Ukrainian President in Turkmenistan – a Futile Journey?

by Roman Kupchinsky

Ukrainian President Viktor Yushchenko completed his state visit to Turkmenistan on September 16 and returned to Kyiv empty handed according to a number of Ukrainian energy experts and political observers.

The purpose of Yushchenko’s trip was ostensibly to try and convince Turkmen President Gurbanguly Berdumykhamedov to sign a direct gas contract with Ukraine that would bypass Russia’s Gazprom. Numerous references to this goal appeared in the Ukrainian media prior to the trip, most of which were propagated by Yushchenko’s energy advisor Bohdan Sokolovsky.

In his September, 14 interview with RFE/RL, Sokolovsky said Ukraine stands a good chance to resume direct supplies of Turkmen gas.

When asked how real the prospect of direct supplies is, Sokolovsky said, “What depends on the will of two parties and does not harm the third one is always real. We have a chance to map out such a format of cooperation which would interest even third parties.”

“I can see excellent prospects for deepening and strengthening gas cooperation with Turkmenistan, with third parties only standing to gain,” Sokolovsky added.

Others in Kyiv, not employed by the presidential administration, were less enthusiastic about the chances of reaching this type of agreement.
Volodymyr Saprukin from the Kyiv-based Razymkov Center was bluntly dismissive of Yushchenko’s initiative:

“As to signing direct contracts with Turkmenistan – this is not realistic due to various reasons. First of all there is a Russian-Ukrainian contract for gas deliveries and Ukraine cannot even fulfill its obligations to take the specified amounts of gas called for. Therefore direct contracts are impossible because there is no demand for so much gas in Ukraine. On the other hand, Russia will never relinquish its hold on Turkmen gas even though it does not need it today.”

The Turkmen media reported on Yushchenko’s visit to Ashgabat, but did not mention any talks between the two presidents about direct gas contracts.

Commenting on the trip, the UNIAN press service speculated that the hidden reason for Yushchenko’s media hype about the possibilities of direct gas deliveries from Turkmenistan was part of his election campaign. According to UNIAN commentator Mykola Pysarchuk, Yushchenko tried to demonstrate to the “pro-Orange” electorate that he is the only presidential candidate that is willing to stop Russian energy expansionism.

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."

Pipeline Politics: Turkmen President in Turkey, Russian President to Ashgabat, more

by Roman Kupchinsky

As the summer of 2009 comes to an end, a rash of political maneuvers has begun on the Central Asian gas pipeline front. The greatest interest centered on Turkmenistan President Gurbangully Berdumykhamedov's visit to Bulgaria and Turkey in late August where he promoted his country’s willingness to join the Nabucco pipeline project.

His key stop was Antalya, Turkey where he met with his counterpart Abdullah Gul who appears prepared to mediate in a border dispute between Azerbaijan and Turkmenistan over important oil and gas fields in the Caspian Sea. If an agreement can be reached between the two regional energy giants, it would greatly improve Turkmenistan’s chances of selling gas to European consumers via the future Nabucco pipeline.

Turkmenistan is desperately in need of customers for its gas following Russia’s decision to stop buying Turkmen gas in April 2009 following an explosion in the Central Asia Center pipeline. In late 2008 Gazprom had contracted to purchase some 47 billion cubic meters (bcm) of Turkmen gas mainly for sale to the Ukrainian market. According to Kommersant daily from mid- April to the end of August, Turkmenistan has lost $3 billion in gas sales revenue.

After the drop in demand for gas in Ukraine in 2009 due to the world-wide recession along with lower demand in the EU, Gazprom was saddled with high-priced Turkmen gas. Gazprom spokesmen began demanding that the contract with Turkmenistan be renegotiated to reflect new market realities.

However, Turkmenistan’s recent support of the Nabucco pipeline project does not mean that more revenue from gas sales will begin flowing into Ashgabat soon. While forthcoming sales to China of 10 bcm and 6 bcm to Iran will help fill the coffers, there still remains 47 bcm of unsold gas and this gas will remain unsold unless a deal is struck with Russia.

Ukrainian President Viktor Yushchenko recently floated the idea that Ukraine buy Turkmen gas directly. However, all the transport routes from Turkmenistan to Ukraine go through Russia and it is unlikely that Gazprom will allow Ukraine to renege on its January 2009 ten year contract to buy all of its imported gas from Russia.

The Kremlin meanwhile is keeping a close eye on Berdumykhamedov’s trip as it prepares talking points and develops a new approach to Turkmenistan for Russian President Dmitry Medvedev to present during his visit to Ashgabat on September 13. Gas will head the list of topics to be discussed and given the instability today of the Russian gas industry - due to dropping production and reduced export revenue - Medvedev’s trip will test his skill as a negotiator in a region which today is the epicenter of the “Great Pipeline Game” between the West and Russia.

“The Great Pipeline Opera” is how Daniel Freifeld, director of international programs at New York Universities Center on Law and Security titled his excellent article in the August 24 issue of Foreign Policy magazine. Freifeld provided this piece of insight into how the libretto of this “Opera” is sung in Russian.

“If recent experience teaches anything, it is not to count Russia out, especially when so much is at stake. When I raised this issue with Russian Energy
Minster Sergei Shmatko at a meeting in Bulgaria in April, he shot me a threatening glare and cautioned against planning for an energy future without Russia,unless the Europeans were fully prepared to deliver it. "We have an expression in Russia," Shmatko told me, "Don't sell the skin off a bear before you kill it."

Turkmen-Russian Gas Relations Continue to Sour

by Roman Kupchinsky

Compounding Russia’s ongoing problems with its European and C.I.S. gas clients is the geopolitically sensitive case of Turkmenistan. On June 2, 2009 The Moscow Times reported that Gazprom demanded that this prime Central Asian gas producing country either slash the price of gas it sells or reduce the volume it ships to Gazprom. The reason for the request was that Gazprom had no immediate need for expensive Turkmen gas at a time when its own exports had dramatically decreased due to depressed Ukrainian and E.U. demand for gas.

The Turkmenistan conundrum has placed the Russian government in a dire squeeze. It exposes the total failure of Russian Prime Minister Vladimir Putin’s strategy to maintain total control over Turkmen gas production which was meant to: A.) Supplement declining gas production in Russia; B.) Prevent Turkmenistan from supplying gas to the Nabucco pipeline.

The announcement was made by Valery Golubev, a former KGB agent who is now a deputy director of Gazprom responsible for sales to C.I.S. countries. Golubev stated: "Since Europe is not taking the gas anymore, we said, 'Dear colleagues, there is no market for your gas at such a price.” But it was Putin who in late December 2008 announced that he had made a deal with Turkmen President Gurbanguly Berdymukhammedov to buy Turkmen gas at “world prices.” Did Putin grossly miscalculate the demand for Turkmen gas or was he guided by other, more personal motives? It is well known that Turkmen gas was sold on the European market not only by the discredited company RosUkrEnergo, but also by various subsidiary companies of Gazprom Germania, Centrex and other Gazprom-affiliated intermediaries.

Golubev, speaking in the Urals city of Chelyabinsk, reminded Turkmenistan that they have no choice but to ship their most valuable export through Russia since no other pipeline routes exist, at least not for the next five years.
"There are no alternatives. Gas to Europe can be supplied from Turkmenistan mainly through the Central Asia-Center gas pipeline system," he said, the news agency reported.

A Turkmen official said last week that if talks failed, it could take Russia to the International Court of Arbitration. Presumably the Turkmen government would attempt to prove that Gazprom was not meeting its obligations under a “take or pay” contract signed with Turkmenistan. However, the contract between Turkmenistan and Russia has not been made public and it is not clear what the payment terms were.

At the same time Gazprom kept insisting that Ukraine meet the terms of its “take or pay contract” and while Putin was forced in mid-May 2009 to forego penalizing Ukraine for not meeting its contractual commitments it remains unclear if this a tactical move to give his pro-Russian friends in Kyiv room to maneuver and win the upcoming presidential elections or was it a slight of hand to cover-up his inept handling of the gas purchase agreement with Turkmenistan in December 2008?