When it comes to gas, top leaders should get the deal done, then talk

Jul 02 2008, 21:19

Roman Kupchinsky

As a new round of Ukrainian-Russian negotiations on the price and volume of deliveries of Central Asian gas to Ukraine for 2009 approaches, all sides in the talks have been careful to abide by omerta – the Sicilian Mafia code of silence.

As public policy, openness is generally the only way to go.

But a little more omerta might yet prove to be a good way to do these gas negotiations, even though one hesitates to ask for less transparency in the already opaque corporate culture of Ukraine’s state oil and gas company, Naftogaz, or Russia’s Gazprom. Yet, historically, both sides have relied on public mudslinging and threats as negotiation tools, an awkward means of resolving disputes. Omerta might lower the level of bitterness and return the talks to dollar and cents issues.

This is the first time such talks are taking place during Dmitry Medvedev’s presidency. And while Medvedev, as the former chairman of the board of Gazprom, was probably familiar with the wide range of issues in the Ukrainian-Russian gas relationship as well as details of the opaque RosUkrEnergo scheme, he never played a direct role in the negotiations. This high profile job was reserved for Vladimir Putin who was a very public participant in the process and was often shown on Russian television giving instructions to Gazprom management on how to proceed.

The upcoming talks will take place during a turbulent moment in Ukrainian-Russian relations. Ukrainian President Viktor Yushchenko’s goal of obtaining a Membership Action Plan (MAP) in order for Ukraine to eventually join NATO has evoked a hysterical response from Russia. The unwillingness of Russia to remove its Russian Black Sea fleet from Sevastopol after the lease expires in 2017 and the Russian chauvinist uproar over the status of Crimea might also be a factor in the upcoming talks. Will Moscow link the price of gas to NATO and Crimea? This possibility certainly exists and some believe that it depends on who gives the Russian negotiators their marching orders – Putin or Medvedev.

The upcoming negotiations will be influenced by other factors as well:

The price Central Asian producers will demand for their gas. Aleksei Miller, CEO of Gazprom, has already stated that the price might double to some $400 for 1,000 cubic meters – in line with current European prices.

A clarification of who is in charge of Ukrainian energy strategy – Yushchenko or Yulia Tymoshenko?

Will RosUkrEnergo remain in the picture? It is well known that this opaque company will have no substantial say in the negotiations since they do not control any gas assets in Central Asia and do not own any part of the Central Asian “Center” pipeline. They are nobody. The only reason for their existence until now has been Russia’s need to sell Central Asian gas to Europe in order to compensate for rising Russian domestic consumption which Gazprom is increasingly pressed to supply. Conveniently, the historic price differential between Central Asian and Russian gas has made the owners of RosUkrEnergo and their pals very rich.

The manner in which the gas talks are conducted will be a test of Medvedev’s stated pledge of making Russia into a country abiding by the rule of law. If threats of gas cutoffs are made and if Russia continues to insist on RosUkrEnergo remaining in the scheme, his reputation could suffer a blow and complicate already tense Russian­EU relations.

The outcome of the negotiations will most likely force the Ukrainian side into coming to terms with the reality that decades of cheap gas are over and the Ukrainian gas feeding frenzy must come to a halt if the country wants to survive or risk becoming a failed state. It makes no sense for the Ukrainian media to present unavoidable price hikes as a “threat” by Moscow. There are no threats – there is only the harsh reality of the market. Ultimately, the prospect of paying a $400 rate might be a blessing in disguise and force Ukraine to abandon its illusion that it is somehow immune from what is taking place in the world.

For the past decade, Ukraine’s negotiating strategy has stressed the need for cheap gas from Turkmenistan. This involved kowtowing in front of the unstable and corrupt Saparmurat Niazov, the “Turkmenbashi,” by Ukrainian as well as Russian leaders. It also involved various barter schemes and alleged deposits into the private bank accounts of Niazov and his closest associates.

The need for cheap gas was understandable in the early 1990s, when Ukraine was broke. But today Ukraine has intentions of joining the European Union and beggars are not welcome into the club. If Romania and Bulgaria can pay world prices for gas, why can’t Ukraine?

During the January 2006 gas negotiations, Ukrainian President Viktor Yushchenko showed himself to be a terrible strategist. His subordinates, Naftogaz chairman Oleksiy Ivchenko and energy minister Ivan Plachkov, made fundamental mistakes during the negotiations and gave away the store. Yushchenko, however, praised the final agreement as a “tremendous success” because “we have the lowest prices in Europe.” The fixation on cheap gas only encouraged Ukraine’s extravagant appetite for energy and was a godsend subsidy to heavy industry, which made a few men very rich but plundered the country in the long run. Countless declarations by presidents and prime ministers that Ukraine will reduce energy consumption were never followed up by deeds, a fact which did not go unnoticed by the EU.

What will Ukraine pay for gas in 2009? Everything depends on what the Central Asians ultimately decide to charge. The new solidarity between the heads of state of Turkmenistan, Kazakhstan and Uzbekistan on gas prices indicates that the price hike will be significant—from the present $179/1,000 cubic meters to $400—and will be non­negotiable.

 The best deal Ukraine can hope to get will be price stability and this means signing a long­term delivery contract with Gazprom. Thus far all Ukrainian contracts with Gazprom have turned out to be short­term, although on paper they were allegedly long­term. Since nobody is allowed to see the final contracts there has been little accountability or oversight of past murky deals.

Whether Ukrainian and Russian politicians will adhere to Omerta and for how long is debatable. The urge to stick it to one another is often unstoppable and with presidential elections on the horizon in Ukraine the need to vent and posture becomes even greater. 

Viktor Yushchenko’s record in gas negotiations has been deplorable; besides, he stands no chance of being re­elected. It would be best for Ukraine if he removed himself from the gas negotiations and left it to Prime Minister Tymoshenko.

This involves some risk­taking. Tymoshenko’s enormous ego might well rebel at the notion of keeping silent before a gas contract is signed. Her need to boost her image by pandering to Ukrainian consumer demands for cheap gas can defeat economic common sense.

Thus far, the preliminary talks between Tymoshenko and Putin were civilized. The next move will be critical and the “Baloha wild card” may be played by the president’s chief of staff, Viktor Baloha. He might well be tempted to upset the cart and sabotage agreements the prime ministers of Russia and Ukraine might reach.

Omerta during the interminable gas negotiations may yet triumph. If such silence means getting a business deal done that moves both sides closer to reality and further from inflammatory rhetoric, then maybe this part of the process can stand the lack of transparency and murky deals that are defining features of the gas business between these two nations. But in the end, the deal should be transparent and easily understandable to the people of both nations. That would be a welcome break from the past.

Roman Kupchinsky is a partner in AZEast Group, www.azeast.com, a business consulting firm on Eurasia based in Mahwah, New Jersey. Kupchinsky can be contacted at Kupchinsky@AZEast.com

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