying Russia $95 per 1,000 cm of gas, the fact that Gazprom's Aleksei Miller announced on September 27 that that rate will stand until the end of the year could mean a loss of nearly $400 million for Gazprom.

The exact price Ukraine will pay for its imported gas in 2007 has not yet been announced, but Prime Minister Viktor Yanukovych has in recent weeks repeatedly touted a price at or around $130 per 1,000 cubic meters.

On September 28, Yanukovych told his cabinet that the country "will pay less for gas than its neighbors in 2007-09." He followed up on that prediction by telling the cabinet on October 4 that "We know that the price of gas for 2007 for our neighbors -- Moldova, the Baltic countries, Georgia, and Azerbaijan -- is already about $200 [per 1,000 cm]. In October we will see what price Ukraine will have to pay. We expect, and we have reasons for this, that the price will be about $130."

Meanwhile, the 2007 draft budget prepared by the Yanukovych government factored in the new price for gas to be $135/1,000 cm and allocated ample funding to account for increased gas expenses, while also lowering the gas price for the public.

The new arrangement apparently caught the Ukrainian government off guard.

As late as September 22, Boyko had told the media that beginning in January 2007 thru the end of 2009, Ukraine would buy an annual total of 62 billion cubic meters of gas from Turkmenistan, Uzbekistan, Kazakhstan, and "partially from Russia." Again, Boyko said the 62 bcm involved would be "fully sufficient to meet Ukraine's gas needs."

Five days later, Gazprom CEO Miller and Boyko announced that Ukraine would only be buying 55 bcm of gas per year beginning in 2007 thru 2009 -- again saying that despite the 18 bcm difference compared to 2006, the gas would "fully meet Ukraine's needs."

It is difficult to account for the vast discrepancy in the volume of gas purchased by Ukraine in 2006 and the new amount for 2007.

The oft-cited decrease of around 18 bcm would be enough gas to meet the demands of a medium-size country. Has Ukraine's consumption of gas declined so drastically in one year?

Ukraine currently ranks sixth in the world in terms of gas usage -- burning more gas than Poland, the Czech Republic, Hungary, and Slovakia combined.

It produces approximately 20 billion cubic meters of its own gas and in 2005 sold 5 bcm abroad. Thus, it is feasible that imports of 55 or 57.5 bcm might be sufficient to meet Ukraine's needs in 2007, although that would also mark the end of profitable sales of gas abroad.

In the weeks preceding the Ukrainian-Russian negotiations, numerous Russian officials -- among them Anatoliy Chubais, the head of Unified Energy Systems, the country's electricity generating monopoly, Andrey Kiriyenko, the head of the country's nuclear energy agency, and German Gref, the economic development and trade minister -- all warned that Russian gas production will not be able to keep up with domestic demand by 2007.

Meaning that the fall in Ukrainian gas imports is likely not by preference -- but can rather be directly traced to Russia's own rapidly rising domestic demand. (Roman Kupchinsky)