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The Ukrainian President Leonid Kuchma is planning to travel to Ashgabat late in March this year.

His regular visits to the Turkmen capital have already become the "chief weapon" in the relationship between Ukraine and Turkmenistan, the relationship itself being not so easy.

The main problem has been periodic frictions over nonpayment. Ukraine, which consumes Turkmen gas in large amounts (its share accounts for almost half of the Ukrainian gas trade balance), was, to put it mildly, reluctant to pay for it. Some means of payment, such as millions of "Bakay's galoshes" are worthy of the Guinness book of records. Turkmenistan has cut its gas deliveries to Ukraine at least twice in the past because of Kyiv's failure to pay its debts which run into thousands of millions of dollars.

Against such a background, Kuchma's visits to Central Asia are the last hope for Ukraine. Incidentally, the Turkmen have said this clearly. "The annual visits of the Ukrainian President to Turkmenistan have already become a tradition. With winter approaching, Leonid Kuchma always comes to see his friend Turkmenbahy. If it is a joke, it is a very friendly one, but it is true," Turkmen president Saparmurat Niyazov was quoted as saying.

Now, however, our relationship has changed. This year Kuchma will proudly and freely go to Ashgabat. Although Ukraine still has problems with the payment of Turkmen deliveries, they are just routine. There is nothing to compare with the failure of the 1998-1999 contract and Kuchma will not be given any "friendly hints". The Ukrainian contract ensures the positive balance of Turkmenistan's exports. Kyiv was sold more than 80% of the 41 billion cubic meters of Turkmen gas exported last year. This delivery costs more than half of the total cost of Turkmenistan's export in last year ($ 1.6 billion out of $ 2.86).

Nevertheless, it should not be viewed as a mere courtesy visit. Currently the gas market, inclusive of the Central Asian market, is undergoing quick and drastic change. The time of total chaos and barter deals between the former Soviet states is passing, payment is now mostly done according to international standards. Thus, Ukraine's position in this region in the future depends entirely on how it will succeed in its adjustment to the new conditions.

Central Asia is a very effective market for Ukrainian products. We expect to receive 36 billion cubic meters of Turkmen gas this year, 4.5 billion of which will be delivered in terms of payment for investment projects - construction of the bridges over the Amudaria river, gas pipelines, compressor plant, etc.

However, the competition in this market is constantly increasing. The Russians have abandoned the expensive Yamal projects of [the former chief of Russian gas monopoly Gazprom] Rem Viakherev and are looking East. Gas from Central Asia has appeared increasingly on Russia's export contracts with Western Europe. Thus, Gazprom is planning to purchase about 11 billion cubic meters of gas from Central Asia for this purpose. Although this still affects only the gas from Kazakhstan and Uzbekistan, there are repeated and persistent attempts to contract Turkmen gas in large amounts.

The Turkmen are now enjoying watching the Russians develop elements of flexibility. The time when Vikherev was waiting for the Turkmen "to ripen" and "to crawl up since they have nowhere else to go" is far in the past as well as efforts to buy Turkmen gas at a rate of $ 22-23 per thousand cubic meters. The Turkmen president was pleased to say that "we have grown wiser and have learned to bargain." Ashgabat's position has also strengthened due to the success of its Ukrainian project: not only does Kyiv buy its gas at $ 44 per thousand cubic meters but it also regularly pays for it. Incidentally, Ukraine holds this as an ace in the negotiations.

However it is not possible to rest on one's laurels indefinitely. For example, the need to organize a joint [venture] on extraction of hydrocarbon in Turkmenistan has been talked about for quite some time, however any significant progress has been achieved only recently.

Competing for a market is a very tough process. Our gas traders still remember well how easily Ukrainian deliveries were forced out of the Yamalo-Nenetsky autonomous district of Russia. The reason was that everything was based on personal relationships and when the influence of the private gas trader Itera with Gasprom increased, the then Gasprom officials easily ceded this region to Itera. There was no place for Ukraine under the new arrangement. Note, that we are talking about a region where the local authorities received 40 to 50 billion cubic meters of gas from the sale.

Ukraine must work hard to prevent this scenario from happening in Central Asia. Firstly, it must prevent any decrease in payments on its domestic market. We have no problems with the external payments. While Turkmen monthly deliveries cost $ 60 million, Ukraine's state petroleum company, Naftohaz Ukrayiny, pays more than $ 80 million to cover its 2001 debt and thus to keep to the schedule of debt repayment.

This, however, is possible not "due to" but "in spite of". Thus, these payments are made with the money received as a gas re-export credit. Naftohaz Ukrayiny is planning to receive up to $ 200 million according to this credit line. This money was provided for the reconstruction of the pipeline system, but in actual fact it is being used to cover current payments. One of the reasons is the complete failure of the electric power stations to pay for the gas they use. Thus, energy generating companies were supplied gas worth $ 57.8 million (excluding transportation cost), but paid back only 29 % of this amount, half in goods and services that cannot be used to pay for the imported gas.

This resulted in friction between Naftohaz Ukrayiny and the Fuel and Energy Ministry, which has not yet been settled. It peaked when the Ministry made an attempt to place Naftohaz under its control. According to the statement of Naftohaz's head, Yuriy Boiko, only due to the decree of President Kuchma canceling the passage of the company to the Ministry's supervision, Naftohaz was saved from a nonpayment chaos. Moreover, the actions of the energy producers confirmed the worst fears of the gas traders as they proposed to provide for future non-payments in a business plan. This would put the Turkmen contract at jeopardy with around a $ 100 -150 million gap. It would not be good if Naftohaz used all of its export revenues (it plans to increase its gas re-export to Europe from 1.4 billion to more that 6 billion cubic meters) to cover the non-payment of the energy generating companies.

Usually before the President's visits, the energy producers are forced to pay off their yearly debts, but this has already become boring. Order must be established in terms of gas payments.

This applies not only to the Fuel and Energy Ministry but also to other ministries. Certainly, walking through the Elysian Fields is much more pleasant for our diplomats than holding negotiations in the heat of Ashgabat, Tashkent or Astana. However, the latter are much more useful. In Europe, we are just another annoying supplicant (pardon, "a neighbor"), whereas in Central Asia we can be an equal partner. Missing this chance would be a great mistake.

Not many will notice another specifics of the forthcoming President's visit that is of fundamental importance. Itera has completely disappeared from Ukraine's gas trade balance. After Rem Viakherev left Gazprom, its special relations with Itera have come to an end. Itera is being strongly pressurized, it had to part with many of what it considered its gains. The loss by Itera of its monopoly over the transit of Turkmen gas to Ukraine is most painful. According to different estimates such monopoly yielded the company about $ 150- 200 million in annual revenues.

Now Turkmen gas will be transported to Ukraine by a new transit company, a Hungary-based Eural Tans Gas, which shares will be then purchased by Naftohaz on a par with Gasprom. The new scheme will provide for decrease in transportation price by $ 60 million.

Naturally Itera is not enthusiastic about the new scheme. Alas, the time when Ukrainian gas market was perceived as a big black hole have passed forever. Given the normal scheme of payments, intermediaries will become mere tools and their demands will not be taken seriously. Itera may return to Ukrainian market, but just as an operator, which trades its own gas, but nobody will create a market for it as it was planned in 2000.

But then Itera is more of a topic for a small talk of the two presidents. It is important that the plans of Ukrainian-Turkmen cooperation are translated into actions.

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By Igor Maskalevich

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