Gazprom Makes U-Turn in a Leap Over Ukrainian Natural Gas Transmission System

Gazprom Makes U-Turn in a Leap Over Ukrainian Natural Gas Transmission System

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They say, “if you want to make God laugh tell Him about your plans.” In the story with Ukraine, Gazprom has become the key figure of this saying. As they say, correctness of the aphorism was tested in the “taking-a-hit” style.

Fables, Miller and Grapes

Until recently, Gazprom executives, including Alexey Miller, played the role of the principal character of the fable ‘The Fox and the Grapes’ by the Russian classical fabulist Ivan Krylov. For several years, they claimed that Gazprom is not interested in continuing transit through Ukraine. They might take interest in it only if the Ukrainians give up all their demands and asked them very kindly. However, at the eleventh hour Russia had to agree to pay $2.9 bln and weaken its claims under the new gas transit contract.

All through this autumn, the trilateral negotiating group comprising Naftogaz, Gazprom and the European Commission discussed the possible gas contracts but it failed to reach common ground. Therefore, it is notable that the new agreements were announced by the higher-ups. Since the official trilateral negotiations between Naftohaz top-team, Gazprom's functionaries and the European Commission's Vice-President were deadlocked, the problem was “solved” by top-rank officials, namely, Ukrainian presidential aide Andrey Yermak and Russian deputy prime minister Dmitriy Kozak.

On 21 December, it became known that Ukrainian and Russian representatives signed an agreement to continue transit through the Ukrainian gas transport system.

By the way, Deputy Prime Minister Dmitriy Kozak, one of the "creators" of the new gas contract, made his position very clear saying that the achieved solution will benefit, first and foremost, the European consumers. A Freudian slip?

“First of all, it is beneficial to European consumers because there are guaranteed exports of Russian gas that will be transported through this territory,” said Kozak at a briefing on December 21. This extremely touching care for European consumers on the part of a Russian official whose primary task is to protect the interests of Russians sounds is very encouraging.

Brave Miller

Earlier, Alexey Miller himself, along with other executives, said outright that Gazprom would not pay anything to Naftogaz. For example, in March 2018, at a meeting with Prime Minister Dmitry Medvedev, Miller dashingly reported that Gazprom lost the arbitration proceedings in the Arbitration Institute of the Stockholm Chamber of Commerce and even threatened to break the contract for gas supplies and transit with Ukraine.

“Of course, under such conditions, these contracts are becoming economically inefficient for us, and Gazprom has decided to start the procedure for termination of contracts through the Arbitration Institute in Stockholm,” suggests a quote from Miller that one can still find at the Russian government’s website.

At a meeting with PM Dmitry Medvedev in March 2018, Miller made it clear that the fate of Ukrainian transit is Ukraine's own problems. According to him, today, it is the Ukrainians who should persuade Gazprom to continue the transits, and Miller will think then if it is worthwhile giving consent to their requests.

“There is no doubt that under the current conditions it is the Ukrainian side that must prove the economic efficiency and worthwhileness of continuing the transit of gas through the territory of Ukraine,” Miller said authoritatively. “We are ready to hear and consider relevant proposals, if any.”

Alexander Medvedev, the Gazprom's deputy board chairman (dismissed in February 2019), also made it clear that Ukraine should be interested in signing a new transit contract. According to him, Gazprom is ready to conduct negotiations but Ukraine should be the first to offer it. As a matter of fact, in business and politics, the party that has bigger interest is the first to make an offer. “...taking into account the shift of our gas production northwards, Ukraine has to make its offer,” said Medvedev in April last year.

In general, Gazprom peddled the idea that no one would need the Ukrainian Gas Transmission System after 2019. If Kiev needed it so badly, Gazprom could generously share about 15 billion cubic meters (bcm) of gas -- only if Kiev begged for on bended knees. In its turn, Kiev’s position was ambiguous. On the one hand, Kiev officially underlined its interest in the new contract but only for ten years and with sufficient throughput volumes.

On the other hand, executives of Ukrainian Naftogaz, for instance, its executive director Yuriy Vitrenko, kept making increasingly more claims to Gazprom. This behavior is typical for people who do not want to negotiate.

Advancing Down a Different Path

In early 2019, it became clear that the launch of Nord Stream 2 will not take place before the established deadline. In fact, on Saturday, December 21, the last force majeure event happened when President Donald Trump signed the U.S. defense budget for 2020 and, effectively, imposed new sanctions against companies engaged in the construction of Nord Stream 2 pipeline. Already on Monday, December 23, Danish company Allseas, which is responsible for the pipe-laying works, withdrew its ships from the area where the works as part of Nord Stream 2 are taking place.

That's why Miller, Medvedev and Putin himself made a "seismic shift" in advance and started talking about their readiness to sign a new contract with Ukraine and even promising a 25% discount if Naftogaz buys up directly from Gazprom. At first, Medvedev and Miller put forward this proposal in March at a meeting with Ukrainian politicians. Then at a press conference in November after the BRICS summit, Putin again made a reminder of his readiness to give Ukraine a discount. Finally, at a press conference on the results of negotiations in the so-called Normandy Four format in Paris, Vladimir Putin offered Zelensky to supply gas with a discount. "We have gas in our flats,” Putin told the Ukrainian president quoting a popular Russian poem for children in the presence of Merkel and Macron. “And what about you? You may have it, too. And it may be much cheaper if we agree to cooperate honestly. Maybe 25% cheaper than the final consumer gets today..."

In general, the Kremlin was obtrusively transmitting the idea of its readiness to sign a new transit contract with its "Ukrainian partners" and tempted the Ukrainians with the discount.

In addition, after losing the Stockholm arbitration, Gazprom “threw on” the subject of the appeal for the Russian audience. Allegedly, the company was disputing the decision of the Stockholm Arbitration in the appeal court of the Swedish district of Svea. However, international commercial arbitration differs from ordinary court proceedings, especially owing to the fact that its judgment is final and cannot be appealed. Therefore, in November, the Swedish court predictably refused to consider Gazprom’s complaint because it was not within its competence to appeal the rulings of international commercial arbitration.

How to Make a U-Turn In a Leap Over Gas Transmission System

Right after that, on November 18, Gazprom sent an official proposal signed by Miller on its readiness to extend the existing agreement or make a new one to Naftogaz. It referred to a one-year contract on the condition that Naftogaz would refuse $2.9 bln adjudged by the Stockholm arbitration and stop all legal proceedings. Gazprom also demanded that the fine of the Ukrainian Antimonopoly Committee “for violating economic competition” be cancelled and that Naftogaz withdraw its petition to the European Commission asking the latter to open an investigation against the Russian gas company.

However, Naftogaz did not agree to these conditions. It should be taken into account that both Andrey Kobolev, chairman of the board, and Yuriy Vitrenko, executive director, are considered to be people oriented at the international level towards the U.S. Democrats and George Soros. The U.S. is interested in the expansion of its liquefied natural gas to the EU markets, so it is logical that they are interested in pushing their competitors out of there. Gazprom is the major competitor -- the Russian company meets more than 40 percent of the European market needs. According to Gazprom-Export, in 2018, the total scope of deliveries was 243.3 billion cubic meters: 201.9 billion is supplied by Gazprom directly and another 41.4 billion cubic meters from foreign companies, which is delivered to the European market, too.

After the reports that Kozak and Ermak had signed a protocol on the new contract, the media and social networks started proliferating the information that in fact, Russia is not losing anything. In 2013, the Ukrainian authorities under President Viktor Yanukovych, borrowed $3 bln from Russia. Allegedly, Ukraine and Russia will offset the debts Gazprom's fine for Yanukovych's loan.

However, the information is far-fetched again, not least since Yanukovych's debt is a public debt. And $3 bln which Gazprom owes to Naftogaz, is the debt of a commercial company. Therefore, it is the dispute between the two economic entities. In addition, offsetting is not as simple a procedure. It requires an international legal pattern for how to do so. And there are no such mechanisms in international legislation. Besides, the court has not yet reached a verdict on Yanukovych's debt. Chances are the court will even find that Ukraine doesn’t have to pay money back or make a decision on restructuring.

Finally, one should recall that Moscow has given the green light to a contract with the very same “Ukrainian partners” who continue the war in the Donbas. With the very "Ukrainian partners" who humiliate the Russians living in Ukraine. Although Zelensky promised to "scrutinize the law on forced Ukrainianization,” after coming to power he did nothing for it. Kiev has even appointed the so-called “language ombudsman” (already dubbed the Sprechenführer by the people), who will impose fines for using the Russian language in shops, beauty salons and schools. Moreover, until the autumn of 2020, the authorities will forcefully close all Russian schools in Ukraine.

However, the vision of dollars does the job. The matter of prime concern is that the “European partners” do not get offended. Why should we feel sorry for the children who died in the Donbas? The women will bear more new babies into the world. It was not for nothing that Dmitry Kozak let a Freudian slip of tongue, when first of all, he expressed his satisfaction with the decision on gas with Kiev, saying it “is beneficial to European consumers.” This confirms the old truth that traders can only trade but they do not see anything beyond their profit.

All the promises to "protect the rights of the Russian-speaking people" made by Russian politicians have turned out to be a mera milling the wind. Official Kiev has got a clear sign that the money and obligations to the European consumers is the most important thing for the Kremlin, and all other idle talking about the "protection of the Russian language" is stories for the poor. Russian Foreign Minister Sergei Lavrov has already complained in public that Kiev is foiling the separation of forces in Donbas. Well, why not if there will be no reprisals for it?

Seeing the impairment of ethnic Hungarians' rights in the sub-Carpathian region, Hungary, a small enough nation, puts from time to time Kiev in different positions and demands respect for the rights of an ethnic minority. Meanwhile, as it was during Boris Yeltsin’s sway, millions of Russians in Ukraine have been left without protection, but with the "overdosing" doubletalk about "Russian world" on TV.

Konstantin Dolgov, media consultant and ex-speaker of the Ministry of foreign affairs of the Donetsk People's republic (Moscow):

To put it simply, we have decided to extend the lifespan of Kiev regime, soaping it down with billions of Russian rubles.

Remember this when the people like (Russian TV talk-show host Olga) Skabeyeva will again tell you about the bombing of Donbas and shed crocodile tears on it. Ukrainian mines and bombs for the children of Donetsk and Gorlovka will be bought with Russian money.

Sergey Salivon, an economic expert (Kyiv):

The protocol is definitely a nasty surprise for the Americans and a great victory for Europe. With help of it the latter reversed the risks of undersupply of Russian gas to its market.

As for Ukraine and Russia, the first protocol means a five-year delay from the collapse of its Gas Transmission System. The revenues from it will be reduced, but at least it will not stop functioning. Plus $2.9 bln is a pleasant bonus for the current management of Naftogaz, which will try to carve them up as much as possible. As for the long-term prospects, they are vague.

On the contrary, for Russia, the need to accept the decision of the Stockholm Arbitration, and therefore, financial losses are a sort of a blow destroying its image. However, it is bearable for Gazprom. In return, Gazprom will take the risks of this year's gas undersupply arising from delays in the construction of the Nord Stream 2 and the by-land pipelines through Bulgaria and Germany.

Additionally, it gives a more advantageous position in the transit negotiations with the Poles that are likely to be carried on next year. The Russian side weighted the advantages and disadvantages and decided to pay the $2.9 bln in order to avoid more troubles in 2020 and, over the long term, to ensure a free hand for itself.