Putin, Gazprom Seek Control of Ukraine's Gas Pipelines to Europe

By Vladimir Socor, IASPS Senior Fellow

During the CIS summit on October 7 (see Policy Briefing no. 1, October 23, 2002) Presidents Vladimir Putin of Russia and Leonid Kuchma of Ukraine signed a Declaration on Strategic Partnership regarding the transit of Russian natural gas to Europe via Ukraine. On that basis and on the same day, the chairmen of Russia’s Gazprom and of Ukraine’s state-owned oil and gas company, Aleksei Miller and Yurii Boiko, signed an agreement of intent to create an interstate gas consortium.

Under the above euphemism, Ukraine’s gas transit system would be turned over to a joint Russian-Ukrainian venture, on a parity basis. The Ukrainian transit system--pipelines and vast storage sites--handles an overwhelming share of Russian gas supplies to Europe, at an average annual throughput of some 120 billion cubic meters (the system’s design capacity being some 150 billion cubic meters). It also constitutes Ukraine’s most valuable economic asset by far, its worth being estimated at $ 10 billion to $ 13 billion by European experts.

Ukraine ranks a distant first worldwide as a transit route for natural gas, the source being Russia and the market being Europe. The Ukrainian transit system has long been up for privatization, with a view to attracting capital investment into its overhaul and modernization. The capital and technology are primarily available in the West, not Russia. However, privatization and Western investment in Ukraine’s gas transit system have long been held up by the absence of an adequate Ukrainian legal framework, and a meshing of corrupt interests in the gas sectors of Russia and Ukraine. Prime Minister Viktor Yushchenko and the deputy prime minister responsible for energy, Yulia Tymoshenko, initiated in 2000-2001 the overdue reform of Ukraine’s gas sector, preparatory to its privatization with both Western and Russian partners. The Kremlin responded by colluding with pro-Kuchma oligarchic circles in Ukraine to oust that reformist government, then saturating Ukrainian airwaves with anti-Yushchenko propaganda in this year’s parliamentary elections.

Turning Ukraine’s transit system into a joint Russian-Ukrainian enterprise would substantially increase Russian leverage over European consumer countries. First, it would preempt Western acquisition of a meaningful share in the Ukrainian transit system through privatization. Part-ownership by Gazprom in no way constitutes privatization, Gazprom being itself controlled by the Russian state -- currently from the Kremlin directly. Second, the supply leverage would become supply-cum-transit leverage. Third, the deal seems designed to leave European Union countries no choice but to invest into modernizing and expanding a transit system beyond the EU countries’ control; in effect, a transfer of resources into a system ultimately controlled by the Russian supplier. Such investments, while necessary in the short term, would in the longer term increase the supplier’s pricing clout -- and, with it, political clout -- over EU consumer countries.

Under the agreement, Russia and Ukraine as founding parties of the consortium would “jointly and on a consensus basis” determine the conditions for Western investment in Ukraine’s gas transit system, and for participation of West European companies in the consortium. Should Western companies join as minority stockholders, Russia and Ukraine would retain both the controlling stakes and the parity among them as founders, according to the agreement (see Ukrainian Center for Independent Political Research (Kyiv), “Research Update,” vol. 8, no. 36, October 13, 2002). This would deprive Ukraine of the freedom to deal with Western companies in seeking to modernize the gas transit system on its territory, in the common interest of European consumer countries and of Ukraine as provider of the transit services. Instead, this agreement institutes a Russian veto power on Ukraine’s relations with the West on gas transit issues. By the same token, it gives Russia upstream almost a full latitude to deal with European consumer countries over Ukraine’s head.

The agreement is valid for 30 years, plus a five-year automatic extension period, with further prolongation negotiable. It is not yet a done deal, being an agreement of intent. Moscow presses for early signature of a binding agreement. The politically crippled Kuchma is being dragged along, on this as on some other issues. He needs Putin’s support to shore up the Kuchma presidency. Those Ukrainian oligarchic factions that have joined with the Kremlin in supporting the embattled Kuchma seem to favor the gas consortium agreement in their own interests.

Significantly, however, Prime Minister Anatoliy Kinakh and other Ukrainian executive branch officials are publicly objecting to some key details of the agreement of intent. It therefore seems quite possible that some of these officials raise more fundamental objections in internal government deliberations. Just as significantly, given the current alignment of parliamentary forces, this agreement stands little chance of being ratified by the Verkhovna Rada now. This is why presidential administration officials and pro-presidential parliamentary groups maintain that this agreement--once signed as a binding document--would not require parliamentary ratification. In parliament and the wider political arena, Yushchenko--now as leader of the main opposition bloc, Our Ukraine--and his ally Tymoshenko heading her own political bloc are strongly opposing the proposed agreement.

The grab for Ukraine's gas transit system is one among several strategic moves to bring Ukraine into Moscow's orbit. The Kremlin stakes this policy largely on the personal relationship between Putin and Kuchma. For the time being at least, the Russian president continues lavishing symbolic political accolades on Kuchma, as if to compensate for -- and certainly to exploit -- general Western ostracism of the Ukrainian president. Putin paid an efusive visit to Kuchma on October 5 in Ukraine, whence the two presidents flew together to the CIS summit in Chisinau, finalized on the plane the draft agreement on the gas transit "consortium," and signed those documents during the summit. On the same occasion, Putin proposed that Kuchma be elected head of the Council of Presidents of CIS member countries at the next CIS summit. Such personal flattery not only underscores the Kremlin's backing for Kuchma against his pro-Western opponents, but also seeks to encourage Eastern-oriented groups in Ukraine, and to deepen the current leadership's international isolation.

Putin is exploiting the European Union's chronic failure to devise a coherent policy toward Ukraine. This  flaw long predates the "Kuchmagate" scandal; it hampers the efforts of  Ukraine's Western-oriented political forces; and can ultimately damage the EU itself, if  Moscow wins the contest over Ukraine by default of the EU. In that eventuality, the EU would face a Russian energy juggernaut that controls not only the source, but also the transit routes of energy deliveries to a Europe increasingly dependent on Russian supplies.

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