ANALYSIS: Will Russian-Ukrainian gas row go to Swedish arbitration? (01/01/06)

ANALYSIS

Will Russian-Ukrainian gas row go to Swedish arbitration?

by Jan Maksymiuk
RFE/RL Belarus, Ukraine and Moldova Report

Despite an apparent war of nerves behind the current Russian-Ukrainian dispute over gas supplies to and transit across Ukraine in 2006, official Kyiv has been showing a fairly relaxed attitude in public to Moscow's demand that gas prices next year be increased more than fourfold from the current level of $50 per 1,000 cubic meters.

Ukrainian President Viktor Yushchenko said earlier this week that Gazprom is taking an "irresponsible approach" in demanding such a price hike. "I cannot comment on the statements of Gazprom officials that the price [for gas] in Ukraine will be $220 or $230 for 1,000 cubic meters. Why not $500 or $700? You know, this is not a basis for a political dialogue," Mr. Yushchenko said on December 20, 2005. "Those people who believe it is possible to do it [introduce new gas prices] starting January 1 - I wouldn't call them professionals."

Ukrainian Prime Minister Yuriy Yekhanurov, who failed to find a way out of the gas impasse in talks with Russian Prime Minister Mikhail Fradkov in Moscow on December 19, 2005, did not seem to be particularly worried either. He told journalists in Kyiv the following day that the new gas price proposed by Moscow was "taken from the top of one's head" and cannot be discussed seriously.

Moreover, Mr. Yekhanurov assured reporters that Moscow is not going to break the existing gas delivery and transit contract with Ukraine. "We have a contract [in force] and all issues, if there are any problems, can be settled in the Stockholm court [Arbitration Institute of the Stockholm Chamber of Commerce]," he added.

What contract was Mr. Yekhanurov talking about? And why was he apparently confident that Ukraine could prevail in a potential arbitration case in Stockholm?

Naftohaz Ukrayiny, Ukraine's gas-transport company, announced on December 7, 2005, that it has a document in which Gazprom obliged itself to supply Ukraine with gas in 2005-2009 at $50 per 1,000 cubic meters as payment for Russian gas transit across Ukraine in that period.

Naftohaz specified that the document at issue is a 2004 addendum to the 2002 contract with Gazprom on conditions and volumes of Russian gas transit across Ukraine in 2003-2013. The addendum, Naftohaz said, explicitly fixes the gas transit tariff at $1.09 per 1,000 cubic meters per 100 kilometers and the gas price supplied to Ukraine as payment for transit at $50 per 1,000 cubic meters in 2005-2009.

Gazprom immediately reacted to this Ukrainian assertion with a statement saying that Russian gas shipment to and across Ukraine, in accordance with an intergovernmental accord of 2001, is primarily regulated by annual intergovernmental protocols that establish volumes and prices of Russian gas delivery and transit on an annual basis.

According to Gazprom, the 2002 commercial contract on gas delivery and transit with Naftohaz Ukrayiny for 2003-2013 is of secondary importance. In other words, Gazprom explained, if Moscow and Kyiv fail to sign a relevant gas protocol for 2006, the 2004 addendum to the existing gas contract will automatically become null and void.

However, Ukrainian lawyers are of a different opinion. Three of them argued in the December 17-23, 2005, issue of the Kyiv-based weekly "Zerkalo Nedeli" that the 2001 intergovernmental agreement does not provide for rescinding the 2002 commercial contract if an annual protocol has not been signed.

These lawyers also dismissed Gazprom's claim that annual gas protocols can be treated as basic documents for determining gas-supply volumes and prices for Ukraine. None of the previously signed gas protocols, they said in "Zerkalo Nedeli," has taken legal effect because none of them has ever been ratified by the Ukrainian parliament. Despite this fact, the lawyers emphasized, Gazprom did not interrupt gas supplies to Ukraine in the past even for a day.

Therefore, they conclude, if Moscow and Kyiv fail to sign such a gas protocol for 2006, the conditions and prices of gas delivery and transit will legally remain the same as this year, as provided for by the 2002 commercial contract.

The 2002 contract and the 2004 addendum to it stipulate that if Gazprom and Naftohaz Ukrayiny cannot agree on the interpretation of some provisions in these documents during at least 45 days, they may appeal to the Arbitration Institute of the Stockholm Chamber of Commerce for an authoritative resolution. If both companies agree to file such an appeal, the ensuing ruling of the Stockholm Institute would be binding for both sides.

Russian politicians and Gazprom executives have so far not responded to Mr. Yekhanurov's suggestion that they might resort to Swedish arbitration in the ongoing gas dispute with Ukraine. Why?

One possible answer is that Moscow may not be sure whether its arguments are sufficiently strong to convince the Swedish arbitrators.

But it seems more likely that decision makers in Moscow see the current gas row with Ukraine not as a commercial dispute, which can be objectively assessed by international arbiters, but primarily as a form of political pressure on Ukraine's Orange Revolution government on the eve of the crucial 2006 parliamentary elections. If so, then the dispute will need primarily political decisions in Moscow and Kyiv in order to end in a mutually acceptable compromise.

Jan Maksymiuk is the Belarus and Ukraine specialist on the staff of RFE/RL Newsline.

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