January 5, 2006

Russia-Ukraine gas deal too murky for comfort

By Douglas Busvine and Elizabeth Piper

MOSCOW/KIEV (Reuters) - Europe may have breathed a
collective sigh of relief after Russia and Ukraine signed a
long-term gas supply deal, averting a possible repetition of
the New Year supply cutbacks that unnerved the continent.

But after a closer look at the complex pact signed on
Wednesday, outsiders may yet have cause for concern about the
region's energy security, especially after Ukraine's ex-premier
Yulia Tymoshenko launched a legal challenge to stop the deal.

The accord uses as middleman a little-known Swiss-based
joint venture called RosUkrEnergo, owned half by Russia's gas
monopoly Gazprom and half by Austria's Raiffeisen Zentralbank.

Sources familiar with the five-year gas deal say Raiffeisen
is representing a group of mainly Ukrainian investors but their
identity is shrouded in secrecy.

"We represent a group of international investors
knowledgeable in the gas business who don't want to reveal
their identity," Wolfgang Putschek, of the Austrian bank's
investment arm, told Reuters by telephone from Vienna.

Until it is clear who is behind the company's business,
uncertainty remains over who stands to profit from it and how
exposed it might be to political interference.

"Ukraine cannot sign a contract where the middleman ... is
a commercial structure when it declares it is a democratic and
transparent European country," said Mykola Rudkovsky, a leader
of Ukraine's Socialist Party, which is in the ruling coalition.

"Such schemes are very vulnerable to political changes," he
told the Ukrainska Pravda Web site.

Putschek estimated RosUkrEnergo's 2005 sales at $3.5
billion and profits at $500 million. He said its gas sales
would rise in 2006 by 35-40 percent from last year's 40 billion
cubic meters (bcm), making RosUkrEnergo one of Europe's top gas


Critics say the non-transparent structure could easily lead
to corruption, with money being siphoned off to private
pockets, and that it would be better both for Ukraine and
Gazprom -- the world's largest gas firm -- to deal directly.

RosUkrEnergo was set up by former Ukrainian President
Leonid Kuchma's government shortly before it was ousted from
power by a popular revolution after flawed elections, leading
critics to fear also that it could be linked to political

Within months of appearing from nowhere it had taken
control of Ukraine's gas imports from Turkmenistan by the start
of 2005.

During her brief tenure as premier of the reformist
government swept to power in Ukraine's 2004 "Orange
Revolution," Tymoshenko denounced RosUkrEnergo as a "criminal
canker on the body" of state energy firm Naftogaz.

She vowed on Thursday to fight the deal in the courts,
saying: "This agreement has put Ukraine into a situation of
unstable gas prices. All these agreements should be canceled."


Tymoshenko and her ally and former security service chief,
Oleksander Turchinov, investigated whether Semion Mogilevich --
a Ukrainian-born Russian businessman wanted by the U.S. Federal
Bureau of Investigation for racketeering, fraud and money
laundering -- was behind the Ukrainian side of RosUkrEnergo.

Mogilevich has, through his lawyer, denied any link and the
investigation petered out after Tymoshenko and Turchinov lost
their jobs last autumn.

Putschek also denied any connection to Mogilevich, saying
RosUkrEnergo's backers were reputable. "Our standard procedure
for accepting customers is that they have to undergo rigorous
compliance checks, and they passed them," he said.

Ukraine is the transit route for 80 percent of Russia's gas
exports to Europe. Polish gas company PGNiG is one customer of
RosUkrEnergo, buying 2 bcm of Poland's annual needs of 13 bcm,
industry sources in Warsaw say.


Under the deal, RosUkrEnergo will this year handle gas
supplies to Ukraine from Russia and Central Asia, to be sold at
an average $95 per 1,000 cubic meters -- up from around $50

But the venture will buy from Gazprom at $230 per 1,000
cubic meters, meaning that part of its business will lose
money. Sources said it would market gas to Hungary and Romania
independently to make good the shortfall.

"In general we believe this is positive for Gazprom because
the prices are higher. But at the end of the day it would be
better if Gazprom did this business itself," said Vadim Kleiner
at Hermitage Capital Management in Moscow.

Officials at Gazprom and in the Russian government say
Russia's side of the bargain is sufficiently transparent, but
they cannot influence the way the Ukrainians choose to operate.

"We know who owns the Russian side and we would rather the
Ukrainians switched to direct state ownership," one Russian
source said. "But that's how they wanted to structure the

That would change, said Putschek, if RosUkrEnergo goes
ahead with a planned initial public offering in the next 12-18
months, as it would have to disclose its owners in its issue

"Then it would become clear," he said.

(Additional reporting by Dmitry Zhdannikov in Moscow and
Kuba Kurasz in Warsaw)