Kremlin Keeps Tight Hold on Natural Gas Profits

January 10, 2006

RENEE MONTAGNE, host: There’s new fallout in Ukraine today over last week’s agreement on gas deliveries from Russia. The Ukrainian Parliament has voted to fire the prime minister and his Cabinet. The lawmakers are angry because under the agreement, Ukraine will pay nearly twice as much for its gas imports this year. Many Ukrainians saw Russia’s demand for market prices as a political move by Moscow. But economists say the structure of the final deal revealed the Kremlin’s real concern, control over Russia’s gas profits. NPR’s Gregory Feifer in Moscow takes a closer look at the arrangement.

GREGORY FEIFER reporting: After the deal was signed last week, Russian President Vladimir Putin said ending Soviet-era subsidized rates to Ukraine would help change the nature of Moscow’s ties with Kiev.

President VLADIMIR PUTIN (Russia): (Through Translator) Our relations have taken on a new quality. They’re becoming the transparent market-oriented relations of real partners.

FEIFER: But economists say there’s no such thing as a free market for Russian natural gas. Belarus, which is friendly with Moscow, is one of the countries that continues to buy Russian gas at heavily subsidized rates. Many Ukrainians think the Kremlin was punishing their country for rejecting the pro-Moscow candidate in presidential elections in 2004. But analysts say political differences were only part of the dispute. Kirill Rogov of the Kommersant business daily says Moscow wanted to adjust its murky system for selling gas and creaming off the profits.

Mr. KIRILL ROGOV (Kommersant): (Through Translator) The results of the gas war, the gas crisis don’t correspond to the declaration about market principles.

FEIFER: Under the deal, Russian gas will be combined with much cheaper supplies from Central Asia by an intermediary company called Rossukra and Ergo(ph). Because Rossukra and Ergo will be paying full price for the Russian component, the state gas monopoly, Gazprom, will still be making high profits that can be skimmed off in Moscow. Clifford Gaddy of The Brookings Institution says this complex deal is only part of a much larger hidden system of Kremlin control.

Mr. CLIFFORD GADDY (The Brookings Institution): It’s very complicated to say that Russia is selling Ukraine gas at a certain number of dollars per thousand cubic meters is one thing, but more interesting is to think of who is getting all of the value.

FEIFER: Rossukra and Ergo is half-owned by Gazprom. The other half belongs to a company called Central Gas(ph), whose owners are believed to be connected to the Kremlin and the previous Ukrainian administration. Last year, Ukrainian authorities investigated Central Gas for connections to organized crime. Former Ukrainian Prime Minister Yulia Tymoshenko calls Rossukra and Ergo a criminal canker and is filing a lawsuit to stop the new Ukrainian-Russian gas deal. The Brookings Institution’s Gaddy says when Moscow lost its influence in Kiev, it set about redirecting the flow of money from Gazprom. He says the Kremlin often orders Gazprom to sell gas at subsidized prices and buy goods it doesn’t need at inflated amounts at other Russian enterprises. Gaddy calls those kinds of activities informal taxes.

Mr. GADDY: These are not legislated by law, but they are, in effect, a form of taxation on these companies if they want to keep in the good graces of the Kremlin and if they want to–in the case of local spending, if they want to buy alliances, friendships and so on that can help protect them. Protect them from what? Well, ultimately protect them from being expropriated.

FEIFER: Last week’s deal doesn’t mean fallout from the gas dispute is over. Today the Ukraine Parliament voted to sack the government over its gas deal with Russia.

Gregory Feifer, NPR News, Moscow.