Saturday, July 01, 2006

The Turkmen Alternative

Moscow is currently seeking to prepare the way for another gas war with Ukraine, intended to culminate during the coming winter. In a series of articles published in EDM, Jamestown analyst Vladimir Socor has been following this re-gearing of the Kremlin's energy designs on Ukraine and also on Europe as a whole. Socor's articles can be read here, here , here, here. and here.

Though the picture Socor paints is a gloomy one - in addition to capturing the most lucrative sectors of Ukraine's energy market through its RosUkrEnergo concern, Moscow is doing everything it can to block Ukraine's access to its traditional energy supplier, Turkmenistan - he is not without hope that disaster can be avoided. For one thing, it is all too blatantly obvious that what Moscow is seeking to do is to undermine and expropriate Ukraine's economy while at the same time portraying Ukraine as an unreliable energy supplier for Europe, and this will inevitably heighten European concerns about Moscow's intentions in the European energy market. And for another, if the chance is taken now, the recent Turkmen gas price hike may actually be to Ukraine's advantage, and also to the advantage of Europe as a whole:
At present, Russia uses most of its intake of Turkmen gas to supply Ukraine through the Kremlin-brokered RosUkrEnergo scheme. This took effect in January-February 2006 and is supposed to last for five years. Mixing large volumes of Turkmen gas priced at $65 with smaller volumes of Russian gas priced at $230, RosUkrEnergo sells the mix to Ukraine at $95 per 1,000 cubic meters. This is a deeply discounted price by any European standard, a heavy subsidy designed -- along with distribution arrangements in Ukraine -- to facilitate deep Russian inroads into Ukraine's industry and political system. In effect, Moscow maneuvered Turkmenistan into subsidizing Ukraine's economy, albeit in ways that advance Russia's own interest to pull Ukraine into a relationship of dependence.

The RosUkrEnergo scheme is only made possible by exploiting Turkmenistan. The deal buys economic and political leverage for Russia in Ukraine and enriches an obscure Gazprom-connected group in the process, all at Turkmenistan's expense. When Moscow got Kyiv to sign onto that scheme in January and February 2006, it brought at least 20 billion cubic meters of Turkmen gas to the negotiating table just for the first half of this year, at the rock-bottom price of $65, as a decisive Russian "near abroad" asset, even as Russia sells its own gas in the "far abroad" at $230. Again, Russia's near-monopoly on the export of Turkmen gas made this possible.

From January through April 2006 (data for May are not available), RosUkrEnergo sold to Ukraine 15.6 billion cubic meters of "Central Asian" gas (presumably all of it Turkmen), mixed with 4.7 billion cubic meters of Russian gas (Concorde Capital [Kyiv], June 6).

Few governments or analysts asked in January-February whether Turkmenistan had freely consented to the RosUkrEnergo deal, let alone to colonial exploitation of its resources by Gazprom in perpetuity. Ashgabat's June 19-21 move suggests that it would not freely consent.

The Turkmen price hike could scuttle the Ukraine-RosUkrEnergo deal and, with it, a key instrument of Russia's policy in Ukraine. To be sure, Moscow has all along cautioned that it might raise the price of the gas mix it sells to Ukraine. It could either hike the price of Russian gas in that mix "in accordance with market conditions," or raise the price of the whole mix in the event that Turkmenistan hiked the price of its gas. But these cautionary notes are calculated to keep Ukraine's government and key economic interest groups uneasy. Moscow wants to reserve for itself the decisions on prices, volumes, and schedules of delivery, in line with its economic and political strategy in Ukraine. Instead of this, Turkmenistan's price hike would force Moscow to raise substantially the price on RosUkrEnergo's gas sold to Ukraine. Meanwhile, in Kyiv's view, Moscow has no right to do so as the January 2006 agreements with Gazprom and RosUkrEnergo set the $95 price for five years. Kyiv officials insist that any early increase above that level could mean collapse of the national economy (Vedomosti [Moscow], June 22).

Thus, Ashgabat's decision could nullify the value of a painstakingly assembled Russian mechanism of influence over Ukraine. Meanwhile, Ukraine faces a quantitative deficit of 10 to 12 billion cubic meters in its gas balance for the second half of 2006. Kyiv seeks to activate the December 22, 2005, agreement of intent whereby Turkmengaz was to sell 40 billion cubic meters of gas to Naftohaz Ukrainy in 2006, at prices of $50 per 1,000 cubic meters in the first half of the year and $60 in the year's second half.
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