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Same-Day Analysis

Ukrainian PM Calls for Gas Trade Transparency After Arrest of Suspected Russian Crime Boss

Published: 29 January 2008
Ukrainian Prime Minister Yulia Tymoshenko yesterday stepped up her campaign to rid Ukraine of "shadowy intermediaries" in the delivery of imported gas supplies, linking the recent arrest in Russia of suspected crime boss Semyon Mogilevich to the need for Ukraine and Russia to eliminate the middlemen in their gas trade.

Global Insight Perspective

 

Significance

Prime Minister Yulia Tymoshenko, in Brussels (Belgium) for talks with European Union (EU) officials, cited the recent arrest of Semyon Mogilevich (on unrelated charges) as further evidence of corruption in the chain of intermediaries that supply Ukraine's gas imports.

Implications

RosUkrEnergo, the joint venture of Russia's Gazprom and two Ukrainian businessmen that holds the monopoly on the supply of gas to Ukraine, fervently denied any connection to Mogilevich, but the episode is nevertheless likely to support Tymoshenko's call for transparency in the gas trading relationship between Russia and Ukraine.

Outlook

Tymoshenko's effort to return to a direct gas supply deal between Russia and Ukraine is laudable, but her plan to substantially hike transit tariffs for Russian gas exports to Europe is more likely to cause additional problems between the two countries than resolve existing issues.

A Link to Crime?

Ever the populist, Ukrainian Prime Minister Yulia Tymoshenko yesterday linked the recent arrest of suspected Russian crime boss Semyon Mogilevich to her campaign to rid Ukraine of intermediaries in the supply of the country's gas imports. Mogilevich, who is wanted by the U.S. Federal Bureau of Investigation (FBI) for alleged fraud and racketeering, was arrested in the Russian capital, Moscow, last week and is expected to be charged with large-scale tax evasion. Previous reports have alleged that RosUkrEnergo, the key intermediary in the supply of Russia and Central Asian gas to Ukraine, has connections to Mogilevich; the Ukrainian Secret Service (SBU) had opened an investigation into this possibility in 2005, but it was abruptly halted when Tymoshenko was fired during her first turn as PM (see "Related Articles").

RosUkrEnergo has strongly denied any connection to Mogilevich, as has Dmitry Firtash, the Ukrainian businessman that indirectly holds a 45% stake in the joint venture (he holds a 90% stake in Centragas, which has a 50% stake in RosUkrEnergo). A spokesperson for Gazprom, the Russian gas giant that holds the remaining 50%, said that the company had no information about Mogilevich's possible involvement with RosUkrEnergo. Asked if Mogilevich could have been arrested due to potential links to RosUkrEnergo, Oleksandr Turchinov, a Tymoshenko cohort who is now Ukraine's First Deputy Prime Minister, stopped short of alleging a direct connection, although he said that RosUkrEnergo copied its "opaque" business style from the previous intermediary in the Russia-Ukraine gas supply relationship, Eural Trans Gas, which operated the transit business in 2003 and 2004. Turchinov, who headed the SBU at the time when the investigation into Mogilevich's possible ties to RosUkrEnergo was launched, demurred from further comment, noting, "I am confident that the Russian special services have just done their duty."

Advancing Her Cause

Regardless of whether a connection between Mogilevich and RosUkrEnergo does exist, Tymoshenko is apparently keen to use his arrest to bolster her case for scrapping the use of intermediaries in the supply of gas to Ukraine. In Brussels (Belgium) for talks with European Union officials, she seized on the news, telling reporters after talks with European Commission President Jose Maunel Barroso that, "We don’t need any shadowy intermediaries. There will be transparency in our government and society. It also concerns energy policy."

Mogilevich's arrest thus comes as a welcome boost to Tymoshenko in her fight to revisit Ukraine's gas trading relationship with Russia, providing her government with additional ammunition to push for change. The prime minister was originally set to visit Moscow this month to discuss possible revisions to the gas transit and supply deals for 2008 that were signed in early December by the previous Ukrainian government, but her trip has been delayed until next month at the request of President Viktor Yushchenko, who is hoping to co-ordinate Ukraine's strategy going into what are likely to be difficult negotiations with Gazprom. Yushchenko and Tymoshenko have publicly voiced differing views in the past few weeks, with Tymoshenko advocating for a substantial hike—reports suggest she is looking for up to a fivefold increase—in the transit rate for Russian gas across Ukraine (currently US$1.70 per 1,000 cm per 100 km), while Yushchenko has argued that the transit rate is fair and any effort to increase this will only prompt Gazprom (via RosUkrEnergo) to hike the price at which it sells gas to Ukraine.

Outlook and Implications

Mogilevich's arrest and the attempt by Tymoshenko to draw a link between him and the gas trade intermediaries will surely build popular support in Ukraine for revising the 2008 gas deal between Naftogaz Ukrainy and Gazprom. Indeed, after the revelation last October that Ukraine had racked up more than US$1 billion in debt for gas supplies, officials in both Russia and Ukraine voiced support for an end to the complex and confusing system. While this debt was determined to be commercial rather than sovereign, the debts accrued by RosUkrEnergo and UkrGazEnergo—the secondary JV between Naftogaz and RosUkrEnergo that until recently had a dominant position in the distribution of gas to Ukraine's industrial consumers—are clearly traced back to Naftogaz.

Although the debts to Gazprom have been resolved, it is now Naftogaz that finds itself in financial peril, with the company technically in default at the beginning of this month. The government under Tymoshenko has committed itself to covering the company's debts and rectifying its financial standing, and the state-owned oil and gas holding yesterday resumed negotiations with RosUkrEnergo on payment arrears of nearly US$600 million for gas supplies from last year and during this month. However, it is Naftogaz's precarious position on the edge of bankruptcy—and the government's determination not to pass on the full price increase in Ukraine's gas imports to consumers—that is prompting Tymoshenko to push for a clearly unreasonable increase in the tariff for Russian gas transit across Ukrainian territory.

Tymoshenko said yesterday that she now plans to visit Moscow on 21 February with hopes of negotiating a "just" increase in gas tariffs. Whether she has actually scaled down her expectations of a hike in the transit tariff for Russian gas remains to be seen, but any attempt on her part to push for a more-than-500% increase in the transit rate will only lead to trouble, likely sparking a new gas war with Russia and prompting Gazprom to impose a similar increase on gas supplies to Ukraine. Although there is support on both sides for ditching the intermediaries—indeed, RosUkrEnergo might not have had a role at all in 2008 if Ukraine had a new government in place when this year's gas deal (essentially a roll-over agreement from 2007) was signed—this will surely result in an increase in the price of gas delivered to Ukraine as well, regardless of whether the gas is of Russian or Central Asian origin.

Ukraine will have to limit the scope of any demand to increase Russian gas transit tariffs if the government is to have any hope of keeping a lid on gas import prices. At the same time, as the current Ukrainian government hopes to scrap the intermediaries in the gas supply deal, the country's officials will have to make peace with the fact that, almost certainly, more expensive gas supplies will be the price paid for increased transparency. Passing on part or all of the increased cost to Ukrainian consumers is necessary to put Naftogaz on more solid financial footing, but whether Tymoshenko or Yushchenko has the political will to tell voters to pay more for gas in a presidential election year—particularly with Tymoshenko harbouring ambitions of challenging Yushchenko—is debatable at best.

Related Articles

Ukraine: 28 January 2008: RosUkrEnergo Says Naftogaz Owes US$589 mil. for Gas Supplies to Ukraine

Ukraine: 22 January 2008: Ukrainian President Argues Against Proposal to Hike Transit Fees for Russian Gas

CIS: 17 January 2008: Is Another Gas War Brewing Between Russia and Ukraine?

Ukraine: 3 January 2008: Naftogaz in Technical Default; New Ukrainian PM Says State Energy Firm on Verge of Bankruptcy

CIS: 5 December 2007: Russia, Ukraine Agree on Gas Price Deal for 2008, Averting Potential Supply Disruption

Ukraine: 27 April 2006: Ukrainian President Pressurised After Audit Sheds Light on Opaque Gas Trader

CIS: 2 February 2006: RosUkrEnergo Emergence Sheds Light on Murky Eurasian Gas Trade

CIS: 4 January 2006: Ukraine and Russia Agree Complex Price Scheme, Resolving Gas Dispute

CIS: 29 August 2005: Turkmenistan Launches Probe in Questionable Gas Shipments to Ukraine

CIS: 28 July 2005: Ukraine Investigates Organised Crime Tie to Turkmen Gas Transit Deal
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