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   September 25
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Analysis & Opinion
08.04.09 Carving Up A Pie In The Sky
By Sergei Balashov

A gas deal between Russia and Ukraine was struck almost three months ago, but the gas rows between the two countries continue. The agreement itself is still being debated in Ukraine, since many think of it as a rip off and a failure of behalf of Prime Minister Yulia Timoshenko’s government. Now it is Russia’s turn to express discontent, after Ukraine signed a pipeline modernization declaration with the European Union at a bilateral summit in Brussels at the end of March.

The declaration presupposes an expansion of the Ukrainian pipelines’ capacity, and calls for Ukraine to set up an independent operator to control the pipes while giving access to its gas storage facilities to third parties. The fact that Ukraine and the EU negotiated and reached agreement without the participation of the supplier sent Russia up the wall. Both parties were accused of negotiating gas deals behind Russia’s back, since a reform of Ukraine’s gas transport system could eventually lead to an increase in transit fees for Russia that were agreed on in January.

The Russians claim that Ukraine’s behavior affects the transparency of the bilateral relations and compromises Russia’s energy development strategy. “We have to understand how to develop our own system, what we should be expecting. Whether we need to develop new [gas fields] or mothball them. We need to know what will happen,” said Vasily Duma, the deputy head of the Federation Council’s natural resources committee, at a press conference this week.

Prime Minister Putin said that Russia reserves the right to revisit its relations with the European Union should its interests be ignored in Europe. The Russian government postponed consultations with the Ukrainian government planned for late March in order to weigh the consequences of the declaration. Russia then started applying pressure on Ukraine.

All payments to Gazprom have so far been made in a timely manner. However, this week Gazprom said that Ukraine bought less gas than it was supposed to according to the deal signed back in January, and could thus face sanctions. Back in March, both Gazprom’s CEO Alexei Miller and Putin said that they would not slam Ukraine with fines because of its economic plight.

A long-term agreement concerning Ukrainian pipelines did not seem logical in the context of Russia’s and the EU’s effort to diversify. Both have been trying hard to avoid gas shipments through Ukraine, each for its own reason. Russia has launched two major pipeline projects, Nord Stream and South Stream, to be able to ship gas to the EU directly. This would cut its dependence on Ukraine and minimize the risks associated with supplying gas to Europe via Ukrainian territory. Russia has been in arguments with Belarus and Ukraine over the price of gas and transit fees, which sometimes caused disruptions in gas supplies to Europe.

While Russia has been working hard to build the Nord Stream pipeline (already under construction) and sign transit deals with the countries that would host the planned South Stream, the European Union has made massive efforts to diversify gas supplies. Concerns within the EU over the ever increasing dependence on Russian gas have been strong, with Russia accused of using natural gas for political leverage. The EU has been working to build the proposed Nabucco pipeline but has had a hard time figuring out who could provide enough supplies to make it function and make the project commercially successful.

According to the declaration, the capacity of the Ukrainian pipeline network will be expanded by 60 billion cubic meters, putting Europe’s intention to snub Russia as its leading gas supplier into question, since Ukrainian pipelines can only transport Russian gas. One possible explanation is Europe’s desperation to find enough gas for Nabucco. Recently, speculations have appeared that Russia might even be invited to provide gas for the pipeline.

Experts say that the agreement makes sense for both sides, but for reasons that have little to do with gas. “This declaration is a bilateral political product. Their motives are clear. The European Commission’s mandate will be up in the fall, and they’ll have to make some kind of a report. [Comissioner for Energy Andris] Piebalgs will have to explain what he has done and how he reacted to Russia’s gas row with Ukraine. He’s going to present this memorandum to show that Europe can now control Ukraine’s gas transit system, and be safe from Russia’s energy blackmail. Yushchenko will say he secured the funding for the modernization,” said Konstantin Simonov, the Head of the National Energy Security Fund.

But there is one nuance that makes both of the sides’ intention to follow through with this plan questionable. The investments that would have to be made to implement this plan were also discussed in Brussels. Ukraine was set to receive ?2.5 billion in aid to finance the modernization, but this plan was later scrapped. Ukraine is now supposed to receive $2.5 billion, but as an investment rather than financial aid. Whether Ukraine will be able to pay this money back is a great concern. “I don’t think Russia will lose out if the capacity of these pipelines in increased. However, it’s not going to happen, as nobody is going to give them the money. It is a bit strange that we’re discussing this project as something that will be put into action. I think there is no reason to think that it will actually be carried out,” said Simonov.
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