The excerpts from the transcript of the meeting on deliveries of Russian gas to Ukraine

I would like to hear, I would like to listen to what you agreed on to resolve the problem that caused our Ukrainian colleagues and friends to come to Moscow yesterday.

IVAN PALCHKOV: Dear Vladimir Vladimirovich!

First of all I would like to thank you for this meeting and for giving us your time, and to pass along Viktor Andreevich [Yushchenko]'s best wishes for the coming New Year.

VLADIMIR PUTIN: Thank you.

IVAN PALCHKOV: Over the past two or three months experts from Naftogaz of Ukraine and Gazprom have discussed in detail various possibilities for our new energy relations concerning gas deliveries and gas transit. Today Gazprom's experts are continuing work on the report, which determines the basic principles for the transition to new energy relations. We propose that such a transfer take place by 2006. Figures on the balance sheet, the volume of gas being sent through, and the volume of gas delivered to Ukraine to settle the balance will correspond with the agreements and contracts we have reached. Today we discussed the issue of increasing the possibilities of using Ukraine's gas transport system, creating a joint venture to exploit gas in Ukraine together, and sharing our underground storage facilities.

The only issue that remains unresolved is prices.

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VLADIMIR PUTIN: I would like to hear from the Russian side. Will the contract be signed or not?

VIKTOR KHRISTENKO: Today the only figure that neither party doubts is the possible volume of gas that could be delivered to Europe. This figure is no less than 110 billion cubic metres. The parties have not yet reached an agreement on any of the other figures—neither on the volume of deliveries nor on the prices.

VLADIMIR PUTIN: In this case I am quite worried about the deliveries of gas to Ukraine. I have no doubt that both Russian or Ukrainian parties are responsible enough so that nothing will interfere with the delivery of Russian energy to western consumers. But of course, in this case I would very much like to hear a more optimistic answer regarding gas deliveries to Ukraine, especially for Ukrainian consumers. I understand that the final agreements have not yet been reached.

VIKTOR KHRISTENKO: Up until now there aren't any. Naturally we are ready to deliver gas to Ukrainian consumers. The problem lies with the agreement on prices, which has not yet been achieved.

VLADIMIR PUTIN: This is very bad, especially bad because already in March of this year with the President of Ukraine, Viktor Andreevich Yushchenko, we agreed on the transition to a market-based regime for payments in energy including

in the gas sphere. Since March there has been enough time to resolve all the necessary issues both at the level of government and at the level of corporations. Since March there has been plenty of time for this. It is simply surprising. You—I am now addressing Russian and Ukrainian participants in this meeting—have created a real crisis, and not only in the energy sector. This is like a crisis between two countries. This is very bad.

After all we recognize the fact that the market price is the benchmark European rate for last year and not the Ukrainian rate because we have never had market-based relations with Ukraine in this sphere. I think that this is perfectly clear to experts.

We are not going to talk about these formulas now even though they are well understood and, I repeat, clear—it is simply mathematics. They are linked to diesel oil and other kinds of energy resources. But what can we do about deliveries to Ukraine? Today this worries me most of all.

Incidentally, I completely agree with Viktor Andreevich [Yushchenko] that we must depoliticize this issue as much as possible, absolutely as much as possible. It is also necessary to arrive at a solution at the professional level as soon as possible. We simply don't have any time. We must stop all press campaigns on this issue, and here I am addressing all participants in the process. We must stop frightening each other with our nationalists because if Russian and Ukrainian nationalists get together and want to celebrate New Year, travel to Paris, London or Brussels, either way they will not receive vodka, pickles, sausages, or bacon free of charge. In Kiev Russian representatives should not count on anything that is not market-based and in Moscow our Ukrainian partners should proceed according to market rules. And, by the way, it seems to me that only cooperating within a market-based regime will permit normal good relations between our countries in the future. Because only when we feel full independence, including economic independence, can we build normal intergovernmental relations. Our Ukrainian colleague has said that our Ukrainian partners consider a transition period necessary.

You know perfectly well what has been happening in this sphere over all these years. I am not speaking now about Russian investments in the Ukrainian economy over the last few years which are measured in billions of dollars. But let's not go into that.

I simply want to tell you how lacking in transparency all this business has been over the last decade. All the barter, calculating gas at an undetermined price, considering some kinds of gas but not others, lack of clarity concerning to whom and how it is sold, and the volume that is re-exported—all this must be stopped. However, and of course I agree with you, we are in the process of developing our relations and should never put each other in a difficult situation.

Certainly we should give our Ukrainian partners the possibility of drawing up a budget and developing the economy in a way that would enable them to adapt to market-based relations. We are changing to market-based relations with practically all of our partners, both in Transcaucasia and the European part of the former Soviet Union—it's the same for everyone.

Resolving the issue of decoupling internal Russian gas prices and Belarussian gas prices was a very difficult decision. We have done this. We shall also build further market-based relations with all countries, including Belarus. There we were in relatively familiar territory—we gave our Belarussian colleagues a loan to cover the difference between internal Russian prices and the prices at which we started to sell gas to Belarus. It is not comparable with the volume of financial resources required by Ukraine because in the Ukrainian case we expect it would be more than three billion dollars, more precisely three billion six hundred million dollars. Even on a Russian scale that's a huge sum. We shall find this money and we are ready to offer either part or all of the necessary financial resources to our Ukrainian partners. If you want the full amount, certainly the loan will be given under market conditions but with as favourable a rate as possible. We understand that there are budgetary issues here and we do not want to put the Ukrainian budget in difficulty. I understand what a budgetary process is. We are ready to give a commercial loan directly to your company, Naftogaz of Ukraine. Of course it would have to be guaranteed by a first-rate American or European international bank. I hope that today the leadership of Ukraine is in a condition to receive such a guarantee.

For our part, it will require changes in the budget we just accepted. But I am confident that the overwhelming majority of Russian citizens will approve of such a step for Ukraine and that I can convince the deputies of the State Duma to make the necessary changes to the Russian budget.

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