By Robert M Cutler
MONTREAL - In a move that could affect the future of Eurasian geo-economics and alter its energy politics, Ukraine is to dismantle its state-owned corporation Naftogaz and review the company's existing contracts, including agreements for gas purchase and delivery with Russia's Gazprom. The stated purpose is to decrease gas imports from Russia by two-thirds by the middle of the decade.
Prime Minister Mykola Azarov made an announcement to this effect at the end of last week, just before the meeting of Commonwealth of Independent States (CIS) heads of state in Dushanbe, Tajikistan, where Ukraine's President Viktor Yanukovych met his Russian counterpart Dmitry Medvedev.
It followed the publication of Yanukovych's book Opportunity Ukraine in German in Vienna on August 24, the 20th anniversary of Ukraine's independence, and Yanukovych's guest column the next day in the Wall Street Journal titled, "Ukraine's Future Is with the European Union". These events have attracted wide attention, since Yanukovych's political career has given him a well-established profile of deep sympathy towards the interests of the Russian state.
The move announced by Azarov is a stratagem for preventing the still-greater insertion of Gazprom's grasp into Ukraine's energy portfolio. Russian energy trusts such as Gazprom have over the past 15 years followed a pattern of allowing state customers in the CIS to run up debt that they are unable to pay, and then to offer to erase that debt in return for control or even outright ownership of the physical plant and infrastructure of energy companies in the debtor states.
Ukraine consumes about 60 billion cubic meters per year (bcm/y) of gas; under the present contract, it must buy 52 bcm/y of gas but already produces about 20 bcm/y of natural gas. Under contract terms, if both sides agree, then the amount imported could be lowered to 41.6 bcm/y. Russia maintains that into the future, Ukraine cannot escape being required to pay for at least 33 bcm/y whether it uses the gas or not.
Ukraine's energy minister, Yuri Boiko, has already announced that he wishes to cut imports from Russia to 27 bcm in 2012. Moreover, under the terms of the contract, the import prices have risen from US$264 per thousand cubic meters (tcm) in the first quarter of the year to $355/tcm at present, and will rise further to $400/tcm in the last quarter. Gazprom is able to avoid customs duties for gas deliveries to Ukraine while receiving basically European prices for it.
Russia is insisting the current gas contract remain in force. Former prime minister Yuliya Tymoshenko is on trial for abuse of office over the very 2009 natural gas imports contract that Yanukovych, who defeated her in the presidential elections in early 2010, wishes to abrogate. The election was widely criticized by observers for administrative improprieties and lack of transparency. The United States, the European Union, and other international organizations have criticized her arrest as "selective prosecution".
If the gas contract does not remain in force, then the only other possibilities, according to Moscow, are that Kiev join the Customs Union of the Russia-led Eurasian Economic Community (other members are Belarus and Kazakhstan; see Russia tries a menage a trois, Asia Times Online, July 8, 2010) or that Naftogaz merge with Gazprom.
Such a merger would result in Ukraine's gas transportation system becoming the property of a Russian energy trust. It would also render impossible Yanukovych's stated policy goal of establishing a free-trade zone with the EU.
It is therefore significant, although it has not been widely observed, that the Ukrainian announcement is also a response to a requirement expressed last September 24 by the European Commission (EC), when Ukraine signed a protocol to accede to the European Energy Community. The communite was created in 2005 to establish a common energy-market regulatory framework by extending the EU's acquis communautaire (that is, the accumulated body of EU law) in the sector to non-EU third countries, mainly in Southeast Europe.
The EC stipulated that Kiev "unbundle" Naftogaz, in particular separating its gas transit pipelines from other businesses. This requirement is in keeping with the rules established by the EU under its third energy liberalization package, which is designed to increase competitiveness throughout Europe's internal energy market. Revision of the contract would help Ukraine balance its budget, and so help it persuade the International Monetary Fund to release the last tranche of a $15.6 billion loan program.
In 2009, the Ukrainian network carried over three-quarters of Russia's natural gas exports to Europe. That is due to change, however, as the Nord Stream project for a gas pipeline under the Baltic Sea from Russia to Germany is now complete. The first gas was reported to be pumped into the pipeline from Russia on Wednesday, to arrive in German in three or four weeks. Nord Stream's maximum design capacity is 55 bcm/y.
Observers do not foresee a "gas war" between Ukraine and Russia, such as occurred twice during the last decade when Gazprom halted exports at the beginning of the calendar year, causing citizens in the EU to freeze in mid-winter and also some deaths from cold in Central and Eastern Europe, which have been highly dependent on Russian gas transited through Ukraine.
The Ukrainian distribution system does need to be modernized. It includes more than 60,000 kilometers of pipe plus 71 compressed air plants and 13 underground gas storage facilities. Russia stated last year that it would be willing to cooperate with the EU in an undefined modernization plan. (See Ukraine seeks pipeline threesome, Asia Times Online, April 9, 2010.)
Depending upon financial advantages that could be accorded in such a deal to Gazprom, for which the Ukrainian transit deal is highly profitable, there may be a basis for arriving at a compromise solution. The question then would be who in the EU would pay for it, and in whose best interests German energy companies, which could likely be involved, would act, other than their own.
By Sunny Lee
BEIJING - The plan to build a trans-Siberia gas pipeline through North Korea to South Korea, highlighted by Kim Jong-il's recent visit to Russia, appears to be on a fast track as Russia's largest extractor of natural gas Gazprom's officials head for Seoul to discuss the matter. It's fair to describe it as an inter-governmental project because the Russian government holds a controlling stake of the company.
Seoul is enthusiastic. On Monday, a key Foreign Ministry official told Yonhap News Agency that the gas pipeline project was not a violation of United Nations sanctions against Pyongyang that restrict economic engagement with the North, saying "The focus of the UN sanctions against North Korea is on weapons of mass destruction [WMD]. The gas pipeline project has no direct relations with WMD."
Lately, Russia has been highlighted in South Korean media, which is curious to know what role the former empire can play with regard to North Korea. The Kremlin and Seoul, the two Cold War adversaries, established diplomatic relations in 1990, under the initiative by then South Korean president Roh Tae-woo. Roh reached out to the communist bloc as a strategy to press North Korea.
"To resolve the South-North Korean tension, I decided to adopt the old Chinese Emperor Qin's strategy of unifying the entire China: Befriend the far and attack the near ... we should have a comprehensive plan to elicit opening up of North Korea," Roh said in his two-volume memoir released on August 9.
The memoir, released at a time when the role of Russia on the Korean Peninsula has come to the fore, is a first-hand account of the many hidden diplomatic backstories between Seoul and the Kremlin, leading up to the knotting of diplomatic ties, and Seoul's intentions in applying "the Russian card" to its rivalry with Pyongyang.
One of North Korea's signature diplomacy strategies, then and now, is to "skip" South Korea to clinch direct deals with world powers, including the United States. It's partly a product of inter-Korean rivalry and assertion of state legitimacy. For example, South Korea's constitution does not recognize North Korea as a state, although both are members of the United Nations.
Roh, who held office as president of South Korea for four years from February 1988, launched an ambitious "Northern Diplomacy" to reach out to the communist bloc on being sworn in. He signed diplomatic relations, including with China and Russia - former Cold War enemies - to counter the North's strategy. The aim was to change Pyongyang's habit of detouring Seoul in international affairs and press it to deal directly with Seoul. "It's a strategy to corner North Korea from its rear and to goad it to dialogue [with South Korea]," Roh explained in the preface of the memoir.
The same philosophy has since been adopted by subsequent South Korean governments. Seoul, for example, has been lobbying hard to bring Beijing onside and persuade it to see the North Korean issue from Seoul's viewpoint, by closely linking China's economic interests to those of South Korea.
The successful completion of the Seoul Summer Olympic Games in 1988 was a golden opportunity for Seoul to impress the Kremlin with its industrial development and make the Soviet leadership think twice about South Korea, which during the 1950-1953 Korean War had been one of the world's poorest countries.
One month after the Seoul Olympics, the Soviet politburo, attended by Mikhail Gorbachev, unanimously adopted a policy shift to normalize relations with South Korea, describing South Korea as "the most promising economic partner in the Far East".
As the Soviet Union was leaning closer to South Korea, Roh calculated that it would also help in thawing the Cold War relationship with Beijing. "The Chinese leadership has a closer relationship with North Korea's Kim Il-sung [the founder of the country and current leader Kim Jong-il's father] than the Soviet Union ... But China is prudent. If we first establish diplomatic relations with the Soviet Union, China will follow suit," predicted Roh (p. 193).
His preference for the Kremlin had also to do with his belief that the Kremlin's interest was mainly economically driven, while China had political ambition on the Korean Peninsula. This fear by South Korea toward China comes from historical experience and runs deep even today.
The Kremlin actually did have a political calculation in mind as it leant closer to South Korea: to check Japan. Around a century ago, the rival imperial ambitions of Russia and Japan led to a war (1904) over their dominance over the Korean Peninsula. Japan defeated Russia at that time, greatly hurting the Russian empire's pride. The two also have had a territorial dispute over the Kuril Islands since the 1950s. The economic giant Japan was perceived by the Kremlin as arrogant and hesitant to broaden economic ties with Russia.
Roh's aides at the presidential Blue House began to meet secretly with a KGB agent in Tokyo, who had a cover as a magazine reporter, to fine-tune the process of establishing diplomatic relations. Later, Roh and Gorbachev met in San Francisco in June 1990. At that time, Gorbachev told Roh, "It would be a big mistake for Japan to think that we need Japan more than Japan needs us." (p. 205) Later in Moscow, Gorbachev also told Roh, "South Korean leaders are different from Japanese leaders. Japan expects us to kneel down. Nothing could be further from the truth!" (p. 212).
Three months later in September 1990, Seoul and Moscow signed diplomatic relations. This was originally supposed to take place in January 1991. But it was Pyongyang that sped up the process by insulting a senior Russian interlocutor. Russian foreign minister Eduard Shevardnadze visited Pyongyang and notified its intention to establish diplomatic ties with Seoul.
He "received blatantly insolent treatment from the North Korean leadership, which was close to a threat. That made the top Russian envoy deeply indignant." (p. 209). When Shevardnadze met with the South Korean foreign minister, Choi Ho-joong, at a UN session and when Choi expressed a desire to speed up the diplomatic process. Shevardnadze readily agreed. A few days later on September 30, the two met again. Shevardnadze personally changed the printed date of the official diplomatic document on the spot from "January 1, 1991" to "September 30, 1990."
"It was a gift from angry Shevardnadze," Roh recalled (p. 207).
In the negotiations leading to the establishment of diplomatic relations, Seoul's major demand on Russia was on North Korea. Seoul wanted Moscow to stop military assistance to the North. Moscow honored the request. Expectedly, that put Pyongyang in great difficulty. According to Roh, "not a single fighter jet, a single tank, a single missile went to North Korea after." (p. 217).
Perhaps a greater irony was that Russia soon changed its weapons export destination: from North Korea to South Korea. Despite North Korea's protest, Russia in 1995 proposed to Seoul that loans could be paid by providing Russian tanks, helicopters and missile parts. Russia's attitude toward North Korea was also becoming "business-like". It scrapped trade favors that had been granted to North Korea and demanded Pyongyang pay its debts in hard currency. The series of gestures by Russia put the Moscow-Pyongyang relationship to test. Experts point out that the duo's relationship has not been fully repaired since.