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Russia and Ukraine agree on gas, naval base

22-04-2010 (updated: 27-04-2010 )

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Russia agreed yesterday (21 April) to cut the price of its gas supplies to Ukraine by 30% in exchange for a 25-year extension of the lease of its Black Sea fleet based on Ukraine's Crimean peninsula.

The concession on the Black Sea fleet was the clearest sign yet of a marked foreign policy shift by Kiev towards Moscow under newly elected President Viktor Yanukovich, and it was immediately portrayed as a sell-out of sovereignty by opponents.

"Our Ukrainian partners will receive a discount in the price of gas," Russian President Dmitry Medvedev said at a joint news conference with Yanukovich after the two men had held talks in the eastern Ukrainian city of Kharkiv.

As a result, Ukraine would benefit from savings which could be spent on domestic economic needs, Medvedev said.

Medvedev made a direct "technical" link between the new gas terms and the extension of the stay of the Black Sea fleet for 25 years beyond 2017 – the date when it is due to leave under the existing agreement.

Its continued presence in the Crimean port of Sevastopol would provide "a greater, better guarantee for European security in the Black Sea basin," Medvedev declared.

Yanukovich has been trying to live down an old accusation that he is a pro-Moscow lackey since winning a bitterly fought election in February. The pro-western Viktor Yushchenko, whom Yanukovich succeeded, regarded the departure of the fleet in 2017 as vital for Ukrainian sovereignty.

Former Prime Minister Yulia Tymoshenko, Yanukovich's rival for the presidency, said the extension "crudely violates the 17th article of the constitution, which prohibits the stay of foreign military bases on the territory of Ukraine".

One deputy of Yushchenko's Our Ukraine party said it amounted to "a surrender of national interests".

The foreign ministry, in a statement that clearly foresaw criticism too in the West, said: "We do not regard the Black Sea fleet as a source of threat to Ukraine's sovereignty and territorial integrity. Its presence should not cause concern among our Western partners for the independence of Ukraine."

Formula price

Medvedev, referring to the complicated calculation by which gas for Ukraine is priced, said Russia would give Ukraine a $100 discount on gas if the formula price was higher than $330 thousand cubic metres (tcm), or 30% if the price was lower than that.

Gazprom later explained the deal meant the discount would be 30% of the formula price, but not more than $100.

The new Ukrainian leadership needs a lower price for its huge gas imports from Russia to nail down the detail of a 2010 draft budget and secure a $12 billion credit line from the International Monetary Fund.

Yanukovich said the gas agreement was "unprecedented in the history of our relations" and Ukraine would undertake to import 30 billion cubic metres of gas by the end of 2010, rising to 40 billion in 2011.

The European Union has a stake in a new gas deal between Ukraine and Russia since it receives a fifth of its gas from Russia via Ukraine's pipeline network.

Fresh credit from the IMF is regarded by the new Yanukovich administration as vital for helping the economy recover from the global downturn, which battered its main export industries, and to restore investor confidence.

"Today's gas price deal is set to accelerate approval of the 2010 state budget and facilitate the government's ongoing talks with the IMF," said Andrey Bespyatov of Dragon Capital brokerage.

Medvedev and Yanukovich spoke of turning a new page after five years of frosty relations under the pro-NATO Yushchenko.

Under the present gas agreement, the ex-Soviet republic would pay an average of $334 per tcm for its gas this year, which the Ukrainian government said would have a disastrous effect on the economy.

The current 10-year agreement was signed early in 2009 by the Tymoshenko government, which the Yanukovich administration has accused of leading the economy to ruin.

A pricing dispute between the two countries preceding the 2009 agreement left EU customers without gas for nearly three midwinter weeks.

(EURACTIV with Reuters.)

Positions

Naftogaz of Ukraine will pay for gas at a discounted rate equal to the reduction in the export duty for gas supplied to Ukraine, set by the government of the Russian Federation, says a communiqué by Russian gas monopoly Gazprom.  

"The duty is expected to be cut by US$100 per 1,000 cubic metres of gas; the reduction will not exceed 30% of the gas price and will apply to 30 bcm to be supplied in 2010, and to 40 bcm in the years to follow," the text continues.

"The price formula and the 'take or pay' principle remained as originally stipulated. Additionally, the signed addenda annul reciprocal penalties that were never applied in practice," the statement says.

Gazprom CEO Aleksey Miller is quoted as saying that that "amendments were made to the contract pursuant to the intergovernmental agreements and do not deteriorate Gazprom's economic position".

It was also agreed that 80% of the gas transit price would be paid by Gazprom by the 6th day of the following month and 20% - in accordance with the effective transit contract – by the 20th day of the following month, the communiqué ends.

The deal to cut gas prices and to extend the lease of the Sebastopol naval base "looks like a peace treaty after a war," Mikhail Korchemkin, director of East European Gas Analysis in Malvern, Pennsylvania, is quoted by Bloomberg as saying.

"This deal will be valid as long as Ukraine behaves. If they do something the Kremlin doesn't like, the discount will be cancelled," he added.

"This is a geopolitical success," said Fyodor Lukyanov, editor of the Russia in Global Affairs magazine. "The naval base itself isn't worth that much, but it's a sign that Russia will remain the major power in the post-Soviet space."

Background

Ukraine is an important energy route for Europe and is seen as crucial for the EU's long-term goal of securing its energy supply (see EURACTIV LinksDossier on 'Pipeline politics'). 

With relations between Moscow and Kiev strained under the former 'Orange Revolution' leadership of Ukraine, Kiev was buying Russian gas at a rather high average annual price of $337 per 1,000 cubic metres. Reportedly, Ukraine had asked Russia to cut gas prices to $250 per 1,000 cubic metres.

Many Ukrainians fear that Moscow covets Ukraine's strategic Crimea peninsula on the Black Sea, which is home to an ethnic Russian majority and is the site of a Russian naval base in the port of Sevastopol. 

Soviet leader Nikita Khrushchev made the historic mistake of donating Crimea to Ukraine. Now Russia rents the naval base of Sevastopol from the country, but the lease contract expires in 2017. Analysts have warned of tensions and even war over the future of the naval base (EURACTIV 19/09/08; EURACTIV 19/08/09).

Timeline

  • 8 May: Medvedev and Yanukovich to meet again at summit of Community of Independent States.

Further Reading

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