Weapons of Mass Destruction (WMD)

Ukraine/Russia: Will Russian-Ukraine Gas Row Go To Swedish Arbitration?

By Jan Maksymiuk

Despite an apparent war of will behind the current Russian-Ukrainian dispute over gas supplies to and transit across Ukraine, official Kyiv has publicly been exhibiting a fairly relaxed attitude to Moscow's demand that gas prices be increased more than fourfold next year 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," Yushchenko said on 20 December. "Those people who believe it is possible to do it [introduce new gas prices] starting 1 January -- 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 19 December, did not seem to be particularly worried either. He told journalists in Kyiv the following day that the new gas price reportedly proposedby Moscow was "taken from the top of one's head" and cannot be discussed seriously.

Moreover, Yekhanurov assured reporters that Moscow is not going to break its 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 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, said on 7 December that it holds a document in which Gazprom obliged itself to supply Ukraine from 2005-09 with gas at $50 per 1,000 cubic meters as payment for Russian gas transit across Ukraine.

Naftohaz Ukrayiny specified that the document at issue is a 2004 addendum to its 2002 contract with Gazprom on the conditions and volumes of Russian gas transit across Ukraine from 2003-13. The addendum, according to Naftohaz Ukrayiny, explicitly fixes the gas-transit tariff at $1.09 per 1,000 cubic meters per 100 kilometers and the price of gas supplied to Ukraine as payment for transit at $50 per 1,000 cubic meters from 2005-09.

Gazprom immediately responded 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 the 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 2003-13 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 17-23 December issue of the Kyiv-based weekly "Zerkalo nedeli" that the 2001 intergovernmental agreement does not provide for rescinding the 2002 commercial contract when 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 told "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, an ensuing ruling of the Stockholm institute would be binding for both sides.

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

One of possible answer is that Moscow may not be sure whether its arguments are sufficiently strong so as to make Swedish arbitrators take its side.

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 finding a mutually acceptable resolution to the dispute will depend primarily on political decisions in Moscow and Kyiv.

Copyright (c) 2005. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036. www.rferl.org