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Gas deal disputed in Ukraine

By Will Englund
Washington Post Foreign Service
Saturday, December 11, 2010; A13

IN MOSCOW Ukraine is moving to settle a long-running dispute over its purchase of natural gas, with a big payout to its supplier. The populist leader of the political opposition, former prime minister Yulia Tymoshenko, says the settlement is a giant swindle and has called on the International Monetary Fund to suspend its loans to her country.

The supplier, a murky company called RosUkrEnergo (RUE), will receive the compensation in the form of 12.1 billion cubic meters of natural gas, which is worth close to $3 billion. In January 2009, when Tymoshenko was prime minister, she had engineered a deal with Russia that cut out RUE from gas transactions. The company claimed that this amounted to a confiscation of its property.

RUE is owned jointly by Gazprom, the Russian gas company, and a Ukrainian tycoon named Dmytro Firtash. American diplomats, in cables released by WikiLeaks, reported back to Washington on speculation that RUE had criminal connections. The U.S. ambassador to Ukraine in 2008, William Taylor, reported that Firtash had admitted to him that he had had dealings with Semyon Mogilevich, reputed to be a powerful Russian mobster. Firtash issued a statement Thursday categorically denying any link to Mogilevich.

The settlement, Tymoshenko wrote in a letter to IMF officials Thursday, leaves the Ukrainian state-owned gas company "entangled in a web of international corruption and fraud."

Calling it the "largest-scale financial crime in Ukraine's history," she said the IMF should withhold the second installment of a $15 billion loan to Ukraine.

"During the difficult post-crisis period, it is very hard for Ukraine's people to live, work and repay credits to the IMF, which will later be transferred to mafia structures," she wrote. "I know that other IMF donor-countries have also experienced difficult times after the crisis. It would be unfair for taxpayers of the IMF donor-countries to finance corrupt schemes in the post-Soviet space."

The government of President Viktor Yanukovych, who took office last spring, points out that the dispute over RUE went to an international arbitration court in Stockholm, where in July Ukraine lost its case. Tymoshenko said the government had no intention of winning. "There was a corrupt conspiracy between the new Ukrainian government and the shadowy company RosUkrEnergo against Ukraine, framed behind the back of Ukraine's people," she wrote.

Western diplomats based in Ukraine agreed that the government didn't try to win its case. "The government took a powder in Stockholm," one said.

The Ukrainian government agreed in November to the settlement, which is in the form of natural gas because Ukraine doesn't have the cash to pay its debt.

The IMF's response to Tymoshenko's letter was muted. "This is a commercial dispute between Naftogaz, the state-owned gas company, and RosUkrEnergo," an IMF spokesman, who requested anonymity, said in a statement. "We understand a settlement has been reached that results in a net financial liability to Naftogaz. . . . While the amount in question is not insignificant, the settlement represents a manageable risk to Ukraine's macroeconomic stability."

He said the IMF will "respond in due course" to Tymoshenko's letter.

Ukraine's foreign minister, Konstantin Gryshchenko, denounced Tymoshenko while on a visit to Moscow Thursday. "She is a true Bolshevik," he said. "When she's not in the driver's seat, everything is wrong."

As prime minister, he said, she moved against RUE "without any legal procedure. Confiscation, it is called."

Gryshchenko denied that Ukraine was giving in to Russia. "We do conduct tough negotiations with Russia on the gas issue," he said. Russia and Ukraine have had several disputes over gas, which Russia supplies. In 2006 Gazprom closed the valves on Ukraine, and another showdown over gas in 2008 led to disruptions through much of Europe. A significant amount of Russian gas that goes to Europe transits across Ukraine - and Tymoshenko raised the specter of future cutoffs affecting the whole continent if RUE takes a controlling position as a natural gas middleman.

Tymoshenko made a fortune buying and selling natural gas in the 1990s. She turned to politics and was a key figure in Ukraine's Orange Revolution of 2004. She served two separate terms as prime minister, before running for president against Yanukovych earlier this year. Yanukovych had the strong backing of Moscow in that election, and won with 48 percent of the vote to Tymoshenko's 45.

Howard Schneider contributed to this article from Washington.

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