Putin Calls for Energy Merger With Ukraine

Russian Prime Minister Vladimir Putin suggested on Friday merging Ukraine’s national energy company with the Russian gas giant Gazprom, a move that, if approved in Kiev, would.put Ukraine’s strategic network of gas pipelines under Moscow’s control.

Mr. Putin shocked many — including, apparently, his Ukrainian counterpart — by announcing the proposal at a news conference after talks in the Russian resort city of Sochi. The Ukrainian prime minister, Mykola Azarov, said through a spokesman that the idea of a merger had not come up in their meetings, and that Mr. Putin had “expressed it in an impromptu way.”

Mr. Putin’s idea is an audacious one politically, coming just two months after Ukraine elected a new president, Viktor F. Yanukovich, who vowed to increase cooperation with Russia. Emotions are still raw in Ukraine over a deal Mr. Yanukovich negotiated with Moscow to extend the lease on a Russian naval base on the Crimean Peninsula for 25 years, and a Tuesday vote on the issue in Parliament deteriorated into a melee.

Russia is heavily dependent on Ukrainian pipelines, which carry about 80 percent of its natural gas exports to Europe, and it has long coveted a greater degree of control over them. If the deal were to go through, Gazprom would effectively swallow the Ukrainian company, Naftogaz, said Chris Weafer, chief strategist at UralSib Capital, an investment bank.

“In any merger, Gazprom would dominate — it would be seen as a complete Russian takeover over of the Ukrainian gas system,” Mr. Weafer said. If it came up for legislative approval, he added, what happened during the vote on the naval base “would look like a kindergarten party by comparison.”

Mr. Weafer called Mr. Putin’s suggestion a “nonstarter,” but he said Mr. Putin could be laying the groundwork for the more politically viable approach of forming a joint venture that would control the Ukrainian pipeline system.
“He’s probably trying out the extreme, knowing full well it would provoke a strong reaction inside Ukraine,” he said.

And that it did, in a country still split between its Europe-leaning west and Russia-leaning east. Yulia V. Tymoshenko, who lost to Mr. Yanukovich in a bitterly fought presidential race, said the merger proposal “could be seen as a joke” but warned of “a large-scale plan to liquidate independent Ukraine.” She predicted the “full absorption of Ukraine by Russia,” and blamed Mr. Yanukovich for ceding too easily to Russia’s will. “You can sculpt whatever you want out of plasticine Yanukovich,” she said, according to a statement posted on her party’s Web site.

Mr. Yanukovich, a former Communist apparatchik who ran on a platform of closer ties to Moscow, has closed a series of agreements with the Kremlin since taking office, culminating Tuesday in the vote allowing Russia to extend its lease on the naval base.

Russia, in return, agreed to cut the price of its natural gas by 30 percent — at a cost to Russia of at least $30 billion, Mr. Weafer said — and went on to waive a $2 billion fine it could have levied on Ukraine for purchasing less gas than was included in a contract signed in January.

The deals come at a critical time for Ukraine, whose economy has contracted precipitously in the downturn, with demand from industrial customers down by 50 percent during the first three months of the year compared with 2009.

Dmitri S. Peskov, Mr. Putin’s spokesman, dismissed the notion that Gazprom would take over the smaller company, saying the proposal would create a new legal entity. He said that Ukraine was interested in finding a co-owner for Naftogaz, and that Russia sought to “receive a guaranteed route for the fulfillment of its obligations to customers in Western Europe.” He also said, in comments carried by RIA Novosti, that it was too early to speculate on a possible asset swap.

The two countries’ energy ministers will meet with the companies’ top officials to discuss the proposal in mid-May.

If the merger idea goes forward, it would reflect a regional trend that has emerged during the financial crisis, as Western banks pulled out of the region and former Soviet states turned to Moscow for capital and business ties.
During his comments in Sochi, Mr. Putin underlined the material support Russia has given Ukraine’s economy.

“Thanks to the gas discount — I said this at the meeting with my colleagues — our neighbors will be able to invest more than $40 billion in their national economy over the next 10 years,” he said, in remarks carried on Russian television.

The Russian proposal would also have implications for Europe, which has been paralyzed by winter stoppages in natural gas deliveries as Ukraine and Russia clashed over payments. The European Commission is likely to take a dim view of a merger because it would hamper efforts to draw Ukraine into its sphere of influence and away from Russia’s orbit.

Europe has heaped much of the blame for gas stoppages on Gazprom and the Kremlin. But it was unclear on Friday whether the commission had the means to intervene, or stymie, the Russian proposal. Part of the deal mooted by Mr. Putin involved lending Ukraine $500 million — a fact European Union officials are most likely to find galling, since they helped secure loans for Ukraine last year so it could pay its gas bills to Russia.

Mr. Weafer said, though, that Europe might sign onto a joint venture plan, which would give Russia some equity in the pipeline system. Russia could then help modernize Ukraine’s pipeline system and use it to carry Central Asian gas into Europe.
That arrangement, he added, could deal a death blow to Nabucco, a proposed pipeline that would transport Central Asian gas through Turkey into Austria, allowing Europe to reduce its dependence on Russian gas.

As Ukraine considers Russia’s proposals, he noted, Moscow is pledging substantial sums.

“They are getting what they want,” he said. “But they are paying for it.”

Source: NY Times