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Financial Times: Ukraine tries to wrestle Russia over South Stream gas pipeline

Thursday will be a crucial day for Ukraine. Its parliament will attempt to adopt a package of bills needed to secure the next tranche of an IMF bail-out loan. Equally important will be a separate bill to allow the creation of a joint venture between EU and US companies to operate Ukraine’s gas transportation system.

That would strike a blow at Russia’s South Stream project. But what are its prospects?

Parliament refused to support either bill last week after the collapse of the pro-western governing coalition. The refusal infuriateddArseniy Yatseniuk, the prime minister, who threatenedto resign.

But it seems Yatseniuk has decided to make one more attempt. On Monday he said the cabinet would re-submit the bills to parliament.

He told reporters:

“First, we need to hold an extraordinary session of the parliament. Second, all members of parliament must attend. Thirdl members of the parliament must participate in the voting for all of the bills submitted by the government… The approval of a decision on Ukraine’s gas transportation system is a key issue that should be on the agenda of the country.”

According to the bill, 51 per cent of the Ukraine’s gas transportation system should be controlled by the state, while 49 per cent could be held by western firms. Yatseniuk said this scheme would help to prevent the construction of Russia’s South Stream gas pipeline under the Black Sea, which bypasses the territory of Ukraine.

Last Friday night, Yatseniuk emotionally explained the details of the government’s plan on the television talk-show Shuster-Live. “Russia wants to bypass Ukraine and turn us off as a transit country. And we will pump air through the Ukrainian gas transportation system… We need the Americans and Europeans who can fund the upgrading of our gas transportation system; they will buy gas from our system; and not allow Russia to build South Stream,” he said.

Alexander Paraschiy, head of research at Kyiv-based Concorde Capital, tells beyondbrics that the Ukrainian government is offering western companies dividends from the profits of the country’s gas transportation system and, therefore, that they would have an interest in maximizing this profit. “This maximization is only possible in the absence of South Stream, an alternative gas pipeline which would reduce the amount of gas pumped through Ukraine up to two-three times,” Paraschiy says.

“Thus, the Ukrainian authorities are proposing to western companies that they invest in Ukraine’s gas transportation system, which is already in existence and gives good profit, instead of investing in an alternative project with a long payback period,” he adds.

On Monday, Yatseniuk said any companies wanting to join a joint venture would have to be approved parliament.

Mikhail Gonchar, president of the Centre for Global Studies Strategy XXI, a Kiev-based think-tank, says the offer could be attractive to western companies if Ukraine’s gas transportation system were transformed from a part of the former Soviet Union’s network into a part of the gas supply system at the eastern borders of the EU. He notes that Ukraine joined the European Energy Community in 2011 as the first step in the country’s gas system transformation to European standards.

“However, it doesn’t mean that as soon as the bill has been adopted, a consortium with the participation of EU and US companies will be created. That is a matter of a more distant future,” he said.

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