Steve LeVine covers foreign affairs for BusinessWeek. He previously was correspondent for Central Asia and the Caucasus for The Wall Street Journal and The New York Times for 11 years. His first book, The Oil and the Glory, a history of the former Soviet Union through the lens of oil, was published in October 2007. Putin’s Labyrinth, his new book, profiles Russia through the lives and deaths of six Russians. It was released this week.

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A Blog on Russia, Central Asia and
the Caucasus

Tuesday, February 12, 2008

Putin, Utility Bills and Missiles

One still marvels at the notion of the president of a country announcing the successful settlement of a utility bill.

But that’s the way it is in the former Soviet Union, where the failure to pay one’s heating bill is regarded so seriously that the cutoff of service to entire other countries can result. Such as to much of Europe.

With minutes to spare before Russia planned to sever a quarter of the natural gas supply to Ukraine, Russia’s Vladimir Putin and Ukraine’s Yuri Yushchenko today announced that they had resolved their differences. Ukraine would begin to pay off somewhere over $1 billion in overdue bills to the Russian behemoth Gazprom. So, unlike in Russia's 2006 cutoff of gas to Ukraine, Ukraine's and Europe's winter heat will be spared.

That dialogue between nations at the highest levels can be disrupted over such matters is notable to say the least. It’s even more so when one looks just underneath the surface and finds the interest of a shadowy middleman company that, at least so far, Russia is highly resistant to push out of the picture.

This company, called Rosukrenergo (for Russia-Ukraine Energy company), is the official supplier of Turkmenistan’s natural gas to Ukraine. It’s half-owned by Gazprom and only partly unidentified private Ukrainian businessmen.

Who are these men? One has come forward -- a billionaire named Dmitry Firtash. But neither he nor anyone else will confirm who his partners are. One name that appears frequently is mobster Semyon Mogilevich, who before his recent arrest in Moscow was on the FBI’s Most Wanted List, and sought by other countries as well.

It can only be conjectured why actually two layers of middlemen – Gazprom and Rosukrenergo – are required to sell Turkmen gas to Ukraine. It’s also a mystery why Ukraine and Gazprom won’t identify who specifically is controlling – and earning the profit from – half of Ukraine’s natural gas supply.

The mystery is broader because Rosukrenergo also sells Turkmen gas on to Hungary, Poland and Slovakia.

Gazprom has said that, sure, you can cut out Rosukrenergo, but if you do, your gas bill is going to go up. Despite that warning, Yushchenko said today that a committee has been formed to unwind Rosukrenergo’s involvement. He expects it to be completed within a year. Having Putin at his side, he could speak with confidence on the full settlement of this utility issue.

For an excellent backgrounder on this company and its personalities, read pages 49-57 in this 2006 report by Global Witness.

More Missile Diplomacy: In the same news conference, Putin also raised the specter of a fresh missile dispute with the West. He said that, if Ukraine proceeds with the idea of joining NATO, and that if as part of that agreement an anti-missile shield goes up in Ukraine, “This would prompt Russia to take retaliatory action." Specifically, he said that Russia might point its missiles at Ukraine.

I have not heard of a public proposal to make Ukraine a part of the U.S.-proposed missile shield -- which has not yet been proven to work -- but according to a BBC report, Putin said, "I am not only terrified to utter this, it is scary even to think that Russia, in response to a possible deployment of... [parts of the] missile shield in Ukraine... would have to target its offensive rocket systems at Ukraine."

Photo: JeffK
Rights: Creative Commons

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posted by Steve at 12:30 PM

1 Comments:

Blogger The Ruminator said...

Steve,

The changes in the rules of the game are simple to understand. Copied below is some text from today's Troika Dialog daily report. It was supposed to take another 4 years before domestic gas hit this price.

The Mezhregiongaz electronic gas exchange posted record-high prices for gas deliveries in February. On Monday, the exchange price for deliveries inthe last 10 days of February in the Central Federal District reached $160 per 1,000 m3, 111% above the relevant wholesale-regulated price for industrial customers. This news highlights the potential for gas price increases in Russia and indicates that some domestic customers, primarily power stations driven by seasonal demand, can afford to pay prices well above the regulated level for gas, even if it is only for small volumes over short periodsof time.
Gazprom, which is short of gas, did not participate in the 10-day trading sessions in February, thus letting independents, including Rosneft and LUKoil, benefit from the extraordinarily high prices.
Despite the recent jump in gas prices, we are witnessing a smooth increase in the average price of gas traded at distribution stations; the extraordinary price spike in February concerns only a small part of overall sales. The total amount of gas traded at the exchange in February amounted to 843 mln m3, soldat full-month and 10-day trading sessions. However, only 5.8% of this total was bought at the previously mentioned $160 per 1,000 m3. Gas scheduled for delivery this month was sold at an average price of $94.6 per 1,000 m3, which is 43.9% above the price set by the Federal Tariff Service despite the latter having gained 25% since January 1.
The future of Russia’s gasexchange appears secure. In December, the government extended the experiment by one year and increased the cap on the volume of gas traded to 15 bln m3. This quota will be equally shared by Gazprom and gas independents. In January, the Industry and Energy Ministry ordered a special task force to draft proposals (expected by mid-September) to transform the experimental gasexchange into a permanent fixture. The creation of a permanent gas exchange holds promise for gas independents such as NOVATEK, LUKoil and Rosneft, whose gas businesses remain entirely within the domestic market because of Gazprom’s export monopoly.

February 13, 2008 3:58 AM  

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