Will the gas deal come unstuck?

Riding a tide of indignation, Ukraine’s parliament voted on Tuesday to punish the government for doing a deal with Russia over the import and transit of natural gas. Parliamentarians had little difficulty poking holes in the two-page document signed by Russia and Ukraine on January 3.

First, the deal promised a relatively moderate rise in gas import prices for Ukraine, but only for a six month period. What happens to gas prices after July 1 2006 is up to the Russians, and the threat of price hikes will hang over the new Ukrainian executive after parliamentary elections in March.

At the same time, the deal commits Ukraine to charging a fixed price for the transit of Russian gas through Ukrainian territory for five years, regardless of any increase in the market price that Russia can charge European customers during that time.

Finally, there is the opaque nature of the company RosUkrEnergo that will have a monopoly on buying gas from Russia – including Central Asian gas that passes through Russian territory – and selling it to Ukraine. Ukrainian prime minister Yuri Yukhanurov was singularly unable to explain to parliament who owns the company and why it had been chosen to play this role.

The Russian business newspaper Kommersant points out that the ownership structure of RosUkrEnergo is reminiscent of the unknown shell company that snapped up the main oil production assets belonging to Yukos – whose chairman Mikhail Khodorkovsky is languishing in a Siberian jail – at auction in 2004. The company was swiftly transfered to state-controlled oil giant Rosneft.

Ukraine’s belligerent parliamentarians found support in the shape of the country’s big business. A statement by industrialists representing major steel makers and energy providers said the deal “placed the economy under threat of collapse and loss of its market competitiveness” and demanded that responsible officials resign for creating this “extremely dangerous situation”.

Ukraine’s president Viktor Yushchenko has vowed that the gas deal will remain in force and that his government will not resign. Changes to the Ukrainian constitution that came into force on January 1 permit parliament to dismiss the government, but don’t allow it to appoint a new one until after the March elections. Ministers are therefore likely to remain at their posts until then, but with the preposition “acting” added to their job descriptions.

At the same time, Mr Yushchenko’s angry threat on Tuesday to disband parliament is also unlikely to carry much weight. The president’s authority to do so is doubtful under the new constitution, which forbids him to do so in the last six months of the parliament.

Parliament is demanding that Ukraine drag Russia through the European courts to establish the legal precedence of the former agreement, signed in 2004, under which Ukraine imported gas from Russia at a knock-down price.

But such a step is fraught with problems for Ukraine, as Mr Yekhanurov pointed out: “We could have dug our heels in and not signed any agreement. But cases in Stockholm [the Arbitration Institute of the Stockholm Chamber of Commerce ] last for months, if not years,” he said in parliament. “Who needs a victory if it means several years without gas, with a collapse of industry and social spending?”

When Mr Yushchenko met Russian president Vladimir Putin on Wednesday he told reporters: “Ukraine and Russia have entered an excellent phase in bilateral relations, a phase of personal friendship, which allows us to discuss wonderful prospects.”

Financial markets were less sanguine and the normally tightly controlled Ukrainian currency, the hryvnia, dropped to its lowest level since April 2005.

Since Viktor Yushchenko’s face was disfigured over a year ago, there have been no shortage of allegations that the Kremlin arranged for him to be poisoned. Russian natural gas, however, looks like being equally venomous to Mr Yushchenko’s presidency.