U.S. Hits Corruption in Russian Gas Deals

Daily News Article   —   Posted on February 9, 2006

(by Nicholas Kralev, WashingtonTimes.com) – U.S. officials say Russia has been using its control of Soviet-era pipelines to squeeze Central Asian sellers of natural gas while setting up corrupt trading intermediaries whose only apparent purpose is to milk huge profits.
    Alarmed by a recent price dispute between Russia and Ukraine that disrupted vital gas supplies to Europe, the Bush administration raised doubts about Russia’s fitness to chair the Group of Eight leading industrialized countries, beginning with a finance ministers’ meeting in Moscow this week.
    The State Department has been talking to Russia and its European customers seeking to change Moscow’s practices, but European officials said they are reluctant to interfere in Moscow’s trading policies.
    U.S. officials noted a huge gap between what Russia pays to import gas from Central Asia and what it charges for the gas in Europe, while middlemen rake off vast profits.
    “It’s a fascinating story, because it combines corruption with economic reform and Russia’s ambition to dominate its neighbors,” said a senior State Department official who asked not to be named because of the sensitivity of the matter. “It’s a great story, but it’s an ugly one, too.”
    Gazprom, the Russian natural gas monopoly, buys gas from Central Asia for less than $50 per 1,000 cubic meters and then sells it to European countries at prices as high as $260.
    Even though Gazprom could handle transactions at both ends, much of the trading is carried out by middlemen, said U.S. officials who briefed The Washington Times in an attempt to call attention to the problem.
    “These mysterious shady trading firms have no purpose,” the senior official said. “They have been a source of corruption for years. They are instruments for arrangements by which some people buy cheap and sell expensive.”
The official singled out RosUkrEnergo, established in 2004 as an intermediary between Gazprom and the Ukrainian state gas company Naftohaz. RosUkrEnergo was at the center of an agreement between Russia and Ukraine last month that ended their bitter price dispute.
    “It’s said to be run by people with organized criminal ties, as well as good Kremlin connections,” the official said of RosUkrEnergo, which is co-owned by Gazprom and an Austrian-registered company, Centragas.
    Ukrainian intelligence thinks that Semyon Mogilevich, an official in the administration of former President Leonid Kuchma who is wanted by the FBI and Interpol for money laundering, has a stake in RosUkrEnergo.
    Mr. Mogilevich, who is said to be living in Moscow, has denied any links to RosUkrEnergo, as has Centragas CEO Wolfgang Putschek.
    Under the January deal, RosUkrEnergo sells gas to Ukraine for $95, up from the previous $50. It is a mixture of Russian gas priced at $230 and Turkmen gas priced at less than $60.
    The pipeline from Turkmenistan to Russia runs through Uzbekistan and Kazakhstan, whose exports to Russia are much smaller than Turkmenistan’s, said Jerome Guillet, a French investment banker who worked on a $3 billion loan for Gazprom several years ago.
    He agreed with the senior State Department official that the middlemen firms “are there to create non-transparency,” but said that Washington’s demands are not realistic.
    “The Central Asians are stuck and totally dependent on the Russians” because of the pipeline infrastructure built by the Soviet Union, said Mr. Guillet, who also edits the European Tribune, an Internet magazine.
    The Central Asian countries cannot sell their gas directly to the Europeans, so they will take any price the Russians offer them, he said.
    The Europeans criticized Russia for cutting off their supplies over the dispute with Ukraine, but they have not been as tough on Moscow as Washington has in recent weeks.
    “Russia is going through a very difficult transformation process, and that takes time, so our policies must be cautious,” a senior European diplomat said.
    The diplomat, as well as several other Europeans officials, agreed that corruption exists and should be fought, but they questioned the criminal accusations against some intermediaries and declined to join the U.S. call to eliminate the intermediary companies.
    Some European diplomats even suggested that the Bush administration was divided over what tactics to pursue in dealing with the issue.
    The senior State Department official played down the differences with the Europeans — as well as those within the administration — saying the United States would work with its allies and Russia to guarantee Europe’s energy security.
    “We are not anti-Russia,” the official said. “We simply want fair and transparent trade.”

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