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. Last Updated: 07/27/2016

Gas Debt Difficulties Mounting Up for Ukraine

Unable to pay for gas, the Ukrainian government has found itself in a stalemate with less than two weeks left before the next round of talks on supplies of natural gas.

While an international law company is trying to seize Ukraine’s foreign commercial assets, the Russian government is negotiating construction of a pipeline stretching through Poland to bypass Ukraine, and Turkmenistan is refusing to sell Ukraine gas at discount prices.

Even as Ukrainian President Leonid Kuchma admitted to German magazine Der Spiegel that Ukraine had stolen gas, he did not rule out more thefts and opted to look for scapegoats rather than put his house in order.

Ukraine says its debts for Russian gas total $1.4 billion from taking more than agreed as payment for transit of the fuel across its territory.

Kommersant newspaper reported Wednesday that Russian gas monopoly Gazprom was negotiating with Ukraine to take shares in major Ukrainian enterprises as repayment for some debt.

Businessmen Valeriy Falkovich and Aleksandr Tymoshenko were seized Aug. 18 in Kiev on accusations of embezzlement through Ukrainian power grid Unified Energy Systems, a company that Deputy Prime Minister Yulia Tymoshenko, who is also the wife of one of the suspects, headed in 1995 to 1998.

The arrest, which Yulia Tymoshenko dubbed as "smacking of the purges of 1930s," may reflect Kuchma’s frustration with his deputy prime minister, who is in charge of talks with Gazprom.

Her husband’s arrest occurred at a time when Monaco-based insurance company Monegasque de Reassurances, or Monde Re, is trying to seize commercial assets that belong to the Ukrainian government.

"We are trying to enforce the arbitration award seizing commercial assets like oil, steal, cement and aircraft exported by the trading arms of the government," Michael Payton, senior partner with legal consultants Clyde & Co., which is acting on behalf of Monde Re, said Wednesday in a telephone interview from London.

Clyde & Co. intends to convert an award over Ukraine’s gas debts made by the Moscow International Arbitration Tribunal into a local judgment in a number of jurisdictions.

Payton believes that his firm will not fall into the same trap as Swiss company Noga, which tried to seize Russia’s assets in France earlier this summer.

"I’m not handling this [Noga’s] case, but I believe they had a problem which we do not have," Payton said.

Monde Re reinsured most of the risks assumed by Gazprom’s captive insurance company SOGAZ, which agreed to cover losses arising from transportation of gas through the territory of Ukraine from November 1998 through 1999.

SOGAZ received a claim from the gas company in January 1999 and passed it to the French reinsurers, who paid Gazprom $88 million, immediately becoming direct creditors of the Ukrainian government.

The Paris arbitration court refused to hear the case and referred it to the Moscow International Arbitration Tribunal, which ruled in favor of Monde Re.

Gazprom could continue with similar actions toward its major debtor, unless Ukraine and the Russian government cut a deal.

"This primarily depends on the government, but I would not exclude more steps of the same sort in the future," said Vladimir Bondarenko, deputy director with SOGAZ.

He did not say whether Gazprom had insurance policies covering other time periods for which more claims could be produced.

Tymoshenko said Tuesday that the Russian side should not raise the debt issue in international courts after a bilateral agreement between Kuchma and President Vladimir Putin was reached at a summit in Yalta last week.

"After debts were verified, Ukraine did not siphon off extra gas," Tymoshenko said.

Tymoshenko hopes to solve the gas puzzle by playing Russia and Turkmenistan off against each other, but its agreement with the Turkmenistan government signed in July was not welcomed by Kuchma, who disapproved of the sales price, set at $42 per thousand cubic meters of gas at Turkmen-Russian border.

Likewise, Kuchma disapproved of Tymoshenko’s proposal to hand Ukrainian pipelines to Gazprom in exchange for debts.

Asked by Der Spiegel who stood behind the thefts from the gas pipeline, Kuchma did not blame anybody in particular, saying that "this is done according to a resolution of the Ukrainian government."

In a reminder of Soviet times, when stealing state property was hailed as more of an achievement than as a crime, Kuchma said, "Moscow pumps 130 billion cubic meters of gas to the West annually. If 1 billion cubic meters are stolen, this is an insignificant fraction."

The previously reluctant Polish government agreed in July with Deputy Prime Minister Viktor Khristenko to allow Gazprom to build a pipeline that would bypass Ukraine on its territory.

"The Polish side is waiting for our proposals," said Stanislav Naumov, spokesman for Khristenko.

At an annual shareholders meeting held in June, Gazprom’s chairman Rem Vyakhirev said that "construction of a pipeline bypassing Ukraine will be his last accomplishment for Gazprom. In all the years I worked in the gas industry, Ukraine always took more gas than it was entitled to."