Ukraine-Russia gas deal: Tymoshenko's biggest bet

KIEV Tue Oct 11, 2011 12:08pm EDT

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KIEV (Reuters) - Former Ukrainian Prime Minister Yulia Tymoshenko's career is a long series of big -- and mostly successful -- political wagers. But luck appears to have abandoned her when she made the last one -- brokering a 2009 gas deal with Russia.

Tuesday, a Ukrainian court sentenced the 50-year-old to seven years in prison for abusing her power in forcing through the gas deal which her opponents say saddled Ukraine with an exorbitant price for gas.

Tymoshenko, the fiercest foe of President Viktor Yanukovich, has denied any wrongdoing. She has accused Yanukovich of carrying out a political vendetta against her, a view shared by many in the West.

However, while expressing concern over what they see as a politically-motivated trial, Western diplomats have stressed they did not consider Tymoshenko a saint.

She earned the nickname "gas princess" in late 1990s after becoming one of the main re-sellers of Russian gas under the government of prime minister Pavlo Lazarenko, who was later jailed in the United States for money laundering and fraud.

BLINKING GAME WITH RUSSIA

Tymoshenko's gas trading experience became relevant once again in January 2009 when Kiev and Moscow were locked in a fresh pricing row that threatened to leave Europe without energy supplies at the coldest time of the year.

Viktor Yushchenko, president at the time, had limited powers following constitutional reform which clipped his wings, and was on bad terms with the Russian leadership over his nationalist rhetoric and NATO membership aspirations.

So it was natural that Tymoshenko stepped in and started negotiations with Russian Prime Minister Vladimir Putin.

However, the resulting deal with Gazprom raised eyebrows both at home and abroad.

After refusing Gazprom's offer to buy gas at $250 per thousand cubic meters (tcm) as too expensive, Ukraine agreed to a price formula that used $450 per tcm as the basis for calculations, with adjustments for global oil product prices.

According to a June 2009 U.S. Department of State cable published by anti-secrecy group WikiLeaks, a World Bank official said in a conversation with a U.S. diplomat that "Russia had a great deal."

Ukraine's gas prices were 10 percent higher than Germany's, whereas Ukraine was getting half of what it should for transit, according to the leaked cable.

Another cable quoted Ukrainian magnate Dmytro Firtash as saying that Ukraine could have won the gas war simply by waiting out Russia since disruptions of European supplies would have destroyed Gazprom's reputation.

SHORT-TERM GAINS

But Tymoshenko's team touted immediate gains from the agreement such as averting a domestic energy crisis and securing an average gas price of about $230 for 2009 thanks to a special first-year discount.

The strategy appeared to be working for some time, as evidenced by yet another leaked U.S. diplomatic cable, this time from September 2009 when campaigning for the January-February 2010 presidential election was in full force.

"Tymoshenko appears to come out on top, for now, with this agreement," the cable said.

"... Russia's decision to let Ukraine purchase only what it needs in gas will ease Naftogaz's growing financial burden and could bolster Tymoshenko's presidential campaign by showing she was able to avoid conflict with Russia."

However, Tymoshenko's arch-rival Yanukovich beat her by a few percentage points in the election run-off and she had to quit the premiership shortly afterwards while state prosecutors started investigating, among other things, the "gas affair."

Making matters worse, the gas price defined by the 2009 formula has since sky-rocketed and is expected to reach about $400 per tcm in the fourth quarter of this year -- taking into account a $100 discount brokered by the new government.

Attempts by Yanukovich's cabinet to renegotiate the 2009 deal have so far been unsuccessful and Moscow warned Kiev on Tuesday against trying to use Tymoshenko's trial as leverage.

"The gas agreements in question were drawn up in strict compliance with the laws of Russia and Ukraine and the applicable norms of international law," the Russian Foreign Ministry said in a statement.

It is not yet clear whether Tymoshenko will indeed serve a seven-year prison term as Yanukovich, pressured by the West, hinted Tuesday that criminal laws may be tweaked by the time an appeals court decides on her case.

But there is little doubt the current government will continue to blame her for rising gas prices, especially if it follows advice from the International Monetary Fund and passes the price hikes onto households.

And if Yanukovich manages to renegotiate the contract, as he hopes to do this year, it will provide him with valuable credit for future elections.

"Tymoshenko had hoped that the 2009 contracts would serve as an engine that would drive her to the presidency, but she blundered and now Ukraine has to pay more (for gas) than Europe," said analyst Valentyn Zemlyansky who worked as Naftogaz spokesman in January 2009.

(Reporting and Writing by Olzhas Auyezov; Additional reporting by Pavel Polityuk)

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