KYIV BLOG: Kyiv and Moscow open school year with a scrap

By bne IntelliNews September 2, 2011

bne -

Kids can be so cruel. As soon as the school year opened across the former Soviet Union on September 1, a cacophony of bickering, name-calling and mimicry erupted between Russia and Ukraine. The worry is that it will snowball into a full-scale fight - and Europe will end up carrying the can.

These particular kids should know better. After all, they all wear long trousers and are meant to run major countries and corporations. They've also had at least two major scraps over the same issue in the last five years.

Yet in first week of Sepetmber, the leaders of Russia and Ukraine have resorted to the kind of behaviour that might shame some children - and all in public as well.

Kyiv has been pushing to get Moscow to renegotiate the gas pricing formula in the current contract all year, but Russia - playing a waiting game as economic and political pressure builds in Ukraine - has played hardball since day one.

Ukrainian President Viktor Yanukovych and his government have grown ever more frustrated, and after talks broke down this summer, they accelerated policy to reduce reliance on Russian gas. They've also grown increasingly combative, flatly refusing Russia's offer of a discount in return for control of Ukraine's gas transit system or agreement to join the Moscow-led Customs Union with Belarus and Kazakhstan, and in the last month frequently hinting they may take legal action to force a revision of the contract

That has seen relations between the two countries nosedive. In 2010, after Yanukovych came to power, meetings with Russian President Dmitry Medvedev were numerous. So far in 2011, the pair have met just twice, with reports from the summits claiming total stalemate on all items.

Fight, Fight, Fight ...

In a worrying sign for gas customers in Europe, in the absence of face-to-face meetings, "negotiations" moved into the media this summer, and as the school year opened, the barrage began.

Stuck between stalled talks with the International Monetary Fund over its demands to raise domestic gas tariffs to plug in the hole in the budget caused by the near-bankrupt gas monopoly Naftogaz and dwindling approval ratings ahead of parliamentary elections next year, Ukrainian Prime Minister Mykola Azarov appeared to make it a point of honour during the last week of August to not a miss the opportunity to threaten to run to the Stockholm International Arbitration panel.

On August 29, he claimed Russia is forcing Ukraine, "into a corner, from which we have only one exit: contract termination." Dmitry Peskov, spokesman for Russian Prime Minister Vladimir Putin, shot back: "We have no information as to whether a decision has been finally reached or what could serve as grounds for such a decision."

The following day, Kyiv announced it would cut imports to 27bn cubic metres (cm) in 2012, compared with the 40bn cm or so it is expected to buy this year. Gazprom CEO Alexei Miller was on the newswires hours later to claim that Ukraine can take no gas if it wants, but it's contracted to pay for at least 33bn cm. So there.

However, Medvedev - apparently still trying to toughen up his image in hope that he will get another crack at being in the Kremlin next year - really let rip on the last day before term, calling Kyiv's position "sad" and accusing Ukraine of "sponging" from Russia.

After taking a whole day to cool off, Kyiv played a trump card on September 2, announcing out of the blue that it plans to dismantle Naftogaz into production and transportation companies, thereby giving a cursory nod to the EU's third energy package into the bargain. The leading edge however, was a statement from Azarov explaining that naturally, as the move will see entirely new companies created, they will need to negotiate new contracts with everyone. "Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary formalities become valid, totally new companies will operate on the market. This is why all existing agreements will be revised," Azarov said.

Miller reached for this PR department instantly, mimicking the Ukrainian PM's statement almost word for word. "Of course after Gazprom merges with Naftogaz, [the latter] will cease to exist, there will be a liquidation period and then some time later, after all the necessary formalities become valid, a completely new company will be operating on the market. This is why all existing agreements will be revised," the Gazprom chief said.

Miller's statement is particularly startling. No matter the state of relations, it's not usual for business executives to so blatantly disrespect the prime minister of another state, a point quickly made by Azarov's spokesman in reply, which essentially translated as: "who the hell does he think he is?"

"Ukraine has not raised the question of relations between Naftogaz and Gazprom. Naftogaz's restructuring is our internal affair. The premier did not address Miller today. He addressed the Russian government. What does Gazprom have to do with it?" Vitaliy Lukyanenko complained.

Growing up quickly?

Even at the start of the week, despite the deterioration in relations, it was hard to see another gas war that would threaten to cut off European supplies such as we saw in 2006 and 2009 actually happening.

However, since Monday the whole affair has rapidly descended into a battle of egos. Whilst Kyiv has the means to pay its gas bills thanks to record international reserves currently, there's too much been said now for it to accept Russian demands to keep to the contract or give in. When the insults are flying and communication has practically closed down, the fists usually come out.

Yanukovych and Medvedev will both attend a regional summit on September 3 in the Tajik capital Dushanbe, and AFP reports that Azarov says the Ukrainian president will try to discuss the issue with his counterpart on the sidelines. However, an unnamed Kremlin source says that no such meeting is being planned. It may be the last chance for the pair to sit down and act like adults before we get to a point of no return.

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