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. Last Updated: 07/27/2016

From Sprats to Diamonds: Just Add Gas

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Well, finally. Now they'll pay us for our gas," was what most of the media had to say when news broke that former Prime Minister Viktor Chernomyrdin had been named ambassador to Kiev. And, indeed, Ukraine presently owes Gazprom $2.2 billion that, to put things in perspective, would be enough to buy half a percent of Microsoft's shares or — to use another measure — Ukraine's entire industrial base.

However, common sense tells us that not all of this money is really properly described as "debt." In fact, one could even argue that none of it is. Let me illustrate with a concrete example, the story of Rospan.

For the last few years, Gazprom has held a controlling stake in Rospan, which has been developing the enormous Eastern Urengoi gas field. Rospan approached Gazprom for money to pay off its suppliers, but instead of cash, the company was given 2 billion cubic meters of gas.

Of course, Rospan couldn't sell this gas itself, so Gazprom instructed it to use Itera. Itera is an offshore company registered in Jacksonville, Florida, to which Gazprom transferred — among other things — the exclusive right to sell gas in Ukraine. Itera sold Rospan's gas and — surprise! — Itera's Ukrainian customers never paid for it. Naturally, Itera never paid Rospan.

Subsequently, though, Itera found enough money to buy up Rospan's debts and to begin bankruptcy proceedings against the company. Some cynics have suggested that Itera bought up Rospan's debts with the money it received by selling Rospan's gas. At the very least, the authorities should be asking why Itera sold Rospan's gas without receiving payment.

But there's the rub. You see, Gazprom conducts all its transactions within the former Soviet Union in rubles, while the controlling organs only verify transactions conducted in hard currency. Only the tax inspectorate is interested in ruble transactions, and it is only interested in making sure that proper duties are paid. If no money is actually paid, the tax authorities are not interested.

The price of Ukrainian transit gas is inflated. And they pay for this insanely overpriced gas using still more insanely overvalued barter arrangements. When used to buy gas, canned sprats in tomato sauce are valued as if they were diamonds. These diamond sprats are then foisted off on administrations in places like Novy Urengoi as tax payments. Eventually, not even specialists can sort out where the sprats begin and where the diamonds end, since every stage of the transaction is protected by some interest or another.

The central press has lauded the Kremlin for the Chernomyrdin appointment. Izvestia wrote that it "is a genuinely extraordinary presidential idea," "original" and "effective." However, when you consider that the gas-debt problem is just a consequence of the universally advantageous process of turning sprats into diamonds, the move doesn't seem so interesting. Ambassador Chernomyrdin is not likely to improve Russia's position so much as to merely place limits on the appetites of one of the Gazprom clans — the one that shelters and nurtures the all-powerful Itera.

Therefore, it is best to interpret the appointment as a victory for Chernomyrdin personally and as another stage in the struggle within Gazprom, for Gazprom.

And, considering the example of Pavel Borodin, Chernomyrdin may find that having a diplomatic passport is a handy thing, too.

Yulia Latynina is a journalist for ORT.