by  Michael Hammerschlag


KYIV WEEKLY                          April 29, 2010     Hammernews

Kiev: At first glance,  the Sevastopol for gas discount deal with Russia set off alarms, that the Yanukovich government really is giving away the store to Russia: allowing the Black Sea Fleet to remain in Sevastopol for 25 years after 2017 (when it was supposed to leave) in exchange for a 30% or $100 discount, whichever is less, in Russian natural gas from the $330/ Cubic Meters (kM3)  PM Tymoshenko negotiated in Jan 2009.


At second inspection it seemed clever- Russia gets nothing for 7 years while Ukraine gets an immediate $1-3 billion/year break in intimidating world gas prices, breathing space in which to put it’s financial house in order. Many things could happen in 7 years; Putin could retire, or be hit by a bus. The collapse of steel demand, delay of IMF loans, and gas price increases has left Ukraine in desperate straits: Dep. PM Tigipko is trying to rustle up a new $12 billion loan, or the $3.8 billion of the last tranche.


A third look and it doesn’t seem as hot- Tymoshenko’s gas deal was terrible, locking Ukraine into a 6 month-delayed oil-linked price at the exact moment of world highs in mid-2008: $150/barrel oil, and $500/1000 kM3- the $330 agreed to is the highest price in Europe, despite Ukraine being on Russia’s doorstep.


The world is now awash in natural gas, because of an explosion in US production from shale rock (by injecting water-mud into the layers and fracturing them open)- that increased 4-fold since 1990 and now accounts for over 50% of all US gas production. Poland also is just tapping huge new shale fields (est. 1.36 trillion  M3)  that could increase Europe’s reserves by 47%- the field extends into Ukraine and could ultimately produce 15-20 billion M3 /year here, half of Ukraine’s need from Russia. America pays only $145/ kM3, and England as little as $181, while Gazprom’s Europe average is $296.

Given Ukraine’s proximity to Russia, pipeline transport fees are negligible to here compared to Western Europe, so that would drop a fair world price to maybe $250/ kM3 or less, making the claimed discount illusory. While long-term gas prices are bound to rise because of China’s and India’s burgeoning appetites, over the short term- maybe 5 years- prices should drop. The Gas Exporting Countries Forum (GECF- Russia, Algeria, Bolivia, Egypt, Equatorial Guinea, Libya, Nigeria, Trinidad and Tobago, and Venezuela), the new gas version of OPEC oil cartel, run by a Russian, is trying to raise prices, but they only control 38% of world pipeline supply. In gas production, Russia is #1, followed by Iran, and Qatar.


At fourth inspection, it probably is moot, because all deals here, especially on gas, are written in sand and will probably be renegotiated in a year or 2- in business, the Rukrainian people have little penchant for permanence. “They (POR) think in (the) short term,” says Mohyla political scientist Olexiy Haran, “they need to solve economic issues now, they need to have a deal with the IMF. They don’t think what will happen afterward.”


3000 Orange forces rallied in protest of the deal at the Rada April 24th, and did again Tuesday, when the deal came up for an accelerated vote. After a wild melee of fisticuffs, smoke bombs and egg-pelting, it passed by 10 votes. “Unconstitutional”, says Haran, “it must be examined in committee first.” It’s the “political capitulation of independent Ukrainian state," Yushchenko’s former deputy Baloha said. There was some chance new turncoat members of Yanukovich’s Rada coalition wouldn't approve the plan, but they probably received too many inducements to say no.


Most Ukrainians have reacted with aplomb to the permanence of a foreign military base, banned by the Constitution:  according to a somewhat suspect poll on Interfax 61% said they would not object to the bases staying on if Russia gave Ukraine economic preferences, 22% were opposed. They have lived with the 40 combat ships of the BSF since 1783, and the Crimean Peninsula is the most pro-Russian part of Ukraine. With a 52% approval now, Yanukovich is speaking of holding a referendum on the deal, but strangely sees the BSF as “one of the guarantees of security among the countries of the Black Sea basin.” Stopping those Ottoman slave traders, perhaps, or restive Romanian gypsy pirates? Putin-pummeled Georgian President Saakashvili was more dour, “Putin doesn't make any secret of trying to restore some kind of Soviet empire... Ukraine…  has been fixed."  The planned Russian purchase of a French Mistral amphibious helicopter/tank carrier gives them a power projecting capability ideal for those pesky invasions.


Even US Sec. of State Hillary Clinton called the naval base lease extension evidence of Ukraine's "balanced approach to its foreign policy… Given Ukraine’s geographic position, that balancing act is a hard one, but it makes sense to us." Do what?


More dangerous is if the proposed Ukrainian pipeline takeover consortium (1/3 Russia, 1/3 Europe) is the next shoe to drop as part of this deal, likely considering the wildly divergent statements from the Kremlin on this issue. Energy minister Sergei Shmatko said Russia and Ukraine are forging ahead with a consortium to modernize Ukraine's gas pipeline network, whereas a Gazprom spokesman derided it, "We don't understand what they (Ukrainians) are talking about."  This really has the potential to compromise Ukraine’s sovereignty and territorial integrity- once Russia “owns” the pipelines, couldn’t they station troops along them to guard against terrorism? Belarus had a tortured gas relationship with Russia, having agreed to such a joint ownership, with constant changes until it was cancelled.


Yanukovich is riding high, having disarmed Obama with gifts of HE Uranium and charmed Europe with civilized promises- he is currently immune from foreign pressure. While needed, this agreement helps Ukraine avoid reforming their monstrously inefficient use of gas and power- any rube could walk through a Soviet era plant and identify immediate improvements that would yield 20% energy savings- just covering the serial radiators with polyethylene bags rather than leaving the windows open to cool overheated apartments in -20C weather might save 20% of the central heating plant gas.


Taken together with Kyrgyzstan’s amazingly unanimous revolution that just happened to purge a leader who had betrayed a $2 billion aid payoff promise to Russia to evict the US from their Manas Air Base (look for the Americans to be given walking papers in 3-6 months), Russia’s startling but little known purchase of Ukraine’s Industrial Union of Donbass in January, Russia’s offer of $6 billion of loans to “help” Ukraine buy Russian nuclear reactors, and PACE's backdown on recognizing the Holodomor... it means Russia is rising: having erased the humiliation of the color revolutions, it is determined to extend its web of military and financial influence throughout Ukrainian life until independence is a dim memory.


Putin came to Kiev Monday to inspect his newly pacified province, or in his words, to revel in “the commonality of interests and historical aims, the feeling of comradeship.”



Michael Hammerschlag  (Hammernews.com)  has spent 1½ years in Kiev, and 2½ in Russia. His articles have appeared in the  New York Times, International Herald Tribune, Seattle Times, Providence Journal, Columbia Journalism Review, Honolulu Advertiser, Capital Times, Media Channel, Scoop; and Moscow News, Tribune, Guardian, and Times.