Ukraine: Gas Test Awaits New Government

(RFE/RL) PRAGUE, August 9, 2006 (RFE/RL) -- One of the first items on the agenda of Ukraine's newly formed cabinet will be to address the unresolved question of future gas supplies from Russia.

The rise of Party of Regions head Viktor Yanukovych to the post of prime minister has led to speculation that the new Ukrainian political climate could result in Russian concessions when gas negotiations resume. The Party of Regions is widely considered to be pro-Russia, which in turn was seen as a Yanukovych supporter during his 2004 presidential run.

In late May, Aleksandr Medvedev, a member of Gazprom's management committee, was asked about possible increases in the price of gas Russia would charge Ukraine in the second half of 2006.

Medvedev replied that, "according to our signed contract, the price was agreed upon for the first half year. This deadline is not far off and both sides will soon discuss the future price," RIA Novosti reported on May 26.

Yet the July 1 deadline came and went without any negotiations and without a change in the price.

Ukraine's months-long political crisis may be one reason Russia opted to put the negotiations on hold.

As the Party of the Regions gradually improved its position as the crisis dragged on, Moscow may have felt that it would not be prudent to demand higher gas prices, lest it stymie its reputed ally's chances of taking over the government.

New Negotiating Team

The composition of the new government in Kyiv will be a major factor in the upcoming gas negotiations with Moscow.

Of Yanukovych's four deputies in his new cabinet, Andriy Kluyev will be the one overseeing Ukraine's fuel and energy sector. Kluyev is widely regarded as a competent specialist with vast experience in industry and government.

He will be assisted in his work by Fuel and Energy Minister Yuriy Boyko, who headed Naftohaz Ukrayina during Leonid Kuchma's presidency, and by Coal Industry Minister Serhiy Tulub.

Boyko was questioned in 2005 over his alleged role in creating RosUkrEnergo, the murky middleman company involved in delivering Turkmen gas to Ukraine. He is known as a professional in the gas industry and an experienced negotiator with Ukraine's Russian and Turkmen suppliers.

Tulub previously held the post of coal-industry minister in the government headed by then-Prime Minister Yushchenko during the second Kuchma administration. Tulub is not expected to play a role in the upcoming gas negotiations.

New Realities

The question of how much Ukraine will pay for future deliveries of Russian and Turkmen gas will hinge on a number of different factors:

• Russia's ability to export gas without harming domestic consumers. Russia is faced with rapidly rising domestic gas consumption and Gazprom has been considering the possibility of decreasing gas exports to European markets in the future;
• Gazprom is reportedly strapped for cash needed to increase production and for geological exploration, a situation that does not bode well for Ukrainian consumers;
• The amount of gas Turkmenistan can export to Ukraine. Any decrease in volume that cannot be replaced by other sources could have a disastrous impact on the new government and on Yanukovych's pledge to raise the country's GDP;
• Ukraine's ability to implement energy-conservation projects, especially in the gas sector. The former head of Naftohaz Ukrayina during the Yuliya Tymoshenko government, Oleksandr Ivchenko, promised to diversify suppliers and called for the construction of a Liquid Natural Gas terminal on the Black Sea. It remains to be seen if the new energy team is willing to spend billions of dollars on such projects.

Common Misconception

Yanukovych's record in managing energy policies during his term as prime minister during the Kuchma administration is neither terrible nor brilliant.

The reason being that energy policy was decided by Naftohaz head Boyko and Kuchma, with Yanukovych apparently playing a peripheral role.

Coming from Donetsk, Yanukovych was more involved in domestic coking coal policy than in gas. The Donbas region of Ukraine has been far more dependent on its native coal for its wealth than on imported gas.

Moreover, during his former stint as prime minister Yanukovych was seen to be obedient to Kuchma, and never agreed to the gas-pipeline consortium the Russians so desperately sought.

For years Gazprom strove to get the Ukrainian government to agree to an "international" consortium (in which Russia would play a very significant role) to manage the main gas trunk line traveling to Europe via Ukraine. And for years the Ukrainians, even those thought to have "pro-Russian" leanings, managed to delay and obfuscate the issue.

Will the Yanukovych government continue the energy policies of the Kuchma government? This is not as absurd as it might seem, considering that neither the governments of Tymoshenko nor her successor Yuriy Yekhanurov remained in office long enough to formulate a gas policy. Thus, the only precedent is the old Kuchma-Boyko one.

The question thus remains: Will Moscow continue to tolerate the Kuchma strategy of Kyiv paying lip service to Moscow while doing what it deems in its own interests, or will Moscow demand a higher degree of subservience from Yanukovych in return for its past support and a possible discount on gas prices?