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Deal Struck on Gas, Black Sea Fleet

Medvedev, left, and Yanukovych holding up their deal Wednesday in Kharkiv. Vladimir Rodionov

Russia agreed to sacrifice $40 billion in state revenues by selling cheaper gas to economically hamstrung Ukraine in exchange for a longer lease of a naval base in the Black Sea port of Sevastopol, the presidents of both countries said Wednesday.

President Dmitry Medvedev announced after a meeting with Ukrainian counterpart Viktor Yanukovych that Russia would give a 30 percent discount for most of Ukraine's gas imports. Ukraine will record the savings as an increase in Russia's lease payment for the naval base, Medvedev said.

“These issues are directly and unequivocally linked in the agreement,” Medvedev said at a news conference that the two presidents gave in Kharkiv, the biggest Ukrainian city near the Russian border.

The gas deal — a revision of the stringent gas trade contract signed with Ukraine's previous government last year — and permission for the Russian Black Sea Fleet to rent the Sevastopol base through 2042, are the first major steps toward an improvement of bilateral ties that deteriorated after former President Viktor Yushchenko swept to power in Kiev five years ago.

“It's really a step by true partners, both for Russia and Ukraine,” Medvedev said. “It's a step that we have long been waiting for.”

Gazprom, the state-controlled gas export monopoly, said the government would remove a 30 percent export duty to achieve the price cut. The discount will apply to 30 billion cubic meters of gas sold this year and 40 bcm of gas annually until the contract expires in 2019, Gazprom said in a statement.

Ukraine will save close to $40 billion in payments over this time, Yanukovych said.

Staying in Sevastopol, which Russia sees as the most convenient base for the Russian Navy in the Black Sea, beyond the end of previous lease term in 2017 had been a key policy goal for Moscow — and a perpetual irritant in bilateral ties over the past five years. Yushchenko had insisted that the Russian base, used in the blitz war with Georgia, threatened regional security.

The countries have settled the dispute within six weeks since Medvedev first met Yanukovych in early March. Yanukovych said Wednesday that the Russian Navy represented a stabilizing force in the region.

“We moved forward the solution for this matter,” Yanukovych said at the news conference. “Our Russian colleagues, our friends, needed certainty on this issue.”

Under the previous lease agreement signed in 1997, Russia had to pay $98 million in rent every year. Ukraine has collected no cash, however, deducting the money from its debts to Russia for gas imports.

Ukraine's and Russia's parliaments have to approve the agreement before it becomes effective.

Negotiators from Moscow and Kiev, lead by Prime Ministers Vladimir Putin and Mykola Azarov, respectively, carried out talks into the wee hours of Wednesday, ironing out the last details of the deal, Medvedev said. “I met some of the counterparts present here and their Russian colleagues at 1:30 a.m.,” he told reporters. “They did a good job.”

Despite bearing the brunt of the talks, Putin did not comment on the Ukraine agreements Wednesday. Instead, he dealt with issues such as the state registration of private country houses and tourism near Lake Baikal.

The gas trade amendment will erase $100 for every 1,000 cubic meters of gas until Ukraine's imports reach the set ceiling, Gazprom said in the statement. This should almost comply with Kiev's hopes to pay an average of no more than $230 per 1,000 cubic meters this year.

If it weren't for the deal, Ukraine would have paid $334 on average, according to its tentative budget for this year.

“The new price will no doubt help Ukraine's economic recovery,” said Mikhail Korchemkin, director of East European Gas Analysis, a U.S.-based consultancy. “It's first of all useful for Russia, as it sells a lot of goods and services to Ukraine.”

He suggested that Russia could reverse the deal if it disagrees with Ukraine other anything in the future.

On Wednesday, Ukraine also agreed to increase its gas imports by 10 percent this year, to 36.5 bcm from 33.75 bcm, Gazprom said. The world's biggest gas producer also agreed to tear out a contractual clause that allowed it to levy penalties on Ukraine's national energy company Naftogaz Ukrainy if it buys less gas than it initially asked for.

Neither presidents or gas companies mentioned Ukraine's earlier proposal to create an international consortium, including Gazprom, for running Ukraine's pipelines. Kiev had hoped to use the proposal as a bargaining chip in the gas price talks because Gazprom — which relies on the pipelines for 80 percent of its lucrative exports to Europe — was thrilled about the idea in the early 2000s.

The plan would require substantial investment in the aging system and prompt more questions about Gazprom's project to build the South Stream, the pipeline under the Black Sea that is designed to bypass Ukraine. Numerous gas trade standoffs with Kiev disrupted transit flows and angered customers in Europe in the past few years, beginning with Yushchenko's rise to power.

Putin has said Russia remained interested in the idea, but not as much as it used to be. Gazprom spokesman Sergei Kupriyanov said Wednesday that the company had received no specific commercial proposals from Kiev yet.

“We don't understand what they are talking about,” he said. “We know nothing about this project except its name.”

Gazprom and Naftogaz appear to have abandoned the plan, Korchemkin said.

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