Reuters: UPDATE 2-Russia relaxes 2010 gas demands on Ukraine

Reuters: UPDATE 2-Russia relaxes 2010 gas demands on Ukraine

* Gazprom, Naftogaz agree to reduced gas volumes

* Ukraine to import 33.75 bcm of Russian gas in 2010

* Gazprom agrees to waive fines for 2009 (Adds details, background)

By Robin Paxton and Pavel Polityuk

MOSCOW/KIEV, Nov 24 (Reuters) - Russia relaxed demands on Ukraine for importing gas in 2010 and agreed on Tuesday to waive fines on this year's supplies in a deal easing European fears of a renewed dispute along a route supplying a fifth of its gas.

Gazprom (GAZP.MM: Quote, Profile, Research), Russia's powerful state-run gas export monopoly, agreed that Ukraine -- whose economy has been crippled by the global financial crisis -- could buy 35 percent less gas than originally contracted for next year.

"The volumes have been corrected in accordance with actual consumption in Ukraine in conditions of crisis," Gazprom Chief Executive Alexei Miller said after four hours of talks with Oleh Dubyna, the head of Ukrainian state energy firm Naftogaz.

"These volumes remove the risk of the payment of fines by Naftogaz Ukraine in 2010 for the non-use of contracted gas." Russian gas to Europe via Ukraine was cut off for three weeks in January after the ex-Soviet states argued over pricing and transit, a dispute that shook confidence in Russia's ability to supply gas and Ukraine's ability to give it safe passage.

Europe is concerned the dispute, which damaged industry and left hundreds of thousands in the cold, could flare up again at New Year, especially as rival political factions in Ukraine jostle for support ahead of a Jan. 17 presidential election.

Russian Prime Minister Vladimir Putin, whose often fierce rhetoric has worried European consumers, has said existing gas deals with Ukraine were a guarantee of stable energy supplies but has also warned Ukraine not to siphon gas meant for Europe.

His earlier pledge to Ukrainian Prime Minister Yulia Tymoshenko that Russia would waive fines for under-consumption of gas this year were formalised in Tuesday's agreement between Gazprom and Naftogaz, both companies said in a joint statement.

"We secured final agreement that Gazprom will not charge fines for the non-use of 13 bcm of gas in the first 10 months of 2009," Miller said.

LOWER VOLUMES

Putin and Tymoshenko, a front-runner in the Ukrainian presidential election, laid the groundwork for Tuesday's deal when they agreed at a Nov. 19 meeting in Yalta to cut the amount of gas Ukraine must take next year. [ID:nLJ170609]

Naftogaz agreed to purchase 33.75 billion cubic metres of gas (bcm) from Gazprom in 2010, both companies said in the joint statement. This was less than the 52 bcm agreed by the two countries in January.

"Considering the way the financial crisis has affected our country, we have taken considerably less gas than contracted this year and we made this request to our partners," Naftogaz head Dubyna said. "We have found understanding on this issue."

Ukraine had already been lobbying for a reduction. Tymoshenko has said she wanted to import between 27 and 33 bcm next year, depending on the economic situation in her country. [ID:nL3432316]

Though Ukraine has so far settled all its monthly gas bills on time, Tymoshenko has conceded this has been a struggle. Russian leaders have also accused her of political infighting with her rival, President Viktor Yushchenko, and of disrupting the process.

Gazprom said 80 percent of contracted gas volumes were subject to "take or pay" conditions -- meaning Ukraine would have to pay for the gas regardless of whether it was used.

Ukraine purchased 18.85 bcm of gas from Russia in the first 10 months of this year, only 59 percent of contracted volumes of 31.7 bcm for the period, a decline in consumption attributable to the global economic crisis, Gazprom said. (Additional reporting by Conor Humphries; Editing by Christian Wiessner) ((robin.paxton@reuters.com; +7 495 775 1242; Reuters Messaging: robin.paxton.reuters.com@reuters.net)) ((For help: Click "Contact Us" in your desk top, click here [HELP] or call 1-800-738-8377 for Reuters Products and 1-888-463-3383 for Thomson products; For client training: training.americas@thomsonreuters.com; +1 646-223-5546))

November 24, 2009

In the Run Up to the Ukrainian Presidential Elections, Russia Seems to Have Gained More Than It Forfeited in the New Gas Deal

The Ukrainian economy has been battered by the financial crisis and Ukraine has subsequently found it particularly hard to meet its contractual obligations to Russia’s state-owned gas monopoly Gazprom. Vastly reduced gas consumption during the economic crisis has meant that Ukraine has fallen short of its consumption quota for gas in 2009, making it eligible for sizeable sanctions in line with its “take or pay” style gas contract. Russia has now, however, agreed to waive these fines. Moreover, at the meeting in Yalta Putin promised that Gazprom would agree to set a new volume of gas to be exported to Ukraine in 2010, taking the currently reduced demand into account. “We sincerely expect that all earlier reached agreements will be implemented, and from our side we guarantee full implementation,” Reuters quoted Putin as saying at a news conference after the deal was struck. “It would be nice to see a New Year without any shocks,” he added.

The deal will bring a sigh of relief from the millions of Europeans who were left shivering in January this year after disagreement between Ukraine and Russia resulted in a temporary disruption in gas supply. Roughly a fifth of Europe’s gas arrives from Russia through Ukraine’s transit network. Past conflicts over gas between Ukraine and Russia have prompted temporary cessations in gas delivery to Europe, often around January, when contracts between Russia and Ukraine are due for renegotiation. This year, political instability in the run up to Ukraine’s approaching presidential elections, slated for January 17, has made conflict over gas into a real worry.

But after Russia’s concession was agreed, there seemed to be a sense of optimism. “Without any doubt, removing the ‘take or pay’ obligations in the contract is good for Ukraine,” said Pierre Noël, a research fellow for energy issues at the European Council for Foreign Relations. “If Ukraine is able to buy less gas next year, that will be a great help to Ukraine’s beleaguered budget,” said Andrew Wilson, a senior policy fellow at the European Council on Foreign Relations and senior lecturer of Ukrainian studies at the School of Slavonic and Eastern European Studies. “I think removing the ‘take or pay’ obligation obviously makes the contract much more favorable to Ukraine in the longer-term, in the sense that, even if gas consumption never really recovers, or recovers really slowly, they still do not have to worry about that,” said Noël.

But still, “Europe is just crossing its fingers,” said Noël. “There is a sense of relief. But you just hope it’s justified.” A gas row this year, or early next, remains a real possibility, because “the risk of a conflict in the coming weeks is more linked to the ability of Ukraine to pay for its gas in the short-term than to the structure of the contract,” he added. And Ukraine’s current economic health is extremely poor. When on November 11, the International Monetary Fund (IMF) announced that it would not be releasing a $3.8 billion bailout earmarked for Ukraine, Tymoshenko recognized that Ukraine was entering an “extremely difficult” period. Putin followed the news up with tough rhetoric underlining that Russia would once again turn off the taps to Ukraine if it fails to pay for its gas on time, or else siphons off gas destined for Europe. “The fact that Ukraine messed up its agreement with the IMF clearly increases the risk that it will not be able to pay,” said Noël.

One reason Ukraine struggles to afford its gas imports is because it sells imported gas to consumers at a cheap rate. “Ukraine has always paid for its gas by borrowing one way or another. They seem to be structurally unable to charge the gas to consumers in Ukraine at a price that reflects the price they pay Gazprom. This is unsustainable. It is a recipe for a crisis and at some point they won’t be able to borrow any more,” said Noël. “Obviously, politically it is very difficult. But so long as I don’t see the price of gas in Ukraine reflecting the import price, I will be worried about the Ukraine-Russia gas relationship. Even if you take the politics and geopolitics aside, it is simply not possible to buy large quantities of gas at a price that you don’t charge to your customers. It’s as simple as that,” he said. 

So, why did Russia make this concession to Ukraine? On the one hand there is a clear economic rationale to the deal. “The reality is that Ukraine’s gas contract had probably become impossible to honor exactly as it was signed. So it’s just adapting to reality - all contracts do that. Of course they were less high-profile negotiations, but after all Russia agreed to drastically reduce the ‘take or pay’ obligations of its European contracts during the last month. So after doing that with France, Germany, Italy, then why not Ukraine?” said Noël.

Politically speaking, the deal with Russia also served to promote Tymoshenko’s candidacy for president, at the expense of the current President Viktor Yushchenko’s. As Wilson said, after the agreement was reached, “it does now seem that Putin’s personal favorite is Tymoshenko.” Yushchenko’s pro-Western policies have made him extremely unpopular amongst Russia’s political establishment, and when on November 19 he appealed to the Kremlin for a revised gas deal in an open letter, he was simply snubbed, which made Tymoshenko look even better when she won a concession from Putin. “Tymoshenko’s smile [after the deal] is not at all surprising,” said Wilson.

Beyond this, however, there was no clear indication of Russia working a secondary political agenda, because Russia has no reason to rock the boat. With Yushchenko’s popularity rating languishing around the five percent mark (scarcely in the frame for a president), Russia has little political stake in another conflict over gas, analysts said. “It wouldn’t be in Russia’s interest to have a gas row where it couldn’t control the consequences, given that it seems to be happy with either [front-runners] Viktor Yanukovich or Tymoshenko for president. Yushchenko is polling so low at the moment that there don’t seem to be any political incentives to have another row,” Wilson noted.

Itar-Tass: Russia FM sends official note to Japan re Southern Kurils

http://www.itar-tass.com/eng/level2.html?NewsID=14566788&PageNum=0

25.11.2009, 06.41

MOSCOW, November 25 (Itar-Tass) - the Russian Foreign Ministry has called “unacceptable” the approval by the Japanese government of a document that says about the “illegal occupation by Russia” of the Kuril Islands, it is said in a statement of the RF Foreign Ministry released on Tuesday.

“Moscow has given the most serious attention to the aforesaid step of the Japanese government,” the ministry’s document says. “We consider it necessary to stress that the Southern Kuril Islands are an inseparable part of the Russian Federation territory on legal grounds based on the WW2 results in accordance with the legally binding agreements and treaties between the ally states, as well as the UN Charter that was ratified by Japan.”

“The approval by the Japanese government of a document with the above wording cannot be assessed any other than unacceptable. The Russian side, including at the top level, has repeatedly warned about counter-productivity of such actions for the bilateral dialogue on the peace treaty problem, including the border delimitation aspect. The current steps of Tokyo contradict the fixed by the leaders of the Russian federation and Japan mutual understanding of the need to create a normal, mutually respectful atmosphere of bilateral cooperation, including the dialogue on the peace treaty problem and border delimitation. The Russian side is ready to continue the corresponding dialogue only in this manner,” the RF Foreign Ministry stated.

“The Russian Foreign Ministry has sent the corresponding official note to the Japanese Foreign Ministry. We hope that Tokyo will draw due conclusions from the situation emerged as a result of its actions,” the statement says.

“Russia for its part is committed to the development of relations with Japan in the constructive spirit that characterises contacts between the RF president and Japanese prime minister,” the Russian Foreign Ministry noted.

The Kuril Islands dispute, also known as the Northern Territories dispute, is a dispute between Japan and Russia over sovereignty over the South Kuril Islands. The disputed islands, which were occupied by Soviet forces during the Manchurian Strategic Offensive Operation at the end of World War II, are under Russian administration as South Kuril District of the Sakhalin Oblast, but are claimed by Japan, which refers to them as the Northern Territories, being part of the Nemuro Subprefecture of Hokkaido Prefecture. The San Francisco Peace Treaty between the Allied Powers and Japan from 1951 states that Japan must give up all claims to the Kuril islands, but it also does not recognize the Soviet Union's sovereignty over the Kuril Islands. Russia maintains, that Soviet Union's sovereignty over the islands was recognized following agreements at the end of the Second World War, however Japan has disputed this claim. The disputed islands are: Iturup, Kunashir, Shikotan and Habomai rocks.

Russia maintains that all the Kuril Islands, including those that Japan calls the Northern Territories, are legally a part of Russia as a result of World War II, and that this acquisition was as proper as any other change of international boundaries following the war. Moscow cites the following basic points:

The explicit language of the Yalta Treaty gave the Soviet Union a right to the Kurils, and the Soviet Union upheld its own obligations under that treaty. The nation of Russia inherited possession of the islands from the former Soviet Union, in accordance with international law.

The Japanese assertion that the disputed islands are not part of the Kurils is simply a tactic to bolster Tokyo's territorial claim and is not supported by history or geography.

Russia has said it is open to a negotiated "solution" to the island dispute while declaring that the legality of its own claim to the islands is not open to question. In other words, Japan would first have to recognize Russia's right to the islands and then try to acquire some or all of them through negotiations.

On February 6, 2008, Japan Today, an English-language news site in Japan, reported that the Russian president had suggested to Japanese Prime Minister Yasuo Fukuda to finally settle all territorial disputes over the Kuril Islands and had sent him a letter inviting him to come to Russia for discussions.

The dispute over the Kuril Islands was further exacerbated on July 16, 2008, when the Japanese government published new school textbook guidelines directing teachers to say that Japan has sovereignty over the Kuril Islands. The Russian Ministry of Foreign affairs announced on July 18, “[these actions] contribute neither to the development of positive cooperation between the two countries, nor to the settlement of the dispute” and reaffirmed its sovereignty over the islands.

Japanese Prime Minister Taro Aso and Russian President Dmitry Medvedev met in Sakhalin on February 18, 2009 to discuss the Kuril Islands issue. Aso said after the meeting that they had agreed to speed up efforts to resolve the dispute so that it would not be left to future generations to find a solution.