Page last updated at 15:45 GMT, Wednesday, 21 January 2009

Devil in the detail of gas deal

Ukrainian Prime Minister Yulia Tymoshenko (centre), Gazprom CEO Alexei Miller (right), and Naftogaz CEO Oleg Dubina at a gas control centre (19 January 2009)
The fine-print of the deal between Kiev and Moscow has not been made public

By Gabriel Gatehouse
BBC News, Kiev

The taps are back on, and Russian gas is flowing back into Europe via Ukraine.

But, after the initial relief, those European governments whose people spent up to two weeks with no heating will be asking themselves: is it really over?

This was Europe's worst energy crisis in years.

Slovakia declared a state of emergency and rationed gas supplies to industry. Hundreds of thousands of people in countries like Bulgaria, Bosnia and Moldova were left shivering in the middle of a particularly harsh winter.

The cause was not a war or a natural disaster, but a commercial dispute between two state-run companies: the Russian energy giant, Gazprom, and its Ukrainian counterpart, Naftogaz.

Despite the resumption of gas deliveries, the European Commission made it clear it was not impressed with either side.

"It is difficult to welcome something that should not have happened in the first place," European Commission President Jose Manuel Barroso said on Tuesday.

"It was utterly unacceptable that European gas consumers were held hostage to this dispute between Russia and Ukraine," he added. "We must not allow ourselves to be placed in this position in the future."

Unanswered questions

So does the agreement, signed in Moscow on Monday night, guarantee that Europe will not be left in the cold again?

On the face of it, it looks like a good deal for energy security.

Both sides needed a face-saving mechanism to climb down from the impossible positions that they'd worked themselves into
Edward Chow, Centre for Strategic and International Studies

Moscow and Kiev say they have signed up to a 10-year agreement that will see each paying the other market rates in the gas trade from 2010.

For 2009, Russia will continue to pay a discounted rate for gas transit across Ukrainian territory, while Ukraine will get a 20% discount on the gas it imports from Russia for domestic consumption.

The problem is that the fine-print of the agreement has not been made public.

"Both sides needed a face-saving mechanism to climb down from the impossible positions that they'd worked themselves into," says Edward Chow, senior fellow at the Centre for Strategic and International Studies, based in Washington DC.

"But whether we're going to have a re-occurrence a year from now or sooner, we don't know yet, until we know a lot more detail of what they actually agreed to. Very little has come out so far."

We do not know, for example, what formulas will be used to calculate exactly how much Ukraine is expected to pay Russia.

Many other questions remain unanswered.

Gas pipeline on Ukraine-Romania border (file)
Some European countries rely almost entirely on Russia for gas

There has been no word on the $600m debt that Moscow had said it was owed by Kiev.

No word either on Russian allegations that Ukraine was "stealing" gas meant for European consumers - a suggestion hotly denied by the Ukrainian government.

Until now, Russia and Ukraine have traded gas through an intermediary, RosUkrEnergo, a secretive, Swiss-based company which many have blamed for the crisis.

Both Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, now say they want to eliminate the middleman and trade gas directly.

But they have both said this before, and somehow, RosUkrEnergo has survived.

A permanent resolution to the conflict between Russia and Ukraine over gas requires two things: long-term, transparent contracts, and an end to the involvement of intermediaries.

Until the details of this deal are fully made public, Brussels will be entitled to a degree of scepticism.

Political instability

For the moment though, the heating is back on, and the crisis is off. But it is clear that the reputations of both Russia and Ukraine have suffered.

Europe is Gazprom's most lucrative market, and Russia needs its European energy revenues as much as Europe needs its Russian gas.

Yulia Tymoshenko and Viktor Yushchenko (25 December 2008)
Ukrainian President Viktor Yushchenko has been critical of the deal, which was negotiated by his ally-turned-rival, Prime Minister Yulia Tymoshenko

However, the crisis has highlighted the EU's vulnerability, and Brussels is likely to focus strongly on diversifying its energy supplies.

The row has also underlined the still murky nature of the energy business.

Four years ago, the Orange Revolution swept a pro-Western administration to power, promising an end to corruption and old-style cronyism in Ukraine.

It is clear that has not happened, amid chronic political instability and in-fighting.

"If anything, I'm afraid to say that the conditions have got worse," says Mr Chow.

"There have been four governments, four different cabinets in the last four years," he adds.

"That has not been conducive to reformů because the officials who happen to be in power at any given moment are very short-term oriented, rather than being able to plan for the good of their own country in the long run."

The Ukrainian President, Viktor Yushchenko, has been critical of the deal, which was negotiated by his ally-turned-rival, Ms Tymoshenko.

Those disagreements are likely to increase, as Ukraine gears up for a presidential election in a year's time.

Kiev wants closer integration with the EU, but many European countries may well recall bitter memories of the gas crisis of 2009 when it comes to negotiating a free trade agreement, or visa-free travel for Ukrainians.

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