ern organizations. These groups have expressed optimism that the deal will help stabilize European gas supplies. When examining the issue, however, it is difficult to understand these responses. In reality, this agreement could signal big problems for Europe in the coming years, as the continent becomes more and more dependent on Russian gas. Simply put, the agreement appears to hand Russia a larger role in gas transit through Ukraine to Europe, while setting the stage for future disagreements between Russia and Ukraine over gas.
Currently, 25 percent of the EU’s gas supply comes from Russia.Eighty percent of that – or 20 percent of the total gas consumed by members of the European Union – is transited through Ukraine’s vast pipeline network.The United States estimates that Russia will provide 33 percent of the EU’s gas in 10 years, and despite Russia’s plans to build at least one new pipeline, the majority of this gas will continue to transit through Ukraine.
The contract allowing Russia to use Ukraine’s pipelines is contained within the overall agreement setting the conditions for Ukraine’s purchase of Russian gas. In addition, Russia uses some of the same pipelines to deliver its gas to Europe. As Europe discovered in January of this year, the two issues are interconnected. Uncertainties about Ukraine’s agreement with Russia have the potential to impact the transit of gas through Ukraine to Europe.
As much as many in Europe would like to think differently, there are numerous uncertainties about this agreement.
First, despite Prime Minister Viktor Yanukovych’s announcement that the country will receive 55 billion cubic meters of gas at $130 per 1,000 cubic meters, key political leaders and the general public have not been allowed to see the contract. Even President Viktor Yushchenko’s deputy chief of staff on October 25 suggested that it remained unclear what criteria were used to determine the announced price.
Critics of the deal wonder whether the contract truly guarantees the price of $130 for a full year.It is obviously in the prime minister’s interest to say it does so. But providing the document would allay the fears of many who remember previous claims of guarantees that turned out to be false.
President Yushchenko also has urged Yanukovych to submit the announced agreement for approval to parliament, as envisioned by a 2001 intergovernmental protocol between Russia and Ukraine.This agreement provides the guiding framework for dealing with gas issues and requires that any price accord should be debated and ratified by lawmakers. Yanukovych has declined to do so.He suggests that the accord falls outside the oversight of the parliament, since it is an agreement not between two states but between two state-controlled firms. In essence, Yanukovych’s stance implies that the deal falls outside the public oversight of the government.
With this agreement, Ukraine effectively cedes control over its gas procurement to the private corporation, RosUkrEnergo. The company has had a troubled history. It is 50 percent owned by Russia’s Gazprom and 50 percent by two enigmatic Ukrainian businessmen, Ivan Fursin and Dmytro Firtash.The company reportedly was investigated by the U.S. Justice Department for its ties to Semyon Mogilevich – a “businessman” on the FBI’s most wanted list for money laundering.
Since 2004, RosUkrEnergo has acted as a middleman, purchasing gas from Russia, Central Asia or both, and selling it to Ukraine. For its troubles, in 2005, the company admits to receiving $500 million, but former U.S. Ambassador John Herbst claimed in February 2006 that the company had received up to $3 billion from its various deals throughout the former Soviet Union.Calling the company a “suspicious organization,” Herbst questioned its role in Ukraine’s gas industry.
On October 26, one-time Prime Minister and current opposition leader Yulia Tymoshenko charged that Ukrainian Fuel and Energy Minister Yuriy Boyko held a seat on RosUkrEnergo’s coordinating council, and that, therefore, the new deal he approved with RosUkrEnergo was a direct conflict of interest. When Tymoshenko produced a RosUkrEnergo document with his signature, Boyko admitted to sitting on the council.He claims he now has withdrawn, but has produced no documentation to support this assertion.Should Boyko remain on the council, he could earn a considerable sum from the new deal.Tymoshenko is now calling for his dismissal and a parliamentary inquiry into the deal.In a fully developed democracy, there would be little question of Boyko’s need to step down.But, although supported by Yushchenko’s political bloc, these calls have received little attention in Ukraine.
Critics of the deal have also expressed concern over what recourse would be available to Ukraine if RosUkrEnergo suddenly increased the gas price.The price is set technically by the company, not by Russia or Turkmenistan, allowing those countries publicly to wash their hands of future pricing responsibility.
Additionally, the price is secured in a private contract, apparently with a new private entity, Ukrgaz-Energo, instead of with Ukraine. This latest company is 50 percent owned by RosUkrEnergo and 50 percent by Ukraine’s state oil and gas corporation, Naftohaz Ukrainy.Ukrgaz-Energo will now be responsible for distributing gas to industrial consumers in Ukraine, a right previously granted solely to Naftohaz Ukrainy.
It is a murky, opaque and confusing arrangement that has not been explained either to Ukrainians or to Europeans. In a recent BBC Panorama documentary, Jonathon Stern of Oxford’s Institute for Energy Studies warned, “If RosUkrenergo breaks up because there are some problems of governance, or some problems of alleged mafia connections, that could eventually disrupt gas supplies.”
The prime minister may also want to avoid questions about possible side agreements attached to this deal.Kommersant newspaper has suggested that, in exchange for the below-market price of $130, Ukraine agreed to delay its membership in the WTO and to allow the Russian Black Sea Fleet to remain in Crimea past the previously agreed 2017. Perhaps not coincidentally, Prime Minister Yanukovych recently stated that WTO entry would be delayed and that he supported an extension of the Russian navy’s stay in Crimea.
Clearly, the questions surrounding this deal are unlikely to go away easily. But examining them will be a delicate balancing act.Tammy Lynch is a Senior Fellow at Boston University’s Institute for the Study of Conflict, Ideology & Policy.
