Five months after they started meeting, Prime Minister Mikhail Kasyanov and his Ukrainian counterpart, Viktor Yushchenko, have found a way out of the eight-year gas deadlock.
Two intergovernmental agreements were signed Dec. 22, 2000: "On guaranteeing the transit of Russian gas through the territory of Ukraine" and "On the conditions for reserve supplies and payment for Russian natural gas to Ukraine in 2001."
The agreements are to cover the gas needs of Russia?€™s neighbors and re-establish normal payment and transportation of raw materials, instead of their being pumped off to Europe. Deputy Prime Minister Viktor Khristenko and his Ukrainian colleague Yury Yekhanurov signed both documents.
Q:
Why were the agreements not signed by the prime ministers of both countries? Does this not reduce the guarantee that they will be performed?
A:
There?€™s no stratagem behind this whatsoever. In the past, I?€™ve signed an agreement in Canada on behalf of the government, so I would imagine the status of deputy prime minister is sufficient in this case as well. After all, it isn?€™t an agreement that affects the fuel and energy sector as a whole. It just deals with guarantees for the supply of gas.
But this issue comes with some heavy baggage and has attracted a vast amount of attention. But essentially, what we are talking about is ensuring that the work of an area in which bordering countries have significant interests goes on uninterrupted.
Q:
How do the signed agreements differ from the document sent by Kasyanov on Dec. 7 to be agreed to in Kiev?
A:
This was a memorandum that set out the positions lying at the basis of the agreements. From their names it is clear that for the time being the problem of debt has been put in brackets. Cooperation in the area of oil pipeline transport has also yet to be textually formulated. Furthermore, we must agree our positions in respect to the Druzhba pipeline to Adriya, the Sukhodolsk-Rodionovsk pipeline and the pipeline from Odessa to Brody.
Now to the essence of the gas agreements. In the first, on guarantees for the transportation of gas to Europe, there are a number of basic points. Ukraine?€™s gas balance sheet for the year has been set at 78 billion cubic meters. This automatically forbids exports ?€” zero export from Ukraine whether or not this gas is Russian, Turkmen or its own. Transit through the territory of Ukraine will come to about 125 billion cubic meters for 2001 ?€” with a quarterly breakdown. Gazprom will make its transfers to Europe according to a similar schedule and will provide 30 billion cubic meters as payment for transit through Ukraine.
If gas is channeled off over and above what is stipulated in the contract, the debt is drawn up as securities, as eurobonds issued by Ukraine. Thus the consumers?€™ debt becomes sovereign while the eurobond issue is made on conditions agreed in detail with Russia. In this case, the contract price of gas ?€” $80 per cubic meter ?€” increases according to the coupon rate of the bonds and is adjusted at the discounting rate.
Q:
Clearly you intend to make it unprofitable for Ukraine to consciously pump off and sell gas abroad?
A:
You understand that it is possible to export raw material at European prices for $100, while one?€™s own bonds can be bought back later at a discount for $60. We will set up a mechanism by which the repayment price for debt would never be lower than the sale price of the raw materials outside Ukraine. Moreover, the moment that volumes are pumped off, interest accrues at the market rate: Libor [or London Inter-Bank Offered Rate] plus some kind of percentage. Pursuant to the parameters indicated at the start of next year, the countries will agree the value of the eurobond issue, as well as the redemption dates. The construction is complex, but in general, it is standard.
Q:
Logically, the second agreement on reserve supplies of Russian gas is tied with the first, as well as with the transfer to Ukraine of 30 billion cubic meters of Turkmen gas.
A:
They do indeed work as a package. True, as far as concerns the Turkmen gas, the contract is signed by the economic subjects ?€” Itera, which buys the gas from Ashkhabad and Gazprom, provides the pipeline. Here, Russia?€™s task is not to hinder passage, but rather to help it in every way it can.
Q:
Does Itera already have an agreement with Ukraine for transporting through Russia?
A:
It?€™s been prepared but cannot come into effect without two intergovernmental agreements and not without a contract between Gazprom and Naftogas Ukraine for moving gas into Europe. But we have moved from the contents of the second agreement between Russia and Ukraine. First, it proposes a technical loan of 1 billion cubic meters for two months in the course of the year. Essentially, this is a seasonal credit against the cold, but that is part of the 30 billion cubic meters that Gazprom supplies as payment for transit. Second, Russia guarantees Ukraine a reserve or standby credit of 5 billion cubic meters.
Q:
In other words, the loan is against force majeure circumstances if Ukraine cannot sustain the payment schedule to Ashkhabad [the Turkmen capital]?
A:
I would have put it differently: The loan is against risks connected with supplying the Turkmen gas. The pipeline goes through Turkmenistan, Uzbekistan, Kazakhstan and Russia ?€” there can be natural disasters. Of the 30 billion cubic meters of Turkmen gas, Russia insures 5 billion cubic meters, but not more than 1.5 billion cubic meters per month. The loan is provided at the price of $80 per 1,000 cubic meters with partial payment in the form of letters of credit and payment by installments. Forty dollars is paid in hard currency, and the second half is drawn up as Ukrainian state debt, again in eurobonds. Exports are similarly banned in this area, and as a guarantee the Ukrainian government will establish customs excise.
Q:
It will actually be prohibitive?
A:
It will be comparable to the price of gas on the European market.
Q:
In other words, more than $100?
A:
Let?€™s say $140.
Q:
But you can?€™t take control of Ukraine?€™s budget ?€” what is the realistic amount of assignments that go there?
A:
We don?€™t need this. Export is forbidden. If Ukraine starts doing this, it will have to give up its pipeline. Gazprom has learned to monitor these things.
Q:
Ukraine won?€™t be able to sustain Turkmenistan?€™s harsh conditions of a $16 million payment in advance per week. They will use up the Russian insurance of 5 billion cubic meters in three to four months. Ukraine, in any case, doesn?€™t have enough volumes on its annual balance sheet, and unsanctioned exports will start up all over again.
A:
I don?€™t like the fact that you seem to assume that Russia?€™s rights will be infringed. Basically, the entire media polemic ?€” especially after Minsk, where presidents [Vladimir] Putin and [Leonid] Kuchma untangled the gas knot ?€” boils down to one thing: who won the battle. Until now, both sides were losing from the lack of regulation in gas relations. We lost financially, while Ukraine lost out in terms of their reputation. Now we have simply balanced out our interests. We have introduced a market settlement scheme and formulated the debt in a civilized manner. No one in the world can criticize Ukraine of stealing now. No one can say Russia is tormenting Ukraine with gas. Everyone will see the true level of the financial support of this country, which is so close to us in terms of blood.
Q:
There was no alarmist subtext intended. My question was meant entirely practically: What will happen if Ashkhabad lets down the latch and the 5 billion cubic meters of Ukraine?€™s standby loan is used up?
A:
We understand that without the Turkmen gas we are unable to balance the requirements of Ukraine and Russia, and we are, therefore, doing all that is possible not to lose this resource. But we are prepared to make commercial deliveries to Ukraine in the event of temporary complications.
Q:
A month ago, Rem Vyakhirev announced that Ukraine had once again begun pumping off gas while his deputy Alexander Pushkin put the figure for October at 2 billion cubic meters in a letter to the Deputy Prime Minister of Ukraine, Yuly Timoshenko. How should this be interpreted: Is this the commercial debt of Naftogas Ukraine to Itera ?€” in which case it does not concern Gazprom ?€” or is it to be considered the Ukraine?€™s sovereign debt to Russia?
A:
We calculate that the agreements will be operative as of Jan. 1. Everything agreed in Minsk and subsequently confirmed by memorandum separates the past from the future. I do not want to discuss the position from which we will continue our dialogue with respect to the final regulation of debt issues. I can say for certain now that the unsanctioned or contractual removal of gas is a thing of the past, while this year [2000] it continued from January to May. In addition to the debt as of Jan. 1, 2000, a further $700 million has accumulated.
There have been no further cases of gas being pumped off. If gas was being pumped off, then it took place only on a daily basis and was not reflected on the overall balance sheet. We must give Ukraine its due. As of May, when we began actively consulting with Yushchenko?€™s government, the situation was normal, and our partners acted in pursuance to the course of negotiations.
Two intergovernmental agreements were signed Dec. 22, 2000: "On guaranteeing the transit of Russian gas through the territory of Ukraine" and "On the conditions for reserve supplies and payment for Russian natural gas to Ukraine in 2001."
The agreements are to cover the gas needs of Russia?€™s neighbors and re-establish normal payment and transportation of raw materials, instead of their being pumped off to Europe. Deputy Prime Minister Viktor Khristenko and his Ukrainian colleague Yury Yekhanurov signed both documents.
Q:
Why were the agreements not signed by the prime ministers of both countries? Does this not reduce the guarantee that they will be performed?
A:
There?€™s no stratagem behind this whatsoever. In the past, I?€™ve signed an agreement in Canada on behalf of the government, so I would imagine the status of deputy prime minister is sufficient in this case as well. After all, it isn?€™t an agreement that affects the fuel and energy sector as a whole. It just deals with guarantees for the supply of gas.
But this issue comes with some heavy baggage and has attracted a vast amount of attention. But essentially, what we are talking about is ensuring that the work of an area in which bordering countries have significant interests goes on uninterrupted.
Q:
How do the signed agreements differ from the document sent by Kasyanov on Dec. 7 to be agreed to in Kiev?
A:
This was a memorandum that set out the positions lying at the basis of the agreements. From their names it is clear that for the time being the problem of debt has been put in brackets. Cooperation in the area of oil pipeline transport has also yet to be textually formulated. Furthermore, we must agree our positions in respect to the Druzhba pipeline to Adriya, the Sukhodolsk-Rodionovsk pipeline and the pipeline from Odessa to Brody.
Now to the essence of the gas agreements. In the first, on guarantees for the transportation of gas to Europe, there are a number of basic points. Ukraine?€™s gas balance sheet for the year has been set at 78 billion cubic meters. This automatically forbids exports ?€” zero export from Ukraine whether or not this gas is Russian, Turkmen or its own. Transit through the territory of Ukraine will come to about 125 billion cubic meters for 2001 ?€” with a quarterly breakdown. Gazprom will make its transfers to Europe according to a similar schedule and will provide 30 billion cubic meters as payment for transit through Ukraine.
If gas is channeled off over and above what is stipulated in the contract, the debt is drawn up as securities, as eurobonds issued by Ukraine. Thus the consumers?€™ debt becomes sovereign while the eurobond issue is made on conditions agreed in detail with Russia. In this case, the contract price of gas ?€” $80 per cubic meter ?€” increases according to the coupon rate of the bonds and is adjusted at the discounting rate.
Q:
Clearly you intend to make it unprofitable for Ukraine to consciously pump off and sell gas abroad?
A:
You understand that it is possible to export raw material at European prices for $100, while one?€™s own bonds can be bought back later at a discount for $60. We will set up a mechanism by which the repayment price for debt would never be lower than the sale price of the raw materials outside Ukraine. Moreover, the moment that volumes are pumped off, interest accrues at the market rate: Libor [or London Inter-Bank Offered Rate] plus some kind of percentage. Pursuant to the parameters indicated at the start of next year, the countries will agree the value of the eurobond issue, as well as the redemption dates. The construction is complex, but in general, it is standard.
Q:
Logically, the second agreement on reserve supplies of Russian gas is tied with the first, as well as with the transfer to Ukraine of 30 billion cubic meters of Turkmen gas.
A:
They do indeed work as a package. True, as far as concerns the Turkmen gas, the contract is signed by the economic subjects ?€” Itera, which buys the gas from Ashkhabad and Gazprom, provides the pipeline. Here, Russia?€™s task is not to hinder passage, but rather to help it in every way it can.
Q:
Does Itera already have an agreement with Ukraine for transporting through Russia?
A:
It?€™s been prepared but cannot come into effect without two intergovernmental agreements and not without a contract between Gazprom and Naftogas Ukraine for moving gas into Europe. But we have moved from the contents of the second agreement between Russia and Ukraine. First, it proposes a technical loan of 1 billion cubic meters for two months in the course of the year. Essentially, this is a seasonal credit against the cold, but that is part of the 30 billion cubic meters that Gazprom supplies as payment for transit. Second, Russia guarantees Ukraine a reserve or standby credit of 5 billion cubic meters.
Q:
In other words, the loan is against force majeure circumstances if Ukraine cannot sustain the payment schedule to Ashkhabad [the Turkmen capital]?
A:
I would have put it differently: The loan is against risks connected with supplying the Turkmen gas. The pipeline goes through Turkmenistan, Uzbekistan, Kazakhstan and Russia ?€” there can be natural disasters. Of the 30 billion cubic meters of Turkmen gas, Russia insures 5 billion cubic meters, but not more than 1.5 billion cubic meters per month. The loan is provided at the price of $80 per 1,000 cubic meters with partial payment in the form of letters of credit and payment by installments. Forty dollars is paid in hard currency, and the second half is drawn up as Ukrainian state debt, again in eurobonds. Exports are similarly banned in this area, and as a guarantee the Ukrainian government will establish customs excise.
Q:
It will actually be prohibitive?
A:
It will be comparable to the price of gas on the European market.
Q:
In other words, more than $100?
A:
Let?€™s say $140.
Q:
But you can?€™t take control of Ukraine?€™s budget ?€” what is the realistic amount of assignments that go there?
A:
We don?€™t need this. Export is forbidden. If Ukraine starts doing this, it will have to give up its pipeline. Gazprom has learned to monitor these things.
Q:
Ukraine won?€™t be able to sustain Turkmenistan?€™s harsh conditions of a $16 million payment in advance per week. They will use up the Russian insurance of 5 billion cubic meters in three to four months. Ukraine, in any case, doesn?€™t have enough volumes on its annual balance sheet, and unsanctioned exports will start up all over again.
A:
I don?€™t like the fact that you seem to assume that Russia?€™s rights will be infringed. Basically, the entire media polemic ?€” especially after Minsk, where presidents [Vladimir] Putin and [Leonid] Kuchma untangled the gas knot ?€” boils down to one thing: who won the battle. Until now, both sides were losing from the lack of regulation in gas relations. We lost financially, while Ukraine lost out in terms of their reputation. Now we have simply balanced out our interests. We have introduced a market settlement scheme and formulated the debt in a civilized manner. No one in the world can criticize Ukraine of stealing now. No one can say Russia is tormenting Ukraine with gas. Everyone will see the true level of the financial support of this country, which is so close to us in terms of blood.
Q:
There was no alarmist subtext intended. My question was meant entirely practically: What will happen if Ashkhabad lets down the latch and the 5 billion cubic meters of Ukraine?€™s standby loan is used up?
A:
We understand that without the Turkmen gas we are unable to balance the requirements of Ukraine and Russia, and we are, therefore, doing all that is possible not to lose this resource. But we are prepared to make commercial deliveries to Ukraine in the event of temporary complications.
Q:
A month ago, Rem Vyakhirev announced that Ukraine had once again begun pumping off gas while his deputy Alexander Pushkin put the figure for October at 2 billion cubic meters in a letter to the Deputy Prime Minister of Ukraine, Yuly Timoshenko. How should this be interpreted: Is this the commercial debt of Naftogas Ukraine to Itera ?€” in which case it does not concern Gazprom ?€” or is it to be considered the Ukraine?€™s sovereign debt to Russia?
A:
We calculate that the agreements will be operative as of Jan. 1. Everything agreed in Minsk and subsequently confirmed by memorandum separates the past from the future. I do not want to discuss the position from which we will continue our dialogue with respect to the final regulation of debt issues. I can say for certain now that the unsanctioned or contractual removal of gas is a thing of the past, while this year [2000] it continued from January to May. In addition to the debt as of Jan. 1, 2000, a further $700 million has accumulated.
There have been no further cases of gas being pumped off. If gas was being pumped off, then it took place only on a daily basis and was not reflected on the overall balance sheet. We must give Ukraine its due. As of May, when we began actively consulting with Yushchenko?€™s government, the situation was normal, and our partners acted in pursuance to the course of negotiations.
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