Russia Aims to Save Face with Ukraine Gas Deal

The deal reached by negotiators on Wednesday was hailed by both sides after Gazprom's decision to cut natural gas supplies to Ukraine prompted a drop in supplies of up to 40 percent in some European countries that receive Russian gas transported through Ukraine.

The accord allowed Russia to claim it would receive the full amount it had demanded for its gas -- an almost five-fold increase to $230 (191 euros) per 1,000 cubic meters (about $6.50 dollars per cubic foot). But with the mixing in of a large amount of cheap gas from Central Asia, Kiev will pay $95 per 1,000 cubic meters -- a significant hike but easier for the Ukrainian government to defend ahead of crucial parliamentary elections in March.

"The Ukrainian economy is completely ready for new market conditions," President Viktor Yushchenko said of the accord on Wednesday.

Russia had cut supplies to Ukraine in order to exact vengeance for the so-called Orange Revolution in 2004, when Kiev broke from Moscow and set a new pro-Western course envisaging membership of the European Union and NATO, the head of the Panorama research center, Vladimir Pribylovsky, said. But the Western criticism that resulted from the energy cut, coming as Russia takes over the chair of the G8 industrialized nations group, had forced a rethink by the Kremlin, he said.

Russia reconsiders

"The question for Russia wasn't the price of gas but its desire to take vengeance and to mock Yushchenko," he said. "At the same time Russia had to deliver to Europe... Relations with Western leaders are more important than anything for Putin."

The damage to Russia's reputation caused by cutting gas supplies in the middle of winter can only speed up Europe's search for alternative energy sources, be they "green" fuels or gas from Iran, said Viktor Kremenyuk, a professor at the Russian Academy of Sciences' USA and Canadian Studies Center.

Gazprom holds nearly a third of the world's natural gas reserves, with nearly twice those of Iran, and is the single largest exporter of gas to Europe.

"Both have won something, both have lost something," Kremenyuk said. "I would bet Yushchenko is in a much better position... Yushchenko has achieved what he wanted. He has demonstrated to the Ukrainian people that Russia is ruthless and at the same time he can withstand Russian pressure."

Is it really good for Ukraine?

How well the deal will work in practice remains to be seen.

Gazprom has often had fraught relations with the ex-Soviet central Asian countries from which it gets the extra supplies that will be crucial to Wednesday's deal, particularly with Turkmenistan's President Saparmurat Niyazov. In addition, the financial side of the agreement cannot necessarily be taken at face value, said Graham Weale, a London-based analyst with Global Insight.

The agreement "may be a way for Russia to save face and, on a headline basis, achieve what it's looking for, but it's possible that…the deal is not all that it seems to be and it's possible that Gazprom is subsidizing the deal," Weale said.


Turkmenistan is unlikely to accept the low prices envisaged by the deal in the long run, he said. "A quick estimate without having all the figures means that Ukraine can only be paying about $30 to Turkmenistan to make that arithmetic work. I don't think that's sustainable."

Political analyst Petro Burkovski, of the School of Political Studies in Kiev, was also critical of the agreement. "Ukraine has resolved one problem only to find itself faced by another one," Burkovski said. The devil is in the detail of the accord and particularly the role to be played by the RosUkrEnergo company that will handle the payments, he said.

The firm, based in Switzerland and owned by Gazprom and Austria's Raiffeisen Bank, has previously handled Turkmen gas supplies to Ukraine.

Dubious business

By uniting control over Turkmenistan's and Russia's exports to Ukraine in the hands of one company, Ukraine effectively loses leverage, Burkovski said. The agreement "creates a potential danger for Ukraine, whose imports will now all be managed by the same structure controlled de facto by the Russians," Burkovski said.

These concerns appeared to prompt an announcement by Ukrainian Prime Minister Yury Yekhanurov later Wednesday that Naftogaz and RosUkrEnergo would create another joint venture for deliveries of Turkmen and Russian gas to Ukraine and Moldova.

Amid long-standing rumors of corruption in transit of gas from Turkmenistan, RosUkrEnergo has had a patchy reputation. A former head of Ukraine's secret service has accused the company of money-laundering, a charge it has denied.

Asked by AFP about the future role of RosUkrEnergo, a Naftogaz official, requesting anonymity, pointed out that Russia had previously been able to disrupt deliveries from Turkmenistan by virtue of the fact that Turkmenistan's main export pipelines cross Russian territory.

"We bought Turkmen gas… but then had problems with supplies," the official said, acknowledging, however, that the situation now is "not great."