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Gazprom 'Harms Russian Interests', Ukraine Refuses To Compromise

Former Russian Deputy Energy Minister Vladimir Milov

RFE/RL Russian Service correspondent Mikhail Sokolov spoke with former Russian Deputy Energy Minister Vladimir Milov, who is a leader of the opposition Solidarity movement, on January 7 about the current standoff between Moscow and Kyiv over natural gas.

RFE/RL: Did the current gas crisis come as a surprise?

Vladimir Milov: Judging by the way that the negotiations have played out over the last few months, Gazprom was intentionally paving the way for a cutoff of gas. Unlike three years ago, Russia's leaders today -- and Gazprom's managers -- are acting confidently. In my opinion, they were psychologically prepared for a prolonged cutoff. Russia is acting more prepared, more harshly, and most likely seems prepared for an extended conflict. Gazprom seriously intends to ratchet up the pressure on Ukraine. It is perfectly possible that this is a continuation of the same political line that we first saw last August during the conflict with Georgia.

RFE/RL: At first Russia offered a price of $250 per 1,000 cubic meters, and now they are talking about a price of $450. How should we understand this pricing scheme, especially since Gazprom officials keep describing it as "market-based"?

Milov: I think that Gazprom's reference to market-level prices is just a sham. It doesn't have any relationship to reality. Over the last year, the differences in prices to former Soviet republics have been colossal. Belarus gets gas for $130; Armenia, for $110; Moldova, for $280; and Ukraine pays $180. There is no way to explain this pricing hierarchy.

This year the prices for different countries are also being established in completely different ways. And it is hard to explain this by tying it to some sort of "market prices." This is all the more true because the only so-called market basis that Gazprom has been referring to in recent years has been the world price of oil, which is now falling sharply. And this means that in a few months, gas in Europe should be being sold for less than $200 [per 1,000 cubic meters].

RFE/RL: Is this connection automatic?

Milov: Yes. All long-term contracts for supplying gas to Western European countries, the customers that Gazprom is focused on, have a connection to the ultimate price of oil on global markets. This means that if oil stays at its present level of about $40 to $50 a barrel, then in June, Germany should be paying less than $200 for 1,000 cubic meters of gas. And this means that Ukraine, Belarus, and the other post-Soviet countries should be paying considerably less.

That's why all this talk of $400 and the rhetoric about market prices has nothing to do with reality. It's pure politics. It's the use of some pretty harsh methods for the restoration of Russia's influence in the post-Soviet space -- and primarily in those countries that have in recent years been following a pro-Western course, pro-Western policies.

It's harder to use energy against Georgia because there have been some significant changes there in the last year. Georgia has almost entirely switched over to gas from Azerbaijan, and is no longer dependent on Russian supplies. In addition, they have brought a new 250 megawatt power station online -- Inguri -- which has made Georgia virtually independent from importing Russian electricity.

But Ukraine is a lot more dependent on Russia, so using the gas tap as a weapon, in Russia's opinion, is still an option. The goal is to discredit Ukraine in the eyes of the West, primarily Europe. To present it as an unreliable partner and as a country of perpetual political chaos.

And, of course, there is one more goal -- to influence Ukraine's domestic politics. I was in Kyiv literally two weeks ago and discussed these questions in great detail with many Ukrainian politicians. I don't think the Kremlin is placing its bets on any specific politician or Ukrainian political clan. Rather, it seems the Russian authorities want some Ukrainian politicians to appear who are ready to establish themselves by running to Moscow's extended arms, and who will ask for help and support in exchange for a pro-Moscow position. It doesn't matter if it is [Prime Minister Yulia] Tymoshenko, [former Prime Minister Viktor] Yanukovych, or some new political forces.

I think that the idea that it is time for the triumvirate of [President Viktor] Yushchenko-Tymoshenko-Yanukovych to leave big politics is gathering support in Ukraine -- that they should give way to new, fresh faces and political forces. Maybe this will be some kind of other, alternative Ukrainian force. I think the Kremlin would like to see a situation in which it is difficult to be a pro-Western politician in Ukraine. And the desire to make concessions to Moscow will bring solid tactical advantages.

Europe Feels The Cold

RFE/RL: How do you think the European Union should react? And in general will we see a cutoff of gas to Western Europe?

Milov: As far as I understand, some pretty serious cutoffs have already been felt in European countries, including some members of the European Union. And we must also keep in mind that, unlike three years ago, we are now seeing some pretty low temperatures. There is a danger that European customers could find themselves in cold houses.

As far as Europe's reaction is concerned, I would break the question into two parts. First, the European Union and the governments of individual countries of Europe want to see the conflict between Russia and Ukraine not simply regulated but resolved. They want to find mechanisms that would prevent such gas scandals -- and the threat of cutoffs in Europe -- in the future.

The second part of the problem is that there isn't much Europe can do to influence the situation. The gas tap, after all, is in Moscow's hands, and Europe and Ukraine have a serious dependence on supplies of Russian gas. Earlier they weren't particularly worried about this dependence, considering Russia a reliable supplier. But now the fears and the risk that people have been discussing -- that dependence on Russia is dangerous -- have begun to be realized.

And it's obvious that such a serious dependence is fraught with serious difficulties if Russia decides, for example, to punish its neighbor for following a pro-Western line. There isn't much that Europe can do in response to that. There are no mechanisms of response and effective reaction in sight.

RFE/RL: Has the diversification of supplies to Europe begun?

Milov: It has begun. But energy is a very sluggish thing. Everything takes a really long time. But the tendencies of recent years show that Europe as a whole has begun to reduce its consumption of gas, including Russian gas. Europe has begun to reorient itself toward coal, demand for which has unexpectedly begun to rise over the last three years after a period of decline. Now, new coal-fired plants are being built, instead of gas-fired ones.

In my view, this is a clear result of the fact that Europe is afraid of Russia as a supplier and because gas has been so expensive lately. The connection between the price of gas and the world price of oil, which Gazprom has always been mentioning in the past, meant that gas has cost up to $1,000 per 1,000 cubic meters to the end consumer in Europe. And this is too much. Of course, in such circumstances, it is cheaper to build coal plants. There is a demand reaction, of course, but that is a slow process.

Slow Progress

RFE/RL: How long might the negotiations take?

Milov: I agree with those who think that a mediating role for Europe in these talks would be positive. I said two years ago, testifying at energy hearings in the European Parliament, that the Europeans need to conduct, for instance, an independent investigation into the cutoff three years ago in order to understand the essence of gas relations between Russia and Ukraine. They need to give some kind of recommendations on how to regulate those relations. We can only hope they will be able to overcome their internal divisions.

RFE/RL: What results might be achieved by international arbitration?

Milov: In any case, I would consider that a proper move. If Gazprom thinks that its Ukrainian partners are violating some contract conditions, then the natural, legal, legitimate mechanism for resolving disputes is written into the agreement. That is, the Stockholm Arbitration Court. And that must be done in order to establish some sort of objective truth. Various sides are making conflicting announcements and it is impossible to tell what is true. And if there are mechanisms for resolving disputes spelled out in the contracts, then they must be applied.

Incidentally, I haven't heard that any such appeal has been prepared or submitted. So far there has only been talk about a future appeal. I would be pleased if Gazprom would sue Ukraine and we could witness a transparent settlement. Most likely, we would find out once and for all if Ukraine has been stealing gas. I think this truth can only be revealed in court, and not in the pronouncements of [Gazprom spokesman Sergei] Kupriyanov.

In my view, it would not harm Russia's strategic interests today to agree to a price of $250. That is the mid-year price that most closely corresponds to the current price of oil, which Gazprom is always citing in its pricing statements. That is a good price for Russia. I don't understand why they are creating scandals and insisting on $418 or even $450. What Gazprom is doing contradicts Russia's national interests. Gazprom is putting forward inflated demands, which are producing a conflict and harm Russia.

RFE/RL: And for what is Ukraine to blame?

Milov: I think that Ukraine has blocked any serious discussion of raising prices. We saw that compromise proposals only appeared after the new year. Before that, the Ukrainians were unwilling to discuss serious price increases. They also have a share of blame for the fact that the conditions for transiting gas through Ukraine are not laid out in detail. It has been useful for Ukraine to appear as an innocent victim in this regard with each dispute.

Although, in my opinion, they could propose clear terms for laying out transit volumes by months, weeks, days, so that it is perfectly clear who owes what to whom. They could have proposed a scheme for buying gas in order to ensure the functioning of the transit system. The Ukrainians correctly say that gas is necessary so that the compressor stations and other infrastructure won't break down. That is, they could be taking only the minimum needed amount and passing that on to Europe. But these matters have not been regulated in legal agreements. And Gazprom is not the only one to blame for this -- Ukraine is too. So I think that both sides need to make certain steps toward one another.

The Briefing: Gas Crisis

The Briefing

RFE/RL energy correspondent Bruce Pannier discusses the gas feud between Russia and Ukraine. Play