Russia–Ukraine gas disputes

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Gas dispute between Russia and Ukraine started in March of 2005, when Russia took steps to radically change the principles of payment for the transportation of natural gas through the Ukrainian territory to Western Europe and the prices for natural gas Ukraine would import for its own use. On January 1 2006 Russia cut gas exports to the Ukraine, which went on to effect numerous other European countries.

Ukraine currently consumes around 80 billion cubic meters of natural gas a year. Of that, Ukraine produces 20 billion on its own, buys around 36 billion cubic meters from Turkmenistan, and receives about 17 billion from Russia as a payment for transporting Russian gas to Europe, the rest (6-8 billion) is purchased from Russia [1]. According to the CIA's World Factbook, Ukraine is the 4th largest importer and 6th largest consumer of natural gas in the world. This is partly due to waste and inefficiency that was promoted by low gas price.

2002 Contract

According to the contract signed by Russian state company Gazprom and Ukrainian state company Naftohaz Ukrainy on June 21 2002, which is valid to the end of 2013, the payment for the transfer of Russian natural gas through Ukrainian pipeline system has to be made in the form of barter exchange – a certain share of gas pumped through the Ukrainian territory was given to Ukraine for its own use as a payment for the transfer. Originally, the amount of gas to be shipped as payment for the transfer was supposed to be negotiated every year and to be fixed by inter-governmental protocols.

Addendum #4

On August 9 2004 the two companies signed an addendum #4 to the contract, according to which the amount of gas given as a payment was calculated based on the tariff of $1.09 for transportation of 1,000 cubic meters to the distance 100 km and the price of the natural gas $50 per 1,000 cubic meters. According to the addendum the price is not subject to changes until the end of the year 2009 [2].

Gazprom argues that addendum #4 is only applicable provided that the two countries sign an annual Intergovernmental Protocol specifying the terms of gas transit, and two conditions are satisfied: first, that gas transit services are to be settled by gas supply, and second, that the transit price is fixed at US $50 per 1,000mі. According to Gazprom, if the annual Protocol is not signed under these terms, the addendum #4 becomes void [3].

Initially, Russia insisted on a new contract in which Ukraine would be paying about $160 per 1,000 cubic meters. Later, Gazprom demanded $230 per 1,000 cubic meters claiming that such a price hike would reflect the trends in the world markets. [4] The tariff for transit, Russia agrees, should be also increased to $1,74 per 1,000 cubic meters/100 km [5] (cf. the typical tariff in Western Europe is about $2.6 per 1,000 cubic meters/100 km [6]). Ukraine contends that Russian demands violate the contract of June 21 2002 and the addendum #4 to it of August 9 2004.

2005 negotiations

The negotiations for new contracts are conducted between Gazprom and its Ukrainian counterpart Naftogaz Ukrainy. At first, the Ukrainian side staunchly opposed any gas price increases, proposing to pay for gas with weapon supplies, but eventually Ukrainian President Viktor Yushchenko agreed to some concessions, in which the price of gas would be gradually increased over time. Russian President Vladimir Putin claims that Ukraine has enough money in its budget to pay the market price: "This is a heavy burden for the Russian budget... The consumers in Ukraine are getting gas today for much lower price than Russian citizens pay in their own country! And we still have about 25 million citizens, who live below the poverty line". [7] His Ukrainian counterpart, Viktor Yushchenko, stated that Ukrainian industry will become unprofitable if the price of gas rises above $90. He also called for avoiding the politicization of the dispute, an expressed his confidence that the problem could be solved by economical rather than political means. Earlier in 2005, A. Ivchenko, the President of Naftohaz said that Ukraine "will continue to blackmail Russia that unless it supplies gas to Ukraine at practically give-away prices, and agrees to pay for transit through the nose, Ukraine will start siphoning EU gas from the pipeline" ([8]).

About 80% of Russian gas exports to the Western Europe are made through Ukraine. Russia stated that it would like to have a consortium company created from Gazprom and Naftogaz, while Ukraine opposes that as it would mean that it would lose control over its own gas pipeline structure. Some Ukrainian officials called to review the lease price Russia pays to Ukraine for keeping its Black Sea Fleet in Sevastopol, Crimea: Russia currently pays about $97 million per year for the lease. Ukrainian officials declared that the lease of the port facilities to Russia is underpriced and called for a complete valuation of inventory of the facilities, which as some suggest could be worth up to $2 billion [9], while Russia resists to any discussions that might affect the conditions of the lease. There were speculations that the calls to reconsider the lease price were prompted by the US pressure, especially since they were made within hours of the US State Secretary Condoleezza Rice's visit to Kiev on December 8 2005. [10]

Cutting off the supply

On December 13 2005, Gazprom stated that if an agreement about the new price is not reached soon, it will cut off supply of natural gas to Ukraine on January 1 2006. The next day, December 14, Gazprom stated unilaterally that the new price would be $220-230 per 1,000 cubic meters. Ukraine claimed that such steps would violate the past contracts and brought up the possibility to resort to international arbitration. On December 19 2005, Ukrainian Prime Minister, Yuriy Yekhanurov, traveled to Moscow but was unable to reach any agreement on the prices. The next day, December 20, Yekhanurov stated that Ukraine would be able to do without Russian gas and urged development of energy efficiency technologies [11].

European transit withdrawals

On December 26 2005, in the midst of the continued dispute Yekhanurov claimed that Ukraine has a contractual right for 15% of the Russian gas transiting to Western Europe in his interview to the Ukrainian 5 Channel TV company. [12] This statement came largely in response to the Gazprom threat to resort to the Arbitration Institute of the Stockholm Chamber of Commerce should Ukraine engage in "unlawful withdrawal of Russian transit gas". [13], [14]. Earlier, Yekhanurov announced that Ukraine could refer the case to the Institute if the compromise is not reached. [15] Both countries are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1960, so a decision by the Stockholm Institute in the case would be legally binding. According to Ukraine's government, its transit arrangements allow it to siphon off 15% of gas moving through the country. While Gazprom's spokesman called Yekhanurov's claim "legally illiterate" [16], a spokesman for Naftohaz confirmed the company would not violate its transit contracts.

On December 29 2005 Vladimir Putin offered Ukraine a $3.6 billion loan to cover the cost of transition to market natural gas prices. His Ukrainian counterpart, Victor Yushchenko, promptly rejected the offer [17]. In the last days of 2005, European countries stayed out of the dispute until then, began urging Russia and Ukraine to find a compromise. On December 31 2005, in a last-ditched effort to solve the dispute, Russian president offered to postpone the price increase until April of 2006, if Ukraine agreed to the new contract. Ukraine, however, rejected the offer [18].

On January 1 2006, as warned, Russia started reducing the pressure in the pipeline system [19] already before the deadline of the Russian ultimatum set at 10 AM. On January 2 2006 Russia accused Ukraine of stealing US$25 million worth of gas. [20]

Impact on European countries

Despite Russian reassurances to the contrary, many European countries have seen a drop in supply [21]:

  • Austria – supplies down by around 33%
  • Croatia – supplies down by around 33% [22]
  • Hungary – Russian imports down 40%
  • Italy – Russian imports down 24% (6% of total imports) [23]
  • Poland – supply down by 14%
  • Romania – supplies down by around 33%
  • Slovakia – supplies down by around 33%

France, Germany and the United Kingdom have all expressed concern that there will be a drop in their supplies in the near future, though none have yet been reported. [24]

Accusations of political motivation

Many observers allege that Russia's step is an act of political retaliation for Ukraine's moving out of Russia's sphere of influence and for its pro-Western policy. Others point out that that the move to increase gas prices before the cold winter is intended to decrease the Ukrainian president and his party's popularity with the people, before the parliamentary elections in spring. Russia contends that the move to higher gas prices is economically, and not politically, motivated and points out that other post-Soviet countries, such as Armenia, Georgia, Moldova, and Baltic states, are also seeing their prices increased. However, the prices for Armenia, Georgia, and Baltic states remain in much lower range of $110-125 per 1,000 cubic meters in the year 2006 [25]. The Russian claims of no political motivation are further contradicted by the fact that Belarus, which has a Russia-friendly government and has handed over control over its pipeline system to Gazprom will, according to the contract signed on December 27 be paying only $47 per 1,000 cubic meters in 2006 [26]. In addition, while earlier this year Gazprom declined Turkmenistan's offer to buy natural gas at $58 per 1,000 cubic meters as too expensive, in December 2005 it made an unexpected deal to buy additional 30 billion cubic metres of gas at $65 (with 15 billion cu metres to be delivered in 1Q2006) in order to limit Ukraine's options to seek alternative sources of the gas.[27] [28] Analysts attribute recent Russian actions to the start of parliamentary election campaign in Ukraine, in which the democratic forces are bound to face a challenge from pro-Moscow parties. [29]

See also

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