The Putin-Medvedev Brawl over Gazprom: Will Europe Suffer?

by Roman Kupchinsky

With the Fall/Winter heating season in Europe rapidly approaching, there are indications that a vicious fight has begun between the apparatus of Russian President Dmitri Medvedev and Prime Minister Vladimir Putin’s entrenched loyalists over control of Gazprom, the giant Russian state-owned gas company.

The victor will have a major say in determining Russia’s energy policy towards Europe in the coming years as well as gaining control over the financial resources of Gazprom, a vital asset in future political campaigns.

The first public indications that a fight had begun in Moscow came on September 1 when Putin met with Ukrainian Prime Minister Yulia Tymoshenko in Poland and agreed to release Ukraine from the key provision of the “take or pay” gas contract signed in January 2009 – that Ukraine would have to pay for the gas it had promised to buy but did not take from Gazprom.

Tymoshenko stated that in 2010, Naftohaz Ukraine, the state oil and gas monopoly, would only purchase 25 billion cubic meters of gas (bcm) from Russia instead of the 52 bcm contracted for under the long term contract. In 2009 Ukraine was obligated to buy 40 bcm but only needed 33 bcm for its domestic consumption.

Tymoshenko was reported by the Moscow Times as saying that “In my view, one can say we removed all gas problems, or at least are firmly on the way to having no problems about the issue,” she said. “I am always delighted to have our meetings and I know that they always result in real actions.”

As part of the agreement, Putin agreed to have Gazprom drop a law suit against Naftohaz by RosUkrEnergo, a Swiss gas trader 50 percent owned by Gazprom, for $600 million in late payment penalty charges.

Soon after the Putin-Tymoshenko agreement was announced, Ukraine raised the transit fee for Russian gas to Europe in 2010 from $1.7 per one thousand cubic meters/100 kilometers to $2.7 and asked that Gazprom pay this bill in advance.

On September 7 Medvedev met with Gazprom CEO Alexei Miller and instructed him not to make this payment. “We need to act in accordance with the agreement which was signed on January 19 (2009). We do not need to dream up anything new. We also face difficult times,” Medvedev stated.

Medvedev’s comment that Gazprom must act in accordance with the existing contract was a direct attack on Putin who a week earlier had pledged to by-pass its fundamental clauses.

As soon as the Putin-Miller meeting ended, Gazprom spokesmen were reported by Kommersant as saying that Ukraine had the right to ask for changes in the existing contract, but that this does not obligate Gazprom to act on them and Gazprom has the right to penalize Ukraine for breaking the contract. This response might indicate that Gazprom management is looking to break its umbilical cord to Putin and switch its loyalty to Medvedev.

Another event which could shed light on the Putin-Medvedev fight began on September 7 when a Moscow court began a new trial in the case of Vladimir Nekrasov, the owner of the now bankrupt chain of cosmetic stores Arbat Prestige and Semyon Mogilevich, an alleged Russian organized crime leader suspected of links to RosUkrEnergo. According to sources in Moscow, Medvedev’s supporters are anxious to show that Mogilevich and organized crime were linked to Gazprom in their efforts to discredit Alexei Miller and Vladimir Putin and take control of Gazprom.

To make matters worse, on August 31, the representative of the IMF in Ukraine, Max Alier, threatened to break off all cooperation with Ukraine if the government led by Prime Minister Yulia Tymoshenko reneged on meeting its commitment to raise domestic gas prices. The first price increase (20 percent) for household users was scheduled to go into effect on September 1, 2009; however, this apparently did not take place and the vast government subsidies for gas remain in place as European frustration with Ukraine grows.

Putin’s new willingness to suddenly meet Ukrainian gas needs is in direct contrast to Medvedev’s new anti-Ukrainian hard line and seems to be part of Putin’s counter-attack in order to preserve the Gazprom Empire for himself and his clan of siloviki.

This does not bode well for anyone. The Medvedev-Putin fight, which boils down to which camp will control billions of dollars of Gazprom's assets,is an internal Russian inter-clan battle with enormous consequences for European energy security.

The European Union could wind up the big loser in this battle. If the Ukrainian-Russian conflict over the future of the January 2009 contract is not resolved soon, Ukraine might be hard pressed to meet its transit commitments of Russian gas to the EU in early 2010.

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.

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?