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. Last Updated: 07/27/2016

Moscow, Kiev Sign Plan to Ship Gas

ReutersPrime Minister Mikhail Kasyanov and Ukrainian Prime Minister Anatoly Kinakh shaking hands Monday after signing the agreement as Putin and Gazprom chief Alexei Miller look on.
Russia and Ukraine on Monday signed off on the basic principles for forming an international consortium to manage the transportation of natural gas from Siberia to Western Europe, a key source of revenue for both governments.

"[Russian and Ukraine] agreed to work together on energy sector issues, including those involving the gas sector, an important sphere," Putin said in the Moldovan capital of Chisinau during Monday's summit of CIS leaders.

"Of course, this is far from the final resolution of the problem, but it is an important step as we further our cooperation," he said.

While Russian and Ukrainian officials have portrayed the deal as a win-win situation for both sides, opponents in both countries have harshly criticized it.

Many Ukrainians believe Kremlin control over their natural gas distribution network will lead to lower transit prices and, thus, lower revenues for the country, while Russian critics question the logic of deepening business ties with the leadership of a country that has yet to make good on its promise to pay off its $1.4 billion gas debt.

An initial agreement on the consortium was struck in June, when President Vladimir Putin and Ukrainian President Leonid Kuchma met in St. Petersburg to discuss bilateral cooperation in the natural gas sector. The next day, German Chancellor Gerhard Schr?der said that Germany, one of Russia's biggest customers, is interested in having a say in how its gas is transported.

Monday's deal, signed by Prime Minister Mikhail Kasyanov and Ukrainian Prime Minister Anatoly Kinakh, is in some ways a capitulation on Ukraine's part. Kiev lobbied for a controlling stake in the yet-to-be-formed company that will operate the transit pipeline system, but the final draft of the agreement envisages a joint venture that would give Gazprom and Ukrainian gas monopoly Naftogaz 50 percent stakes.

A source at Gazprom said a feasibility study for the consortium's goals, which include renovations and additions to Ukraine's trunk pipeline system, is scheduled to be completed by August 2003, Interfax reported.

Gazprom exports 130 billion cubic meters of gas to Europe per year, the lion's share of which goes through Ukraine.

"Right now, there isn't enough investment flowing toward modernization of Ukraine's system," the source said. "This is something that can change with the creation of the consortium."

Others, including some of Kuchma's political opponents, are not so sure.

Yulia Tymoshenko, a former Ukrainian deputy prime minister, told Ukrainian radio on Thursday that, as a consequence of the deal, Ukraine will lose half of the $2 billion in budget revenues reaped from transit fees.

"This is how we leverage our influence, and we're about to lose it," Tymoshenko said.

Oleksandr Gudyma, head of the Ukrainian parliament's subcommittee on the gas industry, said claims that the consortium would attract $2.5 billion in investment were "complete nonsense."

"The gas transportation system isn't about to be privatized, and its current status excludes any investment possibilities," Gudyma said.

Russia's ambassador to Kiev, former Prime Minister and Gazprom founder Viktor Chernomyrdin, dismissed such concerns.

"I am convinced that Ukraine stands to lose nothing in the process," Chernomyrdin told local reporters in Kiev last week.

"Do we have a problem? Let's start with the declaration that both presidents signed. The consortium will be created by Russia and Ukraine, with each side getting an equal share. After the consortium's creation, European companies will be invited to join. Germany has already signed on, the Italians want to," Chernomyrdin said.

"Ukraine doesn't need this system for itself, to supply itself with gas. It's a transit system. Of course, it is expensive, it demands money, it needs to be continually modernized, renewed and developed," he said. "Thus, we believe that if both the supplier and the buyer participate in it, then it will be beneficial."

In order to mollify Ukraine, Russia agreed to register the consortium in Ukraine, meaning it will be subject to Ukrainian regulations, and to establish the head office in Kiev.

But these overtures will mean little if Putin's vision of smooth cooperation between gas suppliers, transporters and buyers meets the same fate as Ukraine's promise to pay its gas debt, signed one year ago, almost to the day.

Ukraine officials said Naftogaz Eurobonds have been issued and deposited with the Bank of New York but Gazprom refuses to claim them because of possible tax penalties. Gazprom has said Ukraine is at fault for the delays. In any case, Russia has yet to receive any payments.