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. Last Updated: 07/27/2016

Ukraine Seeks to Simplify Gas Trade

Ukraine on Saturday took a first step toward removing intermediaries from its natural gas imports, an effort that threatens to annul a hard-won agreement with Russia two years ago.

Some of the contracts with RosUkrEnergo, UkrGazEnergo and other intermediaries "bear the signs of corruption" and are "destructive" for the state, Ukrainian Prime Minister Yulia Tymoshenko said at a news conference in Kiev.

The country's National Security and Defense Council, chaired by President Viktor Yushchenko, decided to cut out the middlemen Friday, Tymoshenko said.

Ukraine will seek to conclude direct contracts with supplying countries, Tymoshenko, a long-time critic of the intermediaries, said without naming the countries. Current top suppliers are Turkmenistan and Uzbekistan, while Gazprom delivers the fuel.

"The president supported the start of government talks with countries that in one way or another deal with Ukraine in terms of supplying gas," Tymoshenko said. "I cannot tell you now how long this will take."

Tymoshenko is due in Moscow on Feb. 21 for talks that are expected to encompass gas trade.

The government will ensure stable supplies to the domestic market and uninterrupted transit on to Europe during the talks with suppliers, she said.

RosUkrEnergo appeared as a key middleman after Russia halted Ukraine's gas supply -- which disrupted flows to European customers -- for several days in January 2006 amid a politically tinged pricing dispute. The company buys Central Asian gas from Gazprom and resells it to another intermediary, UkrGazEnergo. That company sells the gas to Ukrainian industrial consumers and Ukraine's national energy company Naftogaz, which supplies households and other consumers.

Gazprom and two Ukrainian businessmen -- Dmytro Firtash and Ivan Fursin -- own equal halves of RosUkrEnergo, which shares ownership of UkrGazEnergo with Naftogaz.

Gazprom spokesman Sergei Kupriyanov could not be reached for comment Sunday. But Gazprom chairman and First Deputy Prime Minister Dmitry Medvedev, who is the front-runner in the presidential race, has said the proposal to work through RosUkrEnergo had come from Kiev and signaled Moscow's readiness to shed intermediaries. "We will next year probably ... move away from the intermediary structures that are not fully understandable," Medvedev said in an October interview with German television broadcaster ARD.

There is no reason to hope that Ukraine's gas prices will drop drastically without the intermediaries, said Vladimir Vedeneyev, a gas analyst at the Bank of Moscow. Gazprom and RosUkrEnergo draw most revenues on sales to Europe, while they keep their margins small for the Ukraine trade, he said.

"Dropping any intermediary would be a plus for Gazprom, but price conditions for Ukraine would not change much," Vedeneyev said.

Ukraine could hope for $5 off every 1,000 cubic meters of gas as the largest discount, if any, from the current price of $179.50, said Timur Khairullin, an analyst at Antanta Capital.

Gazprom considers RosUkrEnergo as a buffer against political risks on the Ukrainian market and could raise its own commission if the intermediary is gone, Khairullin said.

Tymoshenko said that, in addition to making some money as an intermediary, RosUkrEnergo in its contracts with Naftogaz was able to win suspiciously low rates for gas storage in Ukraine and transit on to Europe. German gas storage facilities charge 4.9 times as much, while Czech facilities charge 6.2 times as much, she said.

"We believe that these contracts bear the signs of corruption. They are anti-market and destructive to the interests of Naftogaz and the state," Tymoshenko said, Interfax reported.

Calls to RosUkrEnergo spokesman Andrei Knutov went unanswered Sunday as did calls to Leonid Fink, a spokesman for Group DF that incorporates RosUkrEnergo.

Tymoshenko urged law enforcement officials to hold responsible the "gray" owner of both Naftogaz and RosUkrEnergo. She did not give a name.

The contracts in question, which run until 2030, took effect in 2005, a year before Moscow and Kiev fell out over gas price, Tymoshenko said.

Tymoshenko also accused RosUkrEnergo and UkrGazEnergo of sidelining Naftogaz in sales on the Ukrainian market. The state company "doesn't have a cash flow because it's UkrGazEnergo that controls all cash flow from sales," she said.