Territory of Death: “Gazprom” Expunged the Degrading Ukraine From Its Plans

Translated by Ollie Richardson & Angelina Siard

17:19:09
24/10/2017

riafan.ru

The Deputy Prime Minister of the Ukrainian government Vladimir Kistion didn’t exclude the possibility of returning to purchasing gas from Russia if the point of metering for the transit of fuel deliveries to Europe is transferred from the western to the eastern border of Ukraine. In response the official representative of “Gazprom” Sergey Kupriyanov noted that the point of delivery of Russian gas to buyers “is a question of relations not with Ukraine, but with our European clients on long-term contracts”. In other words, Kiev, in the opinion of Moscow, isn’t anymore an interlocutor who can demand or offer something.

Experts skeptically estimate the desire of “Gazprom” to return direct gas supplies to Ukrainian “Naftogaz”. Today both parties have multi-billion lawsuits against each other, which they have tried to resolve since 2015 in the Stockholm Court of Arbitration.

On the other hand, Ukraine de facto didn’t stop buying Russian gas, however now it arrives to “independent” Ukraine through a complex chain of European intermediaries buying it from “Gazprom”. For this reason it costs on average $35-45 more than it would by direct deliveries.

Theft of the 1990’s

The Ukrainian route has been the main transit route for supplying Russian gas to Europe since the time of the USSR. This was determined by the geographical position and climate of Ukraine — gas pipelines through the steppe territory were laid more easily than through the marshy and woody Belarus, and in the case of Southern Europe – this was the shortest way of delivery.

The declaration of “independence” by Ukraine in 1991 created a new reality of gas transit. In the conditions of a difficult economic situation real “gas piracy” blossomed concerning the supply route of Russian gas to Europe. With the full connivance of the Ukrainian government, the State company “Ukrgazprom” (the predecessor of “Naftogaz”) began the mass unauthorized offtake of transit gas, which was immediately “dissolved” on the territory of Ukraine.

The main consumers of such “pirated” (in fact — stolen) gas became Ukrainian enterprises, primarily chemists and metallurgists, who thus quietly produced products for export, and, moreover, regularly shipped them abroad. To legally justify theft from energy carriers the special term “unauthorized gas offtake” was invented.

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Russia’s ambivalent attitude towards the Ukrainian “unauthorized gas offtake” issue was then determined by the monopoly position of Ukraine in the gas transit market. Usually only “Gazprom” reported about the suddenly revealed “losses” on the territory of Ukraine, while the governments of both countries only recorded the events. Thus, generally the Ukrainian authorities at first denied any claims of “Gazprom”, but subsequently the plunders were nevertheless recognized, and in full.

Especially indicative in this regard was the interview of the Ukrainian President Leonid Kuchma to the Speigel magazine in 2000, in which he directly stated: “Moscow annually pumps to the West through our country 130 billion cubic meters of gas. If here one billion cubic meters are pumped out — this is an insignificant fraction”.

A legislative settlement of the issue of transit through the territory of Ukraine followed only in 2004. Back then, during the last year of Kuchma’s presidency, “Gazprom” and “Naftogaz”, with the mediation of two governments, managed to reach a compromise. On the one hand, Kiev received a fixed price for Russian gas (the well-known “gas fifty”) of $50 per 1,000 cubic meters. On the other hand, “Gazprom” achieved the account keeping of European transit gas on the western border of Ukraine, which made theft economically senseless.

Bypassing Ukraine

However, the idyll in Russian-Ukrainian gas relations didn’t last for long. In the autumn of the same 2004 in Ukraine the well-known “orange” revolution began, which brought to power the pro-West President Viktor Yushchenko, and just as anti-Russian government. In the new conditions the gas conflict between Russia and Ukraine moved onto another plane — an open foreign policy confrontation. Interestingly, Ukrainian politicians acted as the instigators of the conflict, who considered the transit price for Russian gas – stipulated in the long-term contract of 2004 – to be unfair.

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The well-known “gas war” between Russia and Ukraine for the winter of 2005-06 became the result of the short-sighted actions of the Ukrainian authorities, moreover undertaken at a time when the price in the market of natural gas started growing promptly. Having tried to return to the practice of unauthorized offtake, Ukraine destroyed the fragile consensus on the gas issue, and as a result, in exchange for satisfying its demands for transit, was compelled to agree to the Russian conditions on payment for natural gas at average European prices, taking into account the discount for transit (which then was $160 per 1,000 cubic meters).

The policy of “Gazprom” of leaving Ukrainian out of this transit became a by-product of such a conflict. This process started in 1999 when on the territory of Belarus the new Yamal-Europe gas pipeline was constructed. After that, the trend of leaving Ukraine out of transit only amplified. In 2010 the sea gas pipeline “Nord Stream” became operational, and today “Gazprom” has in construction two simultaneous projects of sea gas pipelines — “Nord Stream-2” and “Turkish Stream”, which must completely neutralise the value of Ukraine as a transit country for Russian gas.

If, at the time of the collapse of the USSR, the Ukrainian gas route provided the transfer of 175-200 billion cubic meters of gas per year, in 2001 124.4 billion cubic meters of natural gas was pumped through Ukraine to the EU, in 2010 — 98.6 billion cubic meters, in 2013 — only 86.1 billion cubic meters.

“Territory of death”

One more tendency that is unpleasant for Ukraine is that the country catastrophically loses attractiveness in the eyes of “Gazprom” as a sales market. It is connected to the fact that “independent” Ukraine promptly reduces its consumption of natural gas. And it is determined, unfortunately, not by energy efficiency, but by the elementary closing of enterprises consuming gas and a mass exodus of people from Ukraine.

According to information from government sources in Kiev, today from 3 to 3.5 million Ukrainians permanently work just in Russia alone. About 3.5 million more Ukrainian citizens found their new place of work in EU countries. Well and, at last, another 2 million Ukrainians work in the countries of Asia and North America. The total figure is about 8 million citizens who have left the country — and they don’t make a contribution to its economy. For the State – which after the loss of Crimea and Donbass officially totalled 42 million inhabitants, including at least 12 million pensioners and about 10 million pupils of preschool age, secondary level, and advanced education — this is the most terrifying blow.

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The condition of the primary gas-consuming sectors of the Ukrainian economy is just as miserable. Following the results of 2017 the production of the main types of steel products is predicted in the following volumes: cast iron — 20 million tons (-14% from 2016), steel — 21 million tons (-12%), rolled metal — 18 million tons (-14%). In comparison with 2007’s indicators, the production of cast iron decreased by 15 million tons (-43%), steel – 21 million tons (-50%), and rolled metal – 20 million tons (-50%), which corresponds to the level of production of 1995-96.

The destiny of the Ukrainian chemical sector no less tragically forms. Practically all its enterprises, except for the Odessa port plant, work with a planned loss. Their survival is only possible through protective taxes against Russian products and orientation towards a domestic market of fertilizers and chemical production, which is subsidized by the State. However, even such protectionist measures won’t save Ukrainian chemistry — most of the enterprises are working only at 30–50% of their designed capacity.

Therefore, it is quite possible to consider as realistic the comments that the Director of “Naftogaz” Yury Vitrenko gave to Ukrainian publications about the purchase of gas from Russia. According to him, Ukraine can resume the direct importation of Russian gas by 2030. If, of course, by that time there will be somewhere and someone to import it for.

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