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Poland, Belarus & Ukraine Report: December 1, 2005

1 December 2005, Volume 7, Number 40
THE GAS IMPASSE. Talks about Russian gas transit across Ukraine and Russian gas supplies to Ukraine for 2006 came to a standstill on 29 November.

If both sides fail to reach a compromise within the following month, the impasse may also affect a number of other European countries, to which Russia currently imports nearly 120 billion cubic meters of gas annually through Ukrainian pipelines.

Under the current barter arrangement, Ukraine is to receive 23 billion cubic meters of Russian gas in 2005 as payment for the transit of Russian gas across Ukraine. Gazprom prices its gas for Ukraine at $50 for 1,000 cubic meters, while Naftohaz Ukrayiny charges $1.093 per 1,000 cubic meters of gas per 100 kilometers of transit.

Russia's gas monopoly Gazprom on 28 November accused the Ukrainian oil and gas transport company Naftohaz Ukrayiny of sabotaging the talks.

Naftohaz Ukrayiny responded by saying that Gazprom's new conditions for gas transit to Europe and gas supplies to Ukraine sound like "ultimatums," adding that it would be Gazprom's sole responsibility if the Russian gas transit to Europe across Ukraine were to be interrupted.

Both sides are basing their arguments on the same governmental agreement signed in 2003.

Naftohaz Ukrayiny wants to retain the barter payment system and has argued that, under the agreement, Gazprom cannot demand an increase in gas price prior to 2009 or a change of the barter scheme prior to 2013.

Gazprom is sticking to another of the agreement's provisions. It says that, according to the agreement, specific conditions of gas transit, such as tariffs and the form of payment, should be determined on a yearly basis in a special protocol.

Gazprom said on 28 November that it had offered to Ukraine to sign a gas transit protocol for 2006 in accordance with international norms and under "European tariffs." The gas giant also said it wants to sign such a protocol ahead of discussing the price of gas supplies to Ukraine for 2006.

It is not clear what new transit tariff Gazprom is ready to pay to Naftohaz Ukrayiny. According to the Moscow-based "Vremya novostei" daily, the "European" gas transit tariff is $2-$2.5 per 1,000 cubic meters per 100 kilometers

What does seem likely is that Gazprom will hike the price that Ukraine pays for its gas.

Gazprom deputy head Aleksandr Ryazanov indicated as much on 29 November. "Of course, with the [former] price of $80 [for 1,000 cubic meters of Russian gas] at the border with Germany, the price of $50 for Ukraine, excluding transportation costs, was considered acceptable," Ryazanov said. "But when this price [for Germany] becomes $200, the price of $50 is too small. It doesn't even cover our real costs for production and transportation of the gas to the CIS countries."

Some Russian media reported earlier this year that Gazprom wants Ukraine to pay $160 for 1,000 cubic meters of gas.

That could be a big extra burden for Ukraine.

According to a calculation in the 29 November issue of "Vremya novostei," if Ukraine and Russia switch to "European" tariffs for gas transit and supplies, Ukraine will be unable to balance the purchase of the current volume of Russian gas with gas transit charges alone and will have to pay an extra $2 billion annually to Gazprom. This calculation, if correct, would explain why Naftohaz Ukrayiny has been reluctant to accept Gazprom's new proposals.

Until now, the Russian-Ukrainian gas talks have been conducted between Gazprom and Naftohaz Ukrayiny -- that is, formally at a corporate level. But some observers in both Russia and Ukraine have suggested that the current impasse can only be resolved by a political compromise, namely between the Russian and Ukrainian presidents, Vladimir Putin and Viktor Yushchenko.

What could lie behind such a compromise?

One of the possible answers is that Moscow, by taking a tough stance on 2006 gas prices, is trying to push Kyiv into accepting Russian conditions for the creation of a free trade zone within the Single Economic Space (SES) of Russia, Belarus, Kazakhstan, and Ukraine.

Earlier this year, the four countries agreed to draft 29 principal accords on the SES free trade zone to make them ready for signing in December. Ukraine has so far agreed to sign 10 of these accords, arguing that the remaining ones would limit its sovereignty. Earlier this month in Moscow, Russian Deputy Prime Minister Viktor Khristenko reportedly told a Ukrainian delegation that Kyiv has a clear choice -- either to sign 29 of them or none at all.

That the Russian-Ukrainian gas talks may somewhat be connected with the SES was indirectly confirmed by President Yushchenko this week.

Yushchenko suggested for the first time during his presidency that it would be logical for Ukraine to transfer a part of its sovereignty to supranational bodies if the country wanted to take advantage of the SES's joint market.

"Let us imagine that we have a free flow of goods, services, and capital, and we have a unified transit policy [within the SES]," Yushchenko said in Kyiv on 28 November, according to the BBC's Ukrainian Service. "What next? A tariff policy. If we accept these three things, then an obvious question will present itself: How to transfer a part of national sovereignty in order to form and pursue these three policies?"

But while the connection between the SES and Russian gas supplies to Ukraine in 2006 has yet to be confirmed, it is already clear that Russia has begun to use gas supplies to CIS countries as a political tool.

Moscow has unambiguously signaled that it wants to considerably increase gas prices for Ukraine, Moldova, and Georgia in 2006. At the same time, Putin said Belarus will continue to receive Russian gas at an unchanged, discount price of $48.68 per 1000 cubic meters. (Jan Maksymiuk)

EU OPERATION BEGINS MONITORING UKRAINIAN-MOLDOVAN BORDER. The European Union ON 30 nOVEMBER officially initiated its operation to monitor the Ukrainian-Moldovan border. The operation has been set up to combat smuggling, which is believed to be rife, especially along Ukraine's 400-kilometer-long border with Moldova's separatist region of Transdniester.

In June, Moldovan President Vladimir Voronin and his Ukrainian counterpart Viktor Yushchenko appealed to the EU to dispatch a monitoring group to their border to help curb the smuggling of goods and other illicit trafficking.

The EU took notice. In October, a formal agreement to launch the operation was signed by the two countries and the EU.

The mission's inauguration ceremony in Odesa today was attended by EU High Representative for the Foreign and Security Policy Javier Solana, European Commissioner for External Affairs and Neighborhood Policy Bettina Ferrero-Waldner, Ukrainian Foreign Minister Borys Tarasyuk, and Moldovan Foreign Minister Andrei Stratan.

The operation reportedly consists of some 70 border policemen and customs officers from 16 EU countries and 50 local staffers. It has a budget of 8 million euros ($9.4 million) and a two-year mandate, which can be extended.

Apart from its core headquarters in Odesa, it will have five field offices, from which it will be able to dispatch mobile teams to monitor the border.

The monitors are authorized to make unannounced inspections at any location on the Ukrainian-Moldovan frontier. However, they will not operate on Transdniestrian territory.

It is Transdniestria that seems to be the problem.

After a short war in 1990-91 with Moldovan forces, Transdniestrian separatists broke away and declared independence. A ceasefire has held ever since, but the Council of Europe recognizes Transdniester as a "frozen conflict."

Both Ukraine and Moldova suspect that the separatist regime of Igor Smirnov in Transdniester may be involved in arms and drug smuggling through the porous border with Ukraine.

Oleh Dolzhenkov, an official from the Odesa City Council, shared such concerns with RFE/RL's Ukrainian Service.

"We know that the city of Odesa was drowning for a long time in illegal weapons, drugs, etc., which went through unmonitored sections of the Moldovan-Ukrainian border," Dolzhenkov said. "We know that some time ago a number of resonant crimes were perpetrated by organized crime groups operating from the territory of the unrecognized Moldovan Transdniestrian Republic, just because there has so far been no efficient system of monitoring of the movement of people and goods through this stretch of the border."

However, hard evidence to support such suspicions has not yet been produced. A team of EU experts who toured Moldova and Ukraine in August could not confirm the allegations that Tiraspol smuggles drugs and weapons to Ukraine.

There are also suspicions that some people on both sides of the border may be involved in transit-related fraud.

A possible deception scheme could look like this: Shipments of goods arriving by sea in Odesa are declared as Tiraspol bound and not taxed by Ukraine. Subsequently, authorities in Tiraspol confirm receipt, but the goods are rerouted to Ukraine.

In a broader perspective, the start of the new border operation can be seen as the EU's contribution to the resolution of the Transdniester conflict. Enforcing tighter controls could go some way in eroding the economic base of the separatist regime. Earlier this year, Ukrainian President Viktor Yushchenko proposed a solution to the Transdniester conflict. Under his plan, the divided country would reintegrate under the Moldovan constitutional system and Transdniester would be granted a "special status." The plan also called for holding democratic elections to the Transdniestrian legislature under international monitoring.

However, the Moscow-supported regime in Tiraspol ignored Yushchenko's initiative and decided to hold legislative elections in December under its own legislation, thus excluding the possibility that they can be recognized by the international community as democratic. (Jan Maksymiuk)

WHY ARE UKRAINIANS DISAPPOINTED WITH THE ORANGE REVOLUTION? Ukrainians converged on Kyiv's Independence Square (Maydan Nezalezhnosti) on 22 November to mark the first anniversary of the Orange Revolution, which installed Viktor Yushchenko as Ukraine's president.

One year ago, tens of thousands of people came to the square to protest against what they saw as a rigged second election round in favor of Yushchenko's rival, then-Prime Minister Viktor Yanukovych. Weeks of peaceful protests in Kyiv and other Ukrainian cities led to a repeat runoff on 26 December, which was won by Yushchenko with 52 percent of the vote.

The Orange Revolution, which has drawn comparisons to the Solidarity movement in Poland in the 1980s and the Velvet Revolution in Czechoslovakia in November 1989, was a time of immense social optimism and activism in Ukraine. However, one year later a majority of Ukrainians say they are disappointed with the current course of events in their country.

According to a poll taken earlier this month, more than half of Ukrainians say the new government has failed to keep the promises that were made on the square. Today just one in seven Ukrainians fully supports President Yushchenko, compared to nearly 50 percent declaring such support shortly after his inauguration in February.

What are the main reasons for this general disappointment?

First, the Yushchenko government has failed to exploit the backing it gained during the Orange Revolution to institute coherent reforms. Such a scenario could have set Ukraine on a path of irreversible transformation from the current oligarchic-capitalism system to a more market-oriented economic model. Instead, Yushchenko resorted to a populist and expensive increase in wages and pensions, apparently to keep the electorate satisfied until the 2006 parliamentary elections. After several months of relative social contentment, this move was followed by increased inflation and a rise in costs of living. At the same time, economic growth rate in Ukraine has slumped from 12 percent in 2004 to some 3 percent today. As a result, Ukrainians justifiably view their economic prospects as bleak.

Second, Yushchenko has failed to fulfill his revolutionary pledge to eradicate endemic corruption and "send all bandits to jail." True, the government has annulled more than 4,000 regulations in business registration, which was a breeding ground for corrupt practices. However, the general view is that corruption in Ukraine has remained no less acute than it was during the reign of Yushchenko's predecessor, Leonid Kuchma. No senior official from Kuchma's regime has been brought to court on charges of corruption or abuse of office.

Third, Yushchenko was constrained to dismiss Prime Minister Yuliya Tymoshenko's cabinet in September, after some high-ranking government officials accused several top presidential aides of corrupt practices. The crisis served to severely damage the Yushchenko camp by fueling arguments that the Orange Revolution was not so much a popular revolt as a rebellion of pro-Yushchenko "millionaires" against pro-Yanukovych "billionaires."

Fourth, Yushchenko made an ill-advised deal with Yanukovych in late September to secure the approval of a new cabinet. In particular, Yushchenko obliged himself to draft a bill on amnesty for those guilty of election fraud in 2004. In other words, Yushchenko not only reneged on his vow to "send all bandits to jail," but also undermined one of the primary motivations of those who supported the Orange Revolution. Many of Yushchenko's former supporters and sympathizers were taken aback by this move, and some accused him of "betraying" the revolution.

Fifth, prior to the cabinet crisis in September, Yushchenko could hardly be credited as a strong-willed and objective-driven leader. For example, he involved himself in an embarrassing public argument with Tymoshenko regarding the scale of reprivatization in Ukraine. While the president wanted to review some 30 dubious privatizations, the prime minister called for a much broader effort -- saying their number must be at least 3,000. For several months Yushchenko also tolerated the existence of two "parallel governments" in the country, one centered on Tymoshenko's cabinet and another on the National Security and Defense Council headed by Petro Poroshenko. To resolve this controversy, he eventually dismissed both of them.

Sixth, there is also a growing feeling in Ukraine that Yushchenko came to power with hardly any coherent or long-term economic program. For many commentators this was illustrated by the much publicized reprivatization of the Kryvorizhstal steel mill. In October, the government sold Kryvorizhstal to a Dutch steel conglomerate for some $4.8 billion -- six times the amount Kuchma's government received for it in 2004. Initially, Yushchenko said the money would be spent in the social sphere to improve the lives of ordinary Ukrainians. However, he recanted on this promise and announced that the sum would be primarily invested in Ukrainian industries. Meanwhile, lawmakers have reportedly drafted no fewer than 20 bills on how to spend the Kryvorizhstal windfall. This seems to indicate that decision makers in Ukraine remain fairly confused regarding the country's development priorities or economic course after the Orange Revolution.

For most Ukrainians, the above-mentioned drawbacks of the postrevolutionary government in Ukraine seem to outweigh the benefits that derived from Yushchenko's coming to power. This is unfortunate, as it is difficult to ignore or to discredit the accomplishments of the Orange Revolution.

First, Ukrainian media now operate in an incomparably freer environment than they did during the Kuchma era. Second, the Orange Revolution has given rise to vibrant civic activism, pulling Ukrainians out of the public passivity that is characteristic of many post-Soviet societies. And third, the Orange Revolution has introduced a political reform that will soon transform the country into a parliamentary-presidential republic -- that is, objectively a more democratic political system than most post-Soviet governments.

It is these achievements that should be most remembered on Independence Square on 22 November. (Jan Maksymiuk)