Gazprom and Ukraine in lucrative and difficult tango

KIEV, Ukraine — Gazprom’s foreign customers are asserting themselves more boldly in their dealings with the giant Russian energy company. French, German, Slovakian and Turkish companies have renegotiated their contracts for natural gas; the European Union has launched an antitrust investigation; and Lithuania recently filed a $1.9 billion legal claim against Gazprom over alleged price gouging.

But no country is more bound up in Gazprom’s increasingly troubled fortunes than Ukraine. And no country has had as little success in dealing with Gazprom. Ukraine has simply been too important to Russian energy policy — and to the flow of money that policy supports.

(The Washington Post/Source: Energydelta.org) - Natural gas in Ukraine

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Exports of natural gas to Europe account for 75 percent of the Russian energy company’s profits, and most of that gas goes through Ukraine. Ukraine is the company’s second-largest customer, after Germany. And for a decade, Gazprom and its revenue have been the most important financial support for the system constructed by President Vladimir Putin.

Now that support is in trouble, in the face of a dramatic decline in gas prices worldwide. But it’s not clear whether that will bring relief to Ukraine. Russia, in fact, is using Ukraine’s energy woes in an effort to bring the country firmly into Moscow’s orbit.

Almost from the start of independence 21 years ago, the relationship has been a rocky one. Twice, Gazprom has cut off the supply to Ukraine. Gazprom is widely viewed as a major enabler of corruption here, using proxies to spread money throughout the political class, though plenty of Ukrainians say the blame lies primarily on their side of the border. And Gazprom has been the most important tool in Putin’s often aggressive policies toward Russia’s big neighbor.

Ukraine, heavily dependent on natural gas as a fuel source, has “failed miserably” in fashioning an intelligent energy policy, according to a new report by a panel at the U.S.-Ukraine Foundation headed by Edward Chow, a former Chevron executive now at the Center for Strategic and International Studies. “The root cause is nontransparent business practices leading to pervasive and massive corruption in the energy sector.”

The gas business made a fortune for Yulia Tymoshenko in the 1990s, thrust her into politics a decade later, and, now that she’s a former prime minister, has put her into prison. Its tentacles have reached deep into Ukraine’s political structures. The business involves so much money, all of it with a Russian stamp, that Ukrainian sovereignty could be called into question.

Ukraine has been a major playing field for middlemen who help manipulate large sums of cash — income that shows up in European bank accounts and in bankrolls that find their way back to Moscow.

Until 2009, Gazprom sold cheap gas to a Ukrainian dealer, a Swiss-registered company called RosUkrEnergo (RUE), which turned around and, as a monopoly, sold it at an immense profit. RUE is half-owned by Gazprom; most of the rest is owned by a Ukrainian oligarch, Dmytro Firtash.