UKRAINE DEBT REPAYMENT CAN REACTIVATE GAS TALKS WITH TURKMENISTAN

The vision of a gas pipeline from the eastern Caspian basin via Azerbaijan and Georgia, bypassing Russia, to Ukraine and farther into Europe was a topic of discussion at Georgia’s international conference on oil and gas infrastructure (GIOGIE 2006) on March 16 in Tbilisi. A project now being drafted by a working group from five engineering firms envisages laying the pipeline from Georgia on the seabed of the Black Sea to Ukraine. The line would intersect with the Blue Stream gas pipeline that runs from Russia to Turkey on the seabed of the Black Sea. The plan envisages lifting the Georgia-Ukraine pipeline over the Blue Stream line by an overpass bridge to be built at the point of intersection on the seabed.

While proponents of the plan at GIOGIE underscored that it would reduce Ukraine’s and Europe’s dependence on Russian gas on a long-term basis, Ukraine also needs a stop-gap solution that would involve direct purchases of gas from Turkmenistan and the Kremlin’s consent to transport that gas to Ukraine. The Ukrainian National Security and Defense Council Secretary, Anatoly Kinakh, raised this issue on March 15 during his discussions in the Kremlin.

Some officials in Kyiv now apparently seek to regain the chance to buy Turkmen gas directly, without corrupt intermediaries, possibly in the second half of 2006 or at least in 2007. Ashgabat demands repayment of Ukrainian arrears as a precondition to resuming negotiations on a supply agreement. Fuel and Energy Minister Ivan Plachkov and Naftohaz Ukrainy chairman Oleksiy Ivchenko lost that opportunity in the final months of 2005 — the negotiations went down to the wire until December 28 — by stonewalling on a debt-settlement agreement or even denying the existence of the debt. Kyiv now seeks to change that negotiating approach and certainly the negotiators.

On March 10-12, a delegation led by Naftohaz Ukrainy commercial director Anatoly Popadyuk held what appear to be conclusive debt-settlement negotiations in Ashgabat. The delegation acknowledged that Ukraine owed $159 million, most of it for Turkmen gas delivered in 2005, as Ashgabat had all along claimed. At the end of Popadyuk’s visit, the Ukrainian side apparently disbursed $59.5 million in cash; pledged to pay another $29 million also in cash; made a commitment to supply $67 million worth of Ukrainian goods, including $55 million worth of steel pipes for Turkmenistan’s oil and gas industry; and pledged to complete the construction of a bridge over the Amu-Darya River and housing in Ashgabat, where construction work has been lagging chronically behind schedule (Turkmen Foreign Ministry press release, Turkmenistan.ru, March 12; Interfax-Ukraine, March 14).

As recently as February 17-18, Plachkov and Ivchenko were stonewalling on the debt issue in their talks with President Saparmurat Niyazov in Ashgabat. Back in Kyiv from Ashgabat, Ivchenko repeatedly told mass media that the debt “does not exist” and accused Turkmenistan and its president of “displaying Eastern perfidy,” “humiliating Ukraine and damaging its image.” Ivchenko urged Ukraine to “renounce Turkmen gas altogether” and stop holding talks with Turkmenistan, threatened to sue Turkmenistan in the Stockholm Arbitration Court, and assured the public that Ukraine would receive gas for only $95 per one thousand cubic meters — i.e., RosUkrEnergo’s price (1 + 1 TV [Kyiv], February 20; UNIAN, February 23). Plachkov and Ivchenko’s tactics apparently reflected their personal involvement in the January 4 and February 2 agreements with Gazprom and its shadowy offshoot RosUkrEnergo.

The new commitment to repay the debt in short order may finally remove an issue that has poisoned Ukrainian-Turkmen relations, restricting Kyiv’s margin of maneuver vis-à-vis Gazprom. Ukrainian President Viktor Yushchenko can now finally hope that Niyazov would no longer ignore the repeated invitations to him to visit with Yushchenko in Kyiv. The Plachkov-Ivchenko tactics had not only infuriated Niyazov, but raised serious questions about who is actually in charge of Ukraine’s energy policy, the authority of the president’s word with some of his officials, and more generally about Kyiv’s business reputation.

That reputation has now taken another heavy hit in the gas sector. Deutsche Bank has stopped a credit line worth hundreds of millions of dollars to Naftohaz Ukrainy after discovering that Naftohaz used the credit’s first installment to pay taxes to the Ukrainian government in 2005. The government had accepted that German credit for maintenance and modernization of Ukraine’s oil and gas transport infrastructure. Instead, however, it doubled the tax burden on Naftohaz, with the result that the company has stopped modernization programs and has not yet published its financial accounts, prompting speculation about possible insolvency. The authorities were slow to acknowledge this situation, which Kinakh now describes as “unfortunate” and “impermissible” (Kontrakt [Kyiv], March 13).

While repayment of Ukraine’s arrears may help reopen the way for negotiations on Turkmen gas supplies, Turkmenistan has already announced steep price hikes for its gas to all customers in 2006 and beyond (see EDM, February 16, 17, 23).