Poland, Belarus & Ukraine Report: June 15, 2004

MINSK SIGNS GAS SUPPLY DEAL WITH GAZPROM. Beltranshaz, Belarus's state-owned gas transport company, and Russia's Gazprom signed a contract on 8 June for the supply of natural gas to Belarus and gas transit via that country in 2004. Under the deal, Belarus will buy 10.2 billion cubic meters of gas from Gazprom at $46.68 for 1,000 cubic meters and collect $0.75 in transit fees for 1,000 cubic meters per 100 kilometers for gas pipelined through Belarus by Beltranshaz's network, as well as $0.46 for gas transported by Gazprom's Yamal-Europe pipeline.

The signing of the deal has addressed a part of the ongoing controversy between Minsk and Moscow regarding the integration of both countries in the gas industry. Until the end of 2003, Belarus received Russian gas for a highly preferential price of some $31 per 1,000 cubic meters (Russia's domestic price for gas supplied to Smolensk Oblast bordering on Belarus), while Gazprom paid Belarus $0.5 for the pumping of 1,000 cubic meters of gas per 100 kilometers via Beltranshaz's pipeline. Moscow offered Minsk the preferential price for gas in April 2002, as a lavish "advance payment" for the latter's anticipated consent to sell a controlling stake in Beltranshaz to Gazprom. Both sides, however, have not come to an agreement on the price and conditions of the sale.

Belarusian President Alyaksandr Lukashenka valued Beltranshaz at $5 billion and offered only a 50 percent stake, while Gazprom said it would pay only $600 million for a controlling stake. The relations between Minsk and Moscow over the Beltranshaz sale soured to the point that Gazprom refused to sign a deal on gas supply to Belarus for 2004. Since the beginning of January, Belarus has been receiving gas from the formally independent traders Itera, Transnafta, and Sibur under short-term contracts, paying $46.68 for 1,000 cubic meters. On 18 February, when a subsequent contract expired and Minsk showed no willingness to sign another one, Gazprom turned off its gas tap for one day, accusing Minsk of stealing Russian gas that was transported to third countries.

The gas cutoff was seen by many as the lowest point in Belarusian-Russian relations during the entire span of Lukashenka's nearly 10-year rule. Some commentators even suggested that, by turning off Belarus's gas, Moscow clearly showed that Lukashenka cannot count on its support if he chooses to prolong his staying in power beyond 2006, when his second and last presidential term expires. Likewise, the recent Gazprom-Beltranshaz deal on the renewal of regular gas deliveries to Belarus is seen by some Belarusian observers as a token that the Kremlin has somewhat changed its mind about Lukashenka and may not be adverse to his supposed plans to seek a third presidential term.

"This is a very serious, positive step," Russian Prime Minister Mikhail Fradkov said in Minsk after the signing of the deal. "We have reached a compromise." The Belarusian government originally wanted the transit fees to be $1.02, while reportedly agreeing to the price of $50 per 1,000 cubic meters of gas (the conditions on which Ukraine receives Russian gas). Russia reportedly wanted the transit fees to be $0.68, while offering gas for $48.68 per 1,000 cubic meters. Fradkov said that the deal "untied a difficult knot in our relations" and added that it has created preconditions for establishing a joint gas transport company that could control the Beltranshaz network. However, as before, the sides are at odds as regards the estimation of Beltranshaz's value. Russian and Belarusian media repeatedly reported in the past that both sides want the Deloitte & Touche consulting company to evaluate Beltranshaz's price, but no formal request has so far been made.

In an interview with "Rossiiskaya gazeta" on 10 June, Fradkov confirmed that Moscow sees the gas supply deal with Minsk as a step to overcome the stalemate over turning Beltranshaz into a Russian-Belarusian joint venture. Fradkov expressed hope that Lukashenka will reverse the move he made last year -- giving 1 percent of stakes in Beltranshaz to its employees -- in order to enable Gazprom and Beltranshaz to create a new joint venture to run Belarus's gas pipelines under a 50-50 parity. "It is possible that [Beltranshaz's] working collective will return the 1 percent stake to the state, but it is the problem of the Belarusian side," Fradkov said. "In any case, we will find a mutually acceptable solution."

Russian and Belarusian commentators differ as to who has made bigger concessions in the gas supply deal -- Russian President Vladimir Putin or his Belarusian counterpart Lukashenka. But they assert in unison that the deal is another sign that Putin's Russia is seeking to promote its economic interests in the continuing integration story with Belarus rather than political ones. True, Belarus in 2004 will pay less for Russian gas than Ukraine -- but the price will be higher than that in the preceding year. And the gas transit fee for Russia will be much lower than the $1.02 that has been unilaterally levied by Minsk since January. It also seems unlikely that Moscow will return to the preferential price for gas supplies to Belarus, even if Minsk eventually agrees to share the control of Beltranshaz with Gazprom.

As regards Russia's political interests in Belarus, it appears that as long as Lukashenka remains in power, no drastic changes in Belarusian foreign policy are possible or even conceivable, and these interests will remain secured. Lukashenka will essentially remain the Kremlin's loyal ally, primarily because in the past 10 years he has made every possible effort to deprive himself of any practical option to associate with the West. His peculiar system of "authoritarian democracy" and "market socialism" -- even if it is set to evolve into something else, so far unnamed -- is doomed to remain not only unacceptable but also utterly incomprehensible to the West. It is not clear whether Lukashenka is understood in Moscow, either -- but he is certainly perceived there as a character suitable for making political and economic bargains. (Jan Maksymiuk)

PRIVATIZATION, UKRAINIAN STYLE. State Property Fund head Mykhaylo Chechetov announced in Kyiv on 14 June that the Investment-Metallurgical Union has won the tender for the sale of a 93.02 percent stake in the Ukrainian steelmaker Kryvorizhstal, which accounts for some 20 percent of the country's steel output. Chechetov said the union paid 4.26 billion hryvnyas ($800 million) for the stake at a starting price of 3.8 billion hryvnyas ($715 million). The Investment-Metallurgical Union represents the interests of the Interpipe corporation -- owned by Viktor Pinchuk, President Leonid Kuchma's son-in-law and parliament deputy -- and the System Capital Management company, which is controlled by Donetsk-based businessman Rynat Akhmetov, reportedly the richest man in Ukraine and a long-time crony of Prime Minister Viktor Yanukovych.

In the past few weeks, Ukrainian opposition lawmakers made several unsuccessful attempts to block the sale of Kryvorizhstal -- a giant steelmaker employing some 52,000 people -- which was widely seen as yet another privatization, at a price well below the real value of the privatized company, intended to enrich the already rich circle of pro-government oligarchs. On 3 June, the legislature lacked just eight votes to the 226 that were needed to approve a resolution halting the Kryvorizstal tender.

The terms of the tender were formulated in such a way that it was clear for everybody that Kryvorizhstal is poised to become a spoil of Pinchuk and Akhmetov. In particular, the tender's qualifying conditions announced in May included the provision that any bidder must have a history of producing 1 million tons of coke and 2 million tons of steel in Ukraine annually in the past three years. Of the six bidders that submitted purchase offers, only two meet this condition -- Pinchuk's and Akhmetov's Investment-Metallurgical Union and the Industrial Union of Donbas, another Donetsk-based oligarchic holding. The Industrial Union of Donbas offered $750 million for the stake, just slightly over the starting price of $715 million but below the Investment-Metallurgical Union's bid.

It is noteworthy that the Anglo-Dutch concern LNM and U.S. Steel, which made a joint bid, offered to pay $1.5 billion for the stake and add another $1.2 billion in an investment package. A higher bid than that of the Investment-Metallurgical Union was also made by Russia's Severstal steelmaker ($1.2 billion). LNM and U.S. Steel have reportedly called on Ukrainian President Leonid Kuchma and Prime Minister Viktor Yanukovych to revise the tender. "By limiting the privatization this way, the Ukrainian economy is being deprived of a competitive tender," LNM and U.S. Steel said in a statement.

The Kryvorizhstal sale -- which many Ukrainian commentators have said is a large improvement on previous dishonest privatizations -- nevertheless highlights Ukraine's notoriously clannish organization of the state power branches. Not only have the executive or legislative branches not seen anything objectionable in such a tender, but also the judicial sphere has expressed its approval for it. Socialist Party lawmaker Valentyna Semenyuk on 8 June lodged a complaint against the Kryvorizhstal sale with the Holosiyivskyy District Court, arguing that the tender terms do not sufficiently protect Kryvorizhstal employees against layoffs. In theory, any court complaint should automatically suspend the privatization in question. Later the same day, however, the documents of the case were transferred to the Pecherskyy District Court, whose jurisdiction was deemed by judicial authorities more appropriate for the State Property Fund, which managed the privatization on behalf of the government. The Pecherskyy District Court -- which is famous in Ukraine for many cases of ruling in favor of the authorities -- rejected Semenyuk's complaint and said the privatization may continue.

More curious still, trade union bosses at Kryvorizhstal have organized a petition among employees saying that they want a domestic investor for their enterprise. The petition was signed by more than 30,000 people, of whom the overwhelming majority, if not all, were reportedly completely unaware of not only the sums offered for their enterprise but also of the tender's provisions regarding guarantees for the Kryvorizhstal workforce.

Kryvorizhstal is a juicy privatization morsel -- it reported net sales of $1.4 billion on production of 7 million tons of steel last year. Therefore, some Ukrainian media assert, it should be expected that the 93 percent stake will unavoidably, even if inconspicuously, be resold in the future, partly or completely, and with a hefty profit for the Investment-Metallurgical Union. Why the state did not want to put this profit in its coffers is, of course, a different question. (Jan Maksymiuk)

"Regarding [Ukraine's] accession to NATO, I think we are at the same level as with the European Union. Today we are not ready to say 'yes.'" -- Ukrainian President Leonid Kuchma on 14 June, quoted by Interfax.