Ukraine and Russia: The Role of a Middleman
Russia has prickly relations with several of its neighbors, but all pale in comparison with its friction with Georgia and Ukraine. Last August, the former resulted in a full-fledged war, and pessimism about the security of the U.S.-backed oil and natural gas corridor connecting the Caspian Sea with the West. Now, the latter -- Russia's long antagonism with Ukraine -- is provoking a similar recalibration of energy security, this time about natural gas supplies to Europe.
I have pointed out the pricing dispute that's raised the temperature between Russia and Ukraine. But Ed Chow, whose activities in Russia on behalf of Chevron in the 1990s I recounted in The Oil and the Glory, thinks something more is afoot. Namely, Chow thinks the issue separating the sides is at least partly who personally stands to gain from a new deal.
Chow and Jon Elkind, another veteran of the 1990s diplomatic conflict with Russia over the Caspian as a member of Bill Clinton's National Security Council, detail the underside of the Russia-Ukraine natural gas game in the latest issue of the Washington Quarterly.
The article notes the role of an opaque middleman company called RosUkrEnergo in the deal. We have discussed RosUkrEnergo at O&G; The Wall Street Journal's Glenn Simpson has done the best ground-breaking work on the company. Half-owned by Gazprom and two Ukrainian businessmen, RosUkrEnergo is the equivalent of a maitre d' who performs no principal role but controls access to the best tables. RosUkrEnergo owns no gas, or pipelines, yet earns a flat 20% take off the top of all the gas sold by Russia to Ukraine.
RosUkrEnergo takes that gas, and sells it. That amounted to a staggering $4.3 billion in proceeds to RosUkrEnergo in 2007, according to Chow and Elkind. How that money is divided has never been explained.
In a phone conversation, Chow notes that Gazprom and Ukraine at one point were just $15 apart in their negotiations -- Russia was demanding $250 per 1,000 cubic meters of natural gas this year, while Ukraine was offering $235. "If that was the only difference, why couldn't they make a deal?" Chow asks. "I suspect the difference was the role that RosUkrEnergo would play."
Chow and Elkind call RosUkrEnergo "shady." "The company’s role is a political bone of contention in that an entity with no assets, no track record, and no transparency was placed at the very center of the Ukrainian gas economy," they write.
I have pointed out the pricing dispute that's raised the temperature between Russia and Ukraine. But Ed Chow, whose activities in Russia on behalf of Chevron in the 1990s I recounted in The Oil and the Glory, thinks something more is afoot. Namely, Chow thinks the issue separating the sides is at least partly who personally stands to gain from a new deal.
Chow and Jon Elkind, another veteran of the 1990s diplomatic conflict with Russia over the Caspian as a member of Bill Clinton's National Security Council, detail the underside of the Russia-Ukraine natural gas game in the latest issue of the Washington Quarterly.
The article notes the role of an opaque middleman company called RosUkrEnergo in the deal. We have discussed RosUkrEnergo at O&G; The Wall Street Journal's Glenn Simpson has done the best ground-breaking work on the company. Half-owned by Gazprom and two Ukrainian businessmen, RosUkrEnergo is the equivalent of a maitre d' who performs no principal role but controls access to the best tables. RosUkrEnergo owns no gas, or pipelines, yet earns a flat 20% take off the top of all the gas sold by Russia to Ukraine.
RosUkrEnergo takes that gas, and sells it. That amounted to a staggering $4.3 billion in proceeds to RosUkrEnergo in 2007, according to Chow and Elkind. How that money is divided has never been explained.
In a phone conversation, Chow notes that Gazprom and Ukraine at one point were just $15 apart in their negotiations -- Russia was demanding $250 per 1,000 cubic meters of natural gas this year, while Ukraine was offering $235. "If that was the only difference, why couldn't they make a deal?" Chow asks. "I suspect the difference was the role that RosUkrEnergo would play."
Chow and Elkind call RosUkrEnergo "shady." "The company’s role is a political bone of contention in that an entity with no assets, no track record, and no transparency was placed at the very center of the Ukrainian gas economy," they write.
Labels: Gazprom, rosurkenergo, Russia, Ukraine
9 Comments:
This is an interesting tidbit from Stratfor:
The marriage of business and organized crime is illustrated in the case of Semyon Mogilevich. Mogilevich was a major actor in Ukrainian oil and natural gas and was considered a kingpin in the Russian mob. Though he was a silent partner in RosUkrEnergo, he used this company as a front to sell oil and natural gas to certain political factions in Ukraine. His activities reached into the United States, where he defrauded investors out of $150 million through a scam that included a magnet producer as a front company and reached up to executives at the Bank of New York. In 2004, the director of Ukraine’s secret police accused him of conducting backroom deals with Russia’s state-owned natural gas company, Gazprom. In January 2008, Mogilevich was arrested in Moscow after meeting with the owner of a cosmetics company. Mogilevich is an example of the new breed of Russian organized criminal who moved away from violence and mixed crime with business to create a highly profitable form of white-collar crime that ran across industries and borders. Mogilevich also exemplifies how prolific Russian organized crime can be.
Mr. Levine, thank you for clearly explaining this little-reported angle to this gas dispute.
But now, how are we supposed to reconcile the two completely different narratives? One is that of ex-KGB men running Russia and trying to prevent an independent, democratically-minded Ukraine from leaving Russia's orbit to join the European family of free nations. The other is that of corrupt officials and organized crime figures both in Ukraine and Russia trying to increase their take of the gas export and transit revenues.
Glenn Simpson's article makes for a scary reading and Ed Chow's piece - for a sad one.
Excellent perspective, Steve. Thanks much.
Alex: I wouldn't say that democracy has much if anything to do with the dispute. Ukraine's internal politics looms a bit larger, but still are not a principal influence.
The mutual antagonism is one key factor. Another is the pricing dispute. A third is personal greed.
A fourth is domestic politics -- it looks good in Ukraine to take on Moscow, and visa versa.
Lastly is pipeline politics. Putin is hoping that, after all the suffering from the gas shutoff, Europe will beg Gazprom to build the Nord Stream and South Stream pipelines so as to avert future shutoffs.
Thanks all for the comments. Steve
Did the agreement reached between Ukraine (Naftogaz) and Gazprom in the fall not eliminate the use of an intermediary?
The agreement was with Timoshenko, so as far as I can tell is not legally binding. Neither apparently is it actively sought by either side.
I'd be interested to hear educated opinions on why -- apart from the reasons being stated publicly -- the dispute is going on much longer than in the past. Does it seem to anyone apart from me that there is a subtext visible at this point almost only to the participants themselves?
Why is it taking longer?
1) Roman Kupchinsky at the Eurasia Daily Monitor, and others think that Putin/Gazprom are trying to drive up prices on a panic basis.
2) The RosUkrEnergo thing is real.
Example: On the Ukrainian side, Firtash is a 45% owner of RosUkrEnergo. He funds the Party of Regions, and Yanukovych (Ukrainian political "parties" are not really parties - they are assorted collections of oligarchs and their minions, who abuse government for personal enrichment. Funding of political parties is done as an investment to get into government in order to abuse it).
If Firtash is cut out of the deal, the Party of Regions which is still tied in with the Kremlin, loses a huge source of funding. The Party of Regions has recently called for the resignation of the cabinet. And, of course, Yulia Tymoshenko - who is one of the big driving forces behind cutting out RosUkrEnergo.
3) Just plain thick-headedness and lack of civilized negotiating skills on both sides. Just look at the media blitz that Gazprom initiated long before this, and which continues now, with all sorts of accusations, and propaganda about "market prices" - which are a sham.
The sovok influence lives on - culturally, one does not negotiate so much as make snide comments, throw temper tantrums, get off the subject, hurl accusations, snort, etc.
I've tried to mediate disputes between these types of people - it is not possible, because then they simply put on a show for the mediator.
If anyone needs links, I will be glad to provide them. See Eurasia Daily Monitor, Streetwise Professor, Washington Quarterly, and others (they do not necessarily support or cover my personal opinions, however.)
Why is this taking so long?
Remember Georgia? And the agreement with Sarkozy that turned out not to be an agreement?
roosha always moves the goal posts, in one way or another, either in getting to an agreement, or in not honoring an agreement.
To be specific:
The current scenario is to have EU monitors to monitor the gas coming from roosha, and then roosha will turn on the gas.
Except that, as it turns out, the "EU monitors" that roosha wants are not independent - they are from Gazprom companies, and roosha does not want Ukrainian co-monitors to have rights equal to rooshan/Gazprom monitors:
http://5.ua/newsline/236//56507/
http://www.kyivpost.com/nation/32993
http://www.kyivpost.com/nation/32994
http://www.kyivpost.com/nation/32982
http://www.kyivpost.com/world/32988
This will be drawn out - Putin wants to make sure to "bring EU - and Ukraine - to its knees," for domestic consumption in roosha. It's sort of like the rooshan attitude I saw about the "big win" for roosha in Estonia, when 4 ethnic rooshans were acquitted of inciting riots surrounding the move of a soviet era monument.
What did they "win"? Who knows, but they are crowing about it.
If you want to see the links between the Kremlin and the Party of Regions, and thus RosUkrEnergo, go to this video (the Party of Regions is funded by Firtash of RosUkrEnergo):
http://www.youtube.com/watch?v=9hHTRiZrwio&eurl=http://tap-the-talent.blogspot.com/2008/03/we-say-medvedev-we-mean-putin.html
If you want a fuller explanation, go to the middle of the page here:
http://tap-the-talent.blogspot.com/2008/03/we-say-medvedev-we-mean-putin.html
If you want to see how to prolong a dispute by arguing over monitors, go to:
http://www.rferl.org/content/Focus_Turns_To_Gas_Monitors_In_RussiaUkraine_Gas_Dispute/1368325.html
You noted in your earlier blog about the central possible role of Bulgaria:
Ukraine has agreed to supply Moldova and Bulgaria from its own reserves (which roosha calls stolen):
http://www.kyivpost.com/world/33002
And finally, there is always the issue of the lease in Ukraine for the rooshan Black Sea Fleet.
Currently Ukraine wants the Black Sea Fleet to leave at the end of the current lease.
So turning off the gas is, in the rooshan sovok mind, a way to entice Ukraine to change its mind.
Is this going to be dragged out?
You betcha.
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