EU Commission Warns Member States of New Russian-Ukrainian Gas War

Following a recent telephone conversation between the head of the European Commission Jose Manuel Barroso, and the Russian Prime Minister Vladimir Putin, the commission urged all E.U. member states to immediately begin filling gas storage facilities because they believe that a new Russian-Ukrainian gas war is imminent. A source in the commission told the Russian newspaper Kommersant on July 3 that “the conversation between Barroso and Putin does not inspire optimism” (Kommersant, July 3).
An emergency meeting of the E.U. coordinating group on gas took place in Brussels on July 2 to discuss the emerging crisis. The E.U. commission summed up the recommendations of the meeting in a statement which noted that Ukraine’s unpredictable ability to fill its gas storage facilities, due to lack of funds, should be taken seriously and urged member states to fill their storage facilities to capacity with gas “from all available sources” (Kommersant, July 3). This call is bound to increase LNG spot market sales to Europe in the coming weeks.

By the end of June the E.U. was optimistic that the terms of a loan for Ukraine could be reached. However, the size of the loan would be $2 billion-half of the total sought by Kyiv. Moreover, the commission attached a number of conditions to the loan, the foremost being the restructuring of the state-owned gas monopoly Naftohaz Ukraine, in order to improve its transparency. The commission wants to see Naftohaz split into separate entities, which would each be responsible for different functions such as transport, sales, production and storage.

Despite the E.U. commission’s optimistic prognosis, Russian energy experts and officials were not convinced that the problem could be resolved in time for the peak heating season. One Gazprom official was quoted as saying: “We heard that it would be impossible to finalize the loan before September. This is already too late and we hope that it will be agreed upon earlier” (, July 1).

The commission’s warning, however, is easier issued than complied with. The Balkan countries do not have LNG receiving terminals, and being tied to Russian pipeline gas, they could suffer most. Germany has been enmeshed in a conflict with E.U. regulators over the construction of its first LNG import terminal designed to import gas from Algeria and the Middle East. An E.ON Ruhrgas spokesman admitted that construction will not begin in 2009 as scheduled (, July 3).

Italy, which according to the CIA Factbook consumes 84.89 billion cubic meters (bcm) (2007 estimate) of gas, has only one operating LNG terminal with less than a 4 bcm receiving capacity, and is owned by ENI, the Italian energy giant. The French GDF Suez hopes to build a second offshore Italian LNG terminal by 2012. In the event of a new prolonged Russian-Ukrainian gas war the Italian economy, as well as homeowners are bound to suffer.

What was once a boom in gas storage projects in Germany and the surrounding countries is running out of steam, as sizeable new additions fall victim to the financial crisis. The region might get by in the long term if the regulators enforce greater access for all players by freeing storage from the grip of heavyweights such as E.ON Ruhrgas and Wingas. These companies have progressively expanded underground facilities to store more Russian gas and to maximize profits from trading seasonal supplies. Smaller players followed suit, but they cannot maintain the momentum as cash flows decrease, and forecasts for gas demand remains gloomy as the economic crisis continues (, July 3).

In anticipation of the upcoming payment deadline for gas deliveries in June, the Ukrainian cabinet of ministers raised the statutory capital of the state-owned UkrEksimbank by almost $1 billion. Most Ukrainian analysts believe that this money will be used by Naftohaz to pay the bill and avoid any shutdown of deliveries (, July 2).

How long Ukraine can continue using such stop-gap measures is a question that is rightfully worrying E.U. officials. In June, the media reported that the Ukrainian Central Bank printed more money to pay for its gas deliveries in May – although Prime Minister Yulia Tymoshenko adamantly denied this. Furthermore, the cost of the 19 bcm of gas which Naftohaz needs to buy from Gazprom to power the compressor stations during the height of the heating season is part of the gas transit contract signed in January 2009. This money has already been given to Ukraine and it was spent on shoring up the budget.

What awaits Europe in the next few months is far from clear. While exasperation with Ukraine grows in Brussels, and while Moscow is justified in demanding timely payment for gas delivered to Ukraine, as well as all the penalties incurred for buying less gas than it was contracted for in the January contract, Russia does not want to be seen again as a villain causing undue human suffering and economic pain by the governments and people of its largest gas and oil market.

–Roman Kupchinsky–

JamesTown Foundation

Will the Ukrainian Parliament be Disbanded?

Ukrainian President Viktor Yushchenko may return to the idea of disbanding parliament and call snap elections. The opposition Party of Regions (PRU), which has the largest caucus in parliament, has disrupted parliament’s work following its leader Viktor Yanukovych’s failure to form a grand coalition with Prime Minister Yulia Tymoshenko’s bloc (BYT). BYT is the only major force that is decidedly against holding snap elections. Apparently, it is only the uncertainties surrounding the legal basis of the move that prevents Yushchenko from dissolving the legislature.

In late June, the PRU started blocking the rostrum in parliament, making the procedure of voting physically impossible. The PRU is determined to continue this action until Tymoshenko’s coalition agrees to increase national wages and pensions. Such a populist move is hardly possible now, since the state coffers are empty following the 20 percent GDP contraction in the first quarter of 2009, as Ukraine has been the nation worst hit by the global recession within Eastern Europe and the CIS. Tymoshenko’s cabinet struggles to contain the budget deficit within the 4 percent allowed by the IMF, otherwise the IMF might delay the disbursal of its $16.4 billion stand-by loan-without which the Ukrainian budget will collapse. If the PRU’s demands on wages and pensions are met, the state finances may slip out of control.

The PRU understands that there is a very slim chance that its conditions will be met. However, even if Tymoshenko bows to this pressure and agrees to increase wages and pensions, the PRU will hardly stop its destructive activities in parliament, as it has formulated a set of additional demands which, if met, would dissolve the ruling coalition. These include dismissing the ministers of interior, education and culture (, June 26). These three ministers have cemented the coalition as representatives of its junior partners, the Self-Defense group of the Interior Minister Yury Lutsenko and several nationalist groups. If they are removed, the coalition will cease to exist, and Tymoshenko will be undermined as prime minister.

Yanukovych said that snap parliamentary elections should ideally coincide with the presidential elections scheduled for January 17 (Interfax-Ukraine, July 2). However, Yanukovych has stopped short of admitting that his party has actively disrupted parliament’s work in order to prompt Yushchenko to disband it. His “shadow finance minister” Mykola Azarov is more forthcoming. During a recent press conference, he admitted that the PRU would push for snap parliamentary elections if its demands regarding wages and pensions are not met (Interfax-Ukraine, July 3).

Yushchenko has not yet reacted to the PRU’s initiative, although he is known to favor the dissolution of parliament. He is apparently uncertain that he has sufficient legal grounds to dissolve the legislature. He tried to do so last fall, but the BYT managed to block it with the help of the courts, and Yushchenko subsequently suspended his dissolution decree, through which snap parliamentary elections were scheduled for December 7, 2008. According to the Zerkalo Nedeli weekly, Yushchenko is considering the possibility of reviving the decree. This would be a legally dubious option, since the constitution provides for holding snap elections within 60 days from the signing of the respective presidential decree, and that term has long since expired. Zerkalo Nedeli suggested that Yushchenko might issue a new decree to dissolve parliament based on its inability to function, partly since Tymoshenko’s coalition lacks a majority (Zerkalo Nedeli, July 4).

There is little time remaining for Yushchenko to consider these options. According to the constitution, the president may not dissolve parliament within six months of his term expiring. Parliamentary Speaker Volodymyr Lytvyn said that Yushchenko can dissolve parliament on July 24 at the latest, as his term should expire on January 23, 2010 (, July 6). If Lytvyn is correct and the PRO’s goal was to prompt Yushchenko to dissolve parliament, then they left it too late to obstruct its functioning. One indisputable legal option for the president to dissolve the legislature is in the event that it proves unable to work for one month, but the blockade of the rostrum by the PRU started on June 26, and there will be less than 30 days until July 24.

The PRU is so fixed on snap elections because its popularity has probably peaked, while that of the BYT is set to slump as it steers the government during a period of deep economic crisis. According to the latest opinion poll by the Kyiv International Institute of Sociology, the PRU would secure 37 percent of the vote had the elections been held in June, while the BYT would muster only 21 percent, followed by the party of former speaker Arseny Yatsenyuk with 15 percent. Moreover, the poll showed that Yatsenyuk’s party might defeat Tymoshenko’s in her stronghold of West Ukraine (Ukrainska Pravda, July 2).

–Pavel Korduban–

JamesTown Foundation

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