Tymoshenko Prison Sentence Strengthens Russia’s Hand in Ukraine Gas Talks

Former Ukrainian Prime Minister Yulia Tymoshenko’s prison sentence may have squashed President Viktor Yanukovych’s drive for closer ties with the European Union, putting him at Russia’s mercy before gas-price talks.

Tymoshenko, 50, was sent to prison on Oct. 11 for abuse of power when signing a 10-year gas supply and transit agreements with Russia in 2009. The verdict may have “profound implications” for Ukraine’s relations with the EU, the bloc’s executive said. The U.S. also condemned the sentencing. She may face 12 more years in prison if found guilty under charges in a new criminal probe started today.

Before Tymoshenko’s trial, Ukraine was set to sign an Association Agreement with the EU this year, which would have included a free-trade area with the bloc. The former Soviet republic, which depends on steel and chemicals exports, relies on Russia for more than 60 percent of its gas needs.

“Ukraine’s already stuttering movement towards” the EU “has come to a grinding halt,” Tomas Valasek, director of foreign policy and defense at the Centre for European Reform in London, said in a telephone interview. “What they’ve done is sacrifice the European option for the sake of domestic political gains. Against their wishes, they are now somewhat closer to Russia.”

New Probe

Ukraine’s security service opened a new criminal probe against the former premier today into whether she unlawfully transferred $405 million of debt owed to Russia by United Energy Systems, a company she headed in the late 1990s, to the state budget, making it guaranteed state debt, Ivan Derevyanko, head of investigations at the security service, told Ukrainian private television Channel 5. The offense is punishable by up to 12 years in prison, he said.

Putin has tried to convince Ukraine to join a Russia-led customs union that includes Kazakhstan and Belarus, instead of seeking EU membership, which is “absolutely unrealistic,” according to a Sept. 16 comment by the Russian premier, who is seeking to return to the presidency next year.

‘Deeply Disappointed’

The U.S. is “deeply disappointed” by the “politically motivated prosecution” of Tymoshenko, State Department spokeswoman Victoria Nuland in Washington said Oct. 11. U.K. Prime Minister David Cameron yesterday called Tymoshenko’s treatment “absolutely disgraceful.”

The Tymoshenko verdict “appears politically motivated” and has an “anti-Russian” flavor, the Foreign Ministry in Moscow said in a statement on Oct. 11. The gas contracts are “valid and must be honored,” according to the statement.

Yanukovych seeks lower gas prices by renegotiating the terms of the Tymoshenko accord by the end of this month. He will meet Russian President Dmitry Medvedev in Donetsk, eastern Ukraine. on Oct. 18 to discuss the agreement.

He will argue that the court decision on Tymoshenko proves that the agreement is void because it violated Ukrainian law, the Kommersant newspaper in Kiev reported yesterday, citing an unidentified government official with knowledge of the matter.

‘Active’ Talks

“Talks with our Ukrainian colleagues are very active, but there are lots of outstanding questions,” Alexei Miller, the chief executive officer at OAO Gazprom, said late yesterday after meeting with Ukraine’s Energy and Coal Minister Yuriy Boyko. “For sure, we will not reach any final agreements in coming days. I think that first result s will be no earlier than in November”.

Tymoshenko signed the gas supply and transit agreements with her Russian counterpart, Vladimir Putin, in January 2009 after a price dispute between the two countries disrupted deliveries to at least 20 nations for two weeks amid freezing temperatures.

Yanukovych has called the gas agreement “discriminatory, unfair and enslaving.” He wants to cut the price to $230 per cubic meter from next year’s expected level of $415. Russia, whose government backed Yanukovych in the past, has rejected his attempts to renegotiate the terms.

Ukraine got a discount in April 2010 in exchange for extending a lease for Russia’s Black Sea Fleet in Ukraine’s Crimea. A new price formula now sought by Ukraine would guarantee even lower costs.

‘Better Deal’

Yanukovych will probably be forced to make concessions “to negotiate a better deal on Russian gas,” Valasek said, adding that “it’s not something they’ll do with joy.” Ukraine may be forced to sell NAK Naftogaz Ukrainy, Ukraine’s biggest energy company, or other government-owned assets to Russian investors, Valasek predicted.

Yanukovych has rejected repeated Russian takeover offers for Naftogaz in return for a new gas contract and threatened to sue Russia in international courts over the gas price.

“Europe and the U.S may isolate Ukraine” for imprisoning Tymoshenko, Vladimir Zastava, an expert at Kiev-based think tank Gorshenin Institute, said in an Oct. 11 phone interview. “Should Ukraine be isolated, it doesn’t have any resources to compete with Russia. Relations will be like boss and dependent.”

Tymoshenko, who has been in police custody since her Aug. 5 arrest, will remain there until a ruling on her appeal of the verdict, her spokeswoman Natalia Lysova said by phone. She is due to serve her term in Kiev’s Lukyanivka Remand Prison, according to the court. She was also fined 1.5 billion hryvnia ($187 million), owed to Naftogaz for damages, the court said.

Narrow Victory

Yanukovych beat Tymoshenko by less than 4 percentage points in the February 2010 election. He won on a platform of balancing Russian influence with integrating the country’s 46 million people more closely with Europe.

The two leaders have been at odds since 2004, when Tymoshenko helped lead the Orange Revolution that led to Viktor Yushchenko’s victory over Yanukovych in presidential elections.

Tymoshenko claims Yanukovych engineered the case to silence the opposition before parliamentary elections next year. Yanukovych has denied any involvement in the trial.

The conviction “is a sad incident which hampers Ukraine’s European integration,” Yanukovych said on Oct. 11. “It triggers concerns in the EU and we do understand why. It wasn’t the final ruling.” The appellate court’s “decision will be very important.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Agnes Lovasz at alovasz@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net;

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