As Ukraine's President Victor Yushchenko prepares to visit Moscow on Tuesday, Russia's energy giant Gazprom has delivered a nasty welcome for a leader not beloved by the Kremlin. Gazprom late Thursday issued an ultimatum over new Ukrainian gas debts arising from a price hike, warning that it had instructed its services to turn off gas supplies to Ukraine by noon on Monday the day before Yuschenko flies in unless it is paid $1.5 billion.
The new gas bill is based on changes in the complex mix of gas that Gazprom supplies Ukraine. Most of it has come from Central Asia, primarily Turkmenistan, with a minor share of more expensive Russian gas. These supplies are delivered through a company called Rosukrenergo, 50% of which is owned by Gazprom. But the cold winter has seen Central Asian suppliers reduce their supplies to Ukraine, increasing the Russian share of the mix to 25% which has sharply raised the cost of the entire package.
Now, Gazprom wants to be paid what it says it is owed by Monday, or else it will turn off the Russian share of Ukraine's supply to painful effect.
Gazprom's decisions in the marketplace are often tied to Kremlin concerns, and there could be several political and economic reasons behind the new pressure on Ukraine. Russia is unhappy at the restoration to power of Yuschenko's pro-NATO coalition following last year's snap legislative election. It is also irked by Ukraine's imminent accession to World Trade Organization membership, which would improve Kiev's ability to stand up to Russian blackmail by giving it the means to block Russia's own, coveted but much postponed entry into the organization.
The Kremlin could also be seeking to deepen existing divisions in Ukraine's anti-Moscow ruling coalition between Yushchenko and Premier Yuliya Tymoshenko. The two politicians who have waged a four-year struggle for leadership of the coalition take different positions on the gas issue: Tymoshenko demands that Ukraine raise transit prices for Russian gas and dump Rosukrenergo as a supplier. The latter campaign received a vigorous boost, late last month, when alleged crime boss Semyen Mogilevich, wanted by the U.S. on fraud and extortion charges, and long suspected of owning Rosukrenergo, was arrested in Moscow. Tymoshenko insists that Mogilevich stands behind the Rosukrenergo/Gazprom arrangement, although he and his lawyers vigorously deny the allegation.
Within days of Mogilevich's arrest, Ukraine's National Security and Defense Council (NSDC) ruled on February 1 that Ukraine's own national oil and gas company should be put back in control of the gas pipeline. But Yushchenko has yet to issue a presidential decree on the matter, and he accuses Tymoshenko of provoking Gazprom's backlash and pursuing her own interests. "Politics are being thrown big way into the Ukrainian gas market, I'm afraid," he told 1+1 Ukrainian TV station Thursday. "These politics bring along corporate interests."
There may be an even simpler explanation for the new squeeze on Ukraine, however. "Gazprom is running out of gas reserves," maintains Mikhail Krutikhin, partner and top analysts with RusEnergy, a respected fuel realm Moscow-based analytic service. He notes that the company did not offer any supplies for sale on the most recent auction in Russia's small domestic commercial market, and explains that during its 15-year existence, Gazprom has commissioned just one new field, while rapidly depleted Soviet-era fields.
Gazprom had also been reselling cheaper gas from Turkmenistan and Uzbekistan at higher prices to Europe. But Turkmenistan has raised its prices to Russia by 30%, and intends to add a further 20% raise in the second quarter of 2008. Uzbekistan has done the same. And Turkmenistan's plans to supply China will also break Gazprom's monopoly, via its control of pipelines, on delivering Central Asian gas exports.
So, what will Gazprom do if Ukraine simply pays its latest bill? "Most likely, it will accuse either Ukraine, or Belarus, or both or any other transitor of diverting its transits," Krutikhin says. If, indeed, Gazprom is running short of gas, the Ukraine price-hike could be just the beginning of a turbulent season on gas markets.