Ukraine: Gas Talks To Dominate Yanukovych's Russia Visit

Putin and Yanukovych meeting in Kyiv in October 2004 (epa) PRAGUE, August 15, 2006 (RFE/RL) -- Viktor Yanukovych is going to Russia today for the first time since Ukraine's Verkhovna Rada voted him into office earlier this month. He is scheduled on his two-day trip to the Black Sea resort of Sochi to talk with Russian President Vladimir Putin and Russian Prime Minister Mikhail Fradkov. The talks are expected to focus on the price of Russian gas supplies to Ukraine.

The gas deal hatched in January, after Russian gas giant Gazprom briefly cut supplies to Ukraine and Europe, has never been particularly popular in Ukraine.

Kyiv agreed to an increase in the price of Russian gas imports from $50 to $95 per 1,000 cubic meters.

Critics of this deal, including former Prime Minister Yuliya Tymoshenko, have repeatedly called for its renegotiation.

Unpopular Points

There are two provisions in the January deal that are subject to particular criticism in Ukraine.

First, the deal established the price of gas imported by Ukraine only for the first half of 2006. At the same time, it set an invariable tariff for Russian gas transit to Europe via Ukraine for five years in advance.

Second, the deal introduced a murky intermediary, the Swiss-based company RosUkrEnergo, as a monopolist responsible for gas supplies to Ukraine. Under a scheme laid down in the deal, RosUkrEnergo mixes Russian gas priced at $230 per 1,000 cubic meters with much cheaper Turkmen gas and sells the mix to Ukraine at $95 per 1,000 cubic meters.

Although it was revealed in April that RosUkrEnergo is owned half by Gazprom and half by two Ukrainian businessmen, both Moscow and Kyiv have so far failed to explain satisfactorily why they needed to include this company in the gas deal.

Yanukovych told journalists on August 14 in Kyiv that he is not expecting any substantial change in the Russian-Ukrainian gas-supply scheme this year.

"If it is possible to change the price, I mean, make it lower, we will go for it. We will see what we can achieve. As for 2007, we will create a transparent system and inform both the international community and the Ukrainian public about the way the system of relationships will work on the Ukrainian gas market," Yanukovych said.

Further Hikes Possible

Can the Ukrainian government hope for the preservation of the current gas price in 2007? Probably not.

Some Gazprom managers have already suggested that Ukraine should be ready for another gas price hike in 2007, which could mean Ukraine paying as much as $230 per 1,000 cubic meters instead of the current $95.

The question of how much Kyiv will pay for gas in the future will also depend on the amount -- as well as the price -- of Turkmen gas in the Russian-Turkmen mix sold by RosUkrEnergo. Turkmenistan has already signaled that it wants to increase the price of gas sold to Gazprom from the current $65 per 1,000 cubic meters to $100.

On the other hand, analysts warn that $120 per 1,000 cubic meters is the highest gas price the Ukrainian economy can accept without losing its competitiveness.

Ukraine's Options

But what about Ukraine's bargaining chips?

Some Gazprom officials have hinted Ukraine will pay more for gas in the future

For many years Moscow sought to persuade Kyiv to set up an international consortium, with Russia as a major partner, in order to manage the Ukrainian pipeline pumping Russian gas to Europe.

It's possible that the issue of control over the Ukrainian gas pipeline will resurface at the Sochi talks. In the past, the issue has been successfully delayed and torpedoed by Kyiv.

But Yanukovych unambiguously told journalists on August 14 that he will not agree to turning over Ukraine's gas-transport system to Russia.

"This [gas-transport] system will be owned by Ukraine. We will never do this, because it does not serve the national interests of Ukraine. The matter of reconstructing this system is a separate question. We will invite partners regardless of what part of the world they are from," Yanukovych said.

That leaves Moscow with a headache: how should it react to Yanukovych's political comeback. Russian media see Yanukovych's return as a major victory for the pro-Russian forces in Ukraine over the Orange Revolution camp personified by President Viktor Yushchenko and former prime ministers Yuliya Tymoshenko and Yuriy Yekhanurov.

Now Moscow must confirm in deeds what it asserted in words in the past 18 months -- namely, that it is easier for Russia to come to an understanding with "pro-Russian" Yanukovych than "pro-Western" Tymoshenko or Yekhanurov.

In other words, Yanukovych will have to return from Sochi to Kyiv with a small political victory if Moscow is to remain true to its word.

While it is highly unlikely that the price of Russian gas for Ukraine will remain unchanged in 2007, a staged price increase cushioning the Ukrainian economy against any shock hike could well soften the blow.