Russian -Turkmen Gas Stalemate Continues

by Roman Kupchinsky

The Russian-Turkmenistan gas conflict, which began in April 2009, is far from over according to reports about Russian President Dmitri Medvedev’s meeting in Turkmenbashi, Turkmenistan on September 13 with Turkmen President Gurbanguly Berdumykhamedov.

RIA Novosti reported that although Berdumykhamedov stated that all questions relating to the resumption of gas sales to Russia had been solved,the key disagreements had not been addressed at the meeting and were left to negotiating teams between Russia’s Gazprom and Turkmengaz. The Turkmen president’s only comment on the controversial price of his country's gas to Russia was that it would it would be part of “a formula” yet to be decided.

Alexander Medvedev, the head of Gazprom Export, a fully owned subsidiary of Gazprom which is responsible for the contract with Turkmenistan, was reported as saying that Gazprom hopes that it will reach an agreement in the near future on the resumption of gas purchases from Turkmenistan. The volume of such purchases is approximately 50 billion cubic meters a year – almost all of which has traditionally been resold by Russia or by opaque intermediary companies such as the Swiss-based trader RosUkrEnergo which Gazprom partially controlled, to Ukraine.

Alexei Miller, the head of Gazprom, noted that his company is holding “substantial” talks with Turkmengaz about renegotiating the December 2008 contract signed by Russian Prime Minister Vladimir Putin. The key topic in these talks is to establish a new pricing formula which will be more favorable to Russia.

With Ukrainian President Viktor Yushchenko due to arrive in Turkmenistan on September 14 where he intends to present Berdumykhamedov with an offer to buy Turkmen gas directly, thereby avoiding Gazprom Export as an intermediary, the stakes for Russia will increase substantially and Alexander Medvedev’s Gazprom Export may stand to lose millions of dollars in fees it charges for its intermediary services.

If Yushchenko can convince the Turkmen leadership to sign a direct purchase contract for 2010 with Naftohaz Ukraine, the Ukrainian state gas monopoly, the Russian side would find it difficult to sabotage such a deal.

Turkmen gas to Ukraine is transported through the Central Asia-Center pipeline which is largely owned by Russia. If Gazprom refuses to allow Turkmen gas into the pipeline to transit to Ukraine, this might raise serious doubts in Europe as to Russia’s motives for doing so.

Yushchenko’s major challenge will be to negotiate a price for Turkmen gas which is lower than the current price scheme agreed to with Russia. If he can get a better deal he stands a chance to sign a contract. If, however, the Turkmen leadership is skeptical of Ukraine’s ability to pay for this gas, the deal with be scuttled.

It is no wonder then that Miller has questioned Ukraine’s ability to pay for gas in 2010.

The BBC reported that “When he [Miller] had asked officials at the Ukrainian gas company Naftohaz Ukraine how bills would be paid in 2010, they had answered by swearing broadly and saying they had no idea."

Miller confirmed that Ukraine had recently asked if it could use future transit fees from Russia to help pay Gazprom for gas supplies. The Gazprom CEO said he had informed the Russian government, but had been instructed to stick strictly to the contract.In fact Miller reported on this development to Dmitry Medvedev who forbade him from doing so, not to Vladimir Putin.

"I hope there will be no new catastrophe," Miller said ominously - apparently not ruling out a new Russia-Ukrainian winter gas crisis.”

Was this a warning to Turkmenistan not to sign a direct supply contract with a potentially insolvent Ukraine?

The other significant aspect of Medvedev’s visit to Turkmenistan is that the Russian President appears to be making an attempt to supplant his predecessor, Putin, as the man in charge of negotiating gas deals.

If Dmitri Medvedev cannot bring Turkmenistan back into the Russian fold he might be facing defeat in what some regard as a deadly power struggle among the Russian elites over control of Gazprom.

Speaking at the Valdai Club of foreign academics and journalists on September 11, Putin hinted that he is thinking of coming back in 2012 when President Dmitry Medvedev's current term expires. This apparently might be a plan to prevent Medvedev from running for a second term

The two leaders, according to Putin, would not compete, but "We'll reach an agreement."

Putin’s Mentor Elected to Gazprom’s BOD

by Roman Kupchinsky

The June 26, 2009 shareholders meeting of OAO Gazprom, the Russian state-owned gas monopoly, did not produce many surprises. Management received large bonuses while shareholders complained that they were being victimized by the company as their dividends shrank.

One of the most interesting developments was the election of Valery Musin to the company’s board of directors as an independent director. Musin, head of the Civil Procedure Department at St Petersburg University Law Faculty, is the former research supervisor of Russian President Dmitry Medvedev and teacher of Prime Minister Vladimir Putin.

Musin received the second most votes from shareholders at the meeting after Alexei Miller, the company CEO.

Musin’s relationship with Putin solidified during their days together in the St. Petersburg Mayor’s office where Putin headed the department of foreign economic relations. Musin worked in this department as a legal expert. Other employees in the section were Alexei Miller, the present CEO of Gazprom, Valery Golubev, a former KGB officer who is now a deputy CEO of Gazprom, and Igor Sechin, the Deputy Prime Minister responsible for energy policy in Putin’s cabinet who is also chairman of the board of directors of the state-owned oil company Rosneft.

At the time of this posting, the Gazprom website had not yet posted a full biography of Musin indicating only that he was head of the Civil Procedure Department.

While Musin might not have much clout on the Gazprom board, his election appears to be the result of Putin’s and Medvedev’s efforts on his behalf. According to an article in Kommersant Daily, "The Prime Minister cut the list (of candidates for the board) apart," our source in the Government said. However, another well-informed source claims that the amendments were made by President Dmitry Medvedev.”

Whatever role Musin is expected to play as an independent director, there is no doubt that his election to the board will only strengthen Putin’s hold over Gazprom. As a legal expert Musin will no doubt provide invaluable advice to Russia’s champion company, its managers and behind-the-scenes power brokers.

Russian Gas Update

by Roman Kupchinsky

The European Commission will send a delegation of officials to Moscow and Kyiv in order to ascertain the facts surrounding the latest gas-related tensions between the two neighboring countries the website Ukrayinska Pravda reported on June 4, 2009. The delegation comes on the heels of a statement by Russian Prime Minister Vladimir Putin who warned that if Ukraine is unable to pay its gas bills, the transit of Russian gas to Europe could be stopped by the end of June. The delegation’s report will be crucial for the upcoming EU summit to be held in Brussels on June 17-18.

At issue is Ukraine’s May 2009 gas bill which is due on June 7th and Naftohaz’s ability to pay for gas to be placed in underground storage which is shipped to Europe during the fall-winter heating season. These topics were discussed in Moscow on June 2, 2009 during a meeting between Alexei Miller, the CEO of Gazprom and Oleh Dubyna, the head of Naftohaz Ukrayina, but no results of the talks were reported in the media.

The mysterious case of the sale of the Hungarian gas company Emfesz KFT to an unknown company named RosGas based in Zug, Switzerland resurfaced today. The Russian daily Vedomosti reported that Emfesz was sold to RosGas for $1 by its manager, Istvan Goczi who apparently had a power of attorney to do so. Emfesz is owned by Mabofi Holdings which in turn is controlled by Dmytro Firtash, a Ukrainian businessman who owns 45 percent of RosUkrEnergo (RUE). Russia’s Gazprom owns 50 percent of RUE and 5 percent is owned by Firtash’s partner Ivan Fursin. Emfesz supplied about 20 percent of the Hungarian gas market with gas it purchased from RUE. However, in January 2009 RUE was eliminated from the gas supply chain and could no longer supply Emfesz.

When news of the sale was made public, the British-based organization Global Witness conducted an investigation into RosGas in order to determine who stood behind it. According to their report:

We have been unable to find the company’s office, but have learned that its correspondence address is that of a mobile phone company in the Swiss tax haven of Zug. There is no evidence to suggest that RosGas AG is currently anything more than a shell company. Curiously, the Hungarian Energy Office (HEO) does not seem to know who owns RosGas AG either, despite having rapidly approved its takeover of Emfesz. The HEO said in an emailed response to questions from Global Witness that: “in the resolution we asked for further information in [the] Hungarian language on the new owner’s owner as the full ownership structure was not transparent enough.” A spokesman added that the HEO was seeking information on the “structure of ‘owners’ tree’”, presumably the chain of ownership of the company. RosGas AG is supposed to provide this information within 45 days of the deal being approved. But even if it does not, there is no suggestion from the HEO that its takeover of Emfesz will be cancelled. Instead, the company will merely face a fine.