Seeking Alpha
What is your profession? ×
Independent research, commodities, macro
Profile| Send Message|
( followers)

It’s January, so that means that the Ukrainians are probably not singing the Gazprom Song right now. Instead, they are engaged in their annual gas price battle with the Russian company. Ukraine wants a lower price, but Gazprom (OTCPK:OGZPY) says no. OK, says Ukraine, if you won’t lower the price, we’ll take half the agreed to quantity. No to that too, says Gazprom: you have a take or pay deal that obligates you to take at least 80% of 52 bcm.

The parties are due to meet for decisive negotiations on Sunday. But one cannot rule out another gas war.

And Ukraine may in fact be singing the Gazprom Song after the negotiations are over. Vladimir Socor claims that Ukraine’s president Yanukovich and his Party of Regions are preparing to cede control of Ukraine’s gas transmission network to Russia in exchange for a break on the gas price:

President Viktor Yanukovych and his government are setting the stage, politically and legislatively, for transferring Ukrainian pipelines to Russian control, in a package deal with Gazprom. The president and government wavered and agonized at times, but are now actively preparing Ukrainian public opinion for an imminent deal. In the endgame of negotiations, Ukraine’s governing Party of Regions is rushing legislation through parliament to authorize transfers of gas infrastructure. Leasing pipelines to Gazprom is one form of transfer, out of several under consideration.

Transferring ownership or control of assets in this way, in exchange for a pie crust promise on future gas prices, would be utterly foolish. But don’t put it past the Ukrainians, whose government (to use the word quite loosely) is utterly dysfunctional.

Ukraine denies this:

Ukraine will not sell its gas pipeline network to Russia in exchange for supplies of cheaper gas, Ukrainian Energy Minister Yuri Boiko said on Friday, ruling out a solution long suggested by Moscow.

He pledged, however, to honour the existing deal, which Ukraine considers unfair, if talks on revising it fall through.

Ukraine, which depends heavily on Russian gas supplies, has sought for over a year to renegotiate a 2009 deal with Moscow, which it says sets an exorbitant price for the fuel. But talks have failed to produce any results so far.

“The issue of (a pipeline network) sale has never been on the agenda. We dismissed it immediately,” Boiko told reporters. “If we find a model that satisfies both sides, we will make a deal. Otherwise we will work under the existing contract.”

But as any investment banker can tell you, there are ways of structuring deals so that they are effectively sales even if they aren’t called such. (Hence the Tymshenko’s government specifying of a large list of things the Ukrainian government wasn’t permitted to do with its pipes–the law that Yanukovich is trying to change, according to Socor.)

Besides, the relationship of the Ukrainian government to the truth is thoroughly Sovok (as a one time commenter was fond of pointing out), so Boiko’s protestations are hardly credible.

We’ll see what happens on Sunday, but it’s unlikely to be good–except, perhaps, for Putin, who has coveted Ukraine’s gas transport network forever. The Ukrainians have done a masterful job of painting themselves into a corner. Europe is distracted by its own issues, right now, but Yanukovich has completely alienated the EU regardless with his prosecution of Tymshenko.

So, the Ukrainians stand cold and friendless. Perhaps they should start memorizing the words: “Let’s drink to you, let’s drink to us, let’s drink to Russian gas.”