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Beginning of Working Meeting with Chairman of the Management Committee of Gazprom Alexei Miller

January 20, 2009

Gorki, Moscow Region

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PRESIDENT OF RUSSIA DMITRY MEDVEDEV: Alexei Borisovich, yesterday at the end of some long and very difficult negotiations, several agreements relating to the supply of Russian gas to Ukraine and gas transit through Ukraine were signed. What is the situation this morning?

ALEXEI MILLER: By 10 o'clock this morning our Ukrainian colleagues had the Ukrainian gas transport system up and running, and Ukraine is ready to open the taps on its part of the pipeline to effect the transit of Russian gas to Europe.

The pressure in our pipeline has been up to the necessary level since 13 January, and Gazprom has been ready since that date to supply gas to European consumers.

As of 10:15 this morning, we can attest that the gas transport system of Ukraine and the gas transport system of Russia are ready to resume the supply of gas in full, at a level that corresponds to that requested by the countries that have contracted to buy Russian gas.

DMITRY MEDVEDEV: So the legal and technical barriers that were preventing the transportation of gas to Europe have now been removed and this transportation can take place?

ALEXEI MILLER: Absolutely all the obstacles, all the problems preventing the transportation of Russian gas to Europe to date have been removed, and there are no obstacles to the transit of Russian gas through Ukrainian territory.

DMITRY MEDVEDEV: That's good. I would like to thank the members of the Government who have been working on this and the management and personnel of the open joint-stock company Gazprom for their concerted efforts in a difficult situation that have brought about these results.

Now lets talk a little about what all this means. Although you reported to us yesterday on the essentials of all these documents that have been signed, I would like to go over some of the small print, so that certain details can be clarified and the citizens of our country know exactly what agreements have been reached.

First off, please remind me at what price we sold gas to Ukrainian consumers last year.

ALEXEI MILLER: We supplied gas to Ukraine in 2008 at a price of 179.5 dollars per thousand cubic meters.

DMITRY MEDVEDEV: That was not the market price?

ALEXEI MILLER: That was absolutely not the market price. That was a preferential price for Ukraine.

DMITRY MEDVEDEV: I see. Late last year the Russian Government and Gazprom negotiated with Ukraine, with the Ukrainian Government and your counterpart there. What prices were discussed?

ALEXEI MILLER: By 31 December 2008 we had agreed with the people in charge at Naftogaz Ukraine to supply gas to Ukraine in 2009 for 250 dollars per thousand cubic metres, although no contracts were signed. The agreement also provided a mechanism that enabled Naftogaz Ukraine to engage in joint gas exports. This meant that the Ukrainian side would receive revenues that would enable it to give a subsidy to its customers by charging them 235 dollars per thousand cubic meters.

DMITRY MEDVEDEV: I understand. At what price will we be supplying gas to Ukraine in the first quarter of this year?

ALEXEI MILLER: In the first quarter the price of gas to be supplied will be determined, as it will be in the future, by a market formula. The base price for the first quarter is 450 dollars per thousand cubic meters. Taking into account a discount factor of 20 percent, in the first quarter the price for Ukraine will be 360 dollars per thousand cubic meters. Given the fact that gas prices depend on the prices of petroleum products in the future, the price of gas for Ukraine will depend on the way prices of petroleum and petroleum products go up and down.

DMITRY MEDVEDEV: Can you remind me why this discount was applied?

ALEXEI MILLER: This discount was applied because the tariff for transit of Russian gas through Ukrainian territory has remained at the same level, the same as it was in 2008, 1.7 dollars per thousand cubic metres per 100 kilometres. And with this in mind, taking into account both economic interests and economic viability, in the end we decided to meet Ukraine halfway and offer them a 20 percent discount off the market price.

As of 2010 and in accordance with a long-term contract that has been signed concerning gas transit for the next ten years, Gazprom will move to a market-based pricing system for the transit of Russian gas through Ukrainian territory.

DMITRY MEDVEDEV: Strictly speaking, we have reached an agreement with Ukraine that is based on market principles for pricing, but in addition to these market principles we have agreed to a special dispensation in order to counterbalance the old rate for gas transit.

Unfortunately, our experience with Ukraine has shown that our Ukrainian partners arent very good at paying for gas. What sorts of assurance do Gazprom and our nation in general have for these payments?

ALEXEI MILLER: In 2008 there were a number of times that the Ukrainian side failed to pay and we met them halfway by paying in advance for the gas transit. We did this in virtually every quarter and, when this was no longer possible within the framework of the budget year, it became clear that in the last quarter of 2008 our Ukrainian colleagues were simply not going to be able to fulfill their obligations and pay Gazprom what they owed us.

And this problem with payment or, more precisely with non-payment, on the part of our Ukrainian colleagues, occurred when the price was 179 dollars per 1000 cubic meters. Of course there is no reason to expect that, given the significant increase in price to 360 dollars, this problem will go away. 

Thus the contract includes the following mechanism: if Naftogaz Ukraine fails to make its payments, if we end up in another payment default situation, then immediately, automatically, the terms of the contract permit us to move to a one hundred percent prepayment system. At this point Ukraine would have to pay a month in advance. In point of fact we would receive in advance the money for the amount of gas that Ukraine was actually buying.

I emphasize that this mechanism will go into effect only if we are faced with a situation of non-payment. Let us hope that this does not happen, but we needed this insurance, this protection, so that Gazprom can receive its money promptly and in its turn transfer the money to the state treasury.

DMITRY MEDVEDEV: If I have understood correctly, if they fail to make a single payment the transaction process goes immediately to this prepayment system for any gas that is to be supplied.

ALEXEI MILLER: Yes, a single instance of non-payment and this system of one hundred percent prepayment goes into force.

DMITRY MEDVEDEV: I see. Now, with regard to protecting the interests of European consumers: since Ukraine shut down the export pipeline that supplies gas to European consumers we have created a so-called control mechanism. Do you think that such a mechanism is still necessary or that it has outlived its usefulness?

ALEXEI MILLER: As you know, yesterday in negotiations with our Ukrainian colleagues we discussed this issue. No one can claim that this mechanism, which was created on the basis of a multilateral agreement with the European Commission, ever worked effectively. It seems that we do have to admit that, making sure that Russian gas is once again making its way across Ukrainian territory, we can go to the European Commission with Naftogaz Ukraine to arrange for the termination of this arrangement, after of course thanking the observers and the experts who contributed to the resolution of these problems. That said, I repeat that one cannot say that this is an effective mechanism or one that has done its job effectively.

DMITRY MEDVEDEV: I see. However, we have to think about other possible situations. And from all appearances we really do need to thank our European colleagues, all those who participated in establishing this monitoring mechanism. At the same time we have to keep in mind that in general such a control will still be needed. Of course I would like to avoid such situations, but we have to think about these possibilities.

There are a number of other ideas that were also considered. In particular, what is going to happen to the gas transportation consortium, which has been repeatedly mentioned and which we talked about in the course of the negotiations? You reported on this to me and we discussed this issue at the event we arranged, the summit of heads of state and government in Moscow. What are we going to do with this consortium idea?

ALEXEI MILLER: In the course of negotiations to resolve the crisis, to resolve the situation created by Ukraines decision to block Russian gas supplies to Europe, we did discuss creating a consortium of Gazprom and some of the biggest gas companies, the companies in Europe that buy Russian gas. Our European partners in large part agreed to take part in this consortium and the consortiums main task at that stage was the purchase of so-called technical gas for Naftogaz Ukraine.

Now that a long-term contract for the purchase of gas by Ukraine has been signed, at the moment the creation of such a consortium is not nearly as urgent or topical, nor is the factitious question of technical gas.

This issue was raised by the Ukrainian side in part to explain the reasons why the gas transport system of Ukraine and Ukraine in general had failed to meet their transit obligations. But the question is factitious.

Ukraine signed a contract for the purchase of gas, Ukraine bought the gas all that is clear. And we simply do not care whether this gas for compressor stations comes from underground storage facilities, from their own production, from pipelines that supply Russian gas to Ukraine, or from some other source.

DMITRY MEDVEDEV: Alexei Borisovich, as you know for more than eight years I was on Gazproms Board of Directors. I know exactly what technical gas is. But our colleagues and those who have been following this gas conflict, and even government officials from various European countries, may have the feeling that this transit gas and also so-called furnace gas is a very special substance, which is different in kind, has a different chemical formula, a different price, and so on. That is simply not the case.

ALEXEI MILLER: That is simply not the case, that is an absolutely factitious argument. This is the same gas as natural gas, which we provide for the needs of our customers in Europe. Ukraine had to buy this gas and it bought it.

At the moment there is no technical gas problem. The gas is in the pipeline and we hope that Ukraine will discharge its transit obligations in full measure, one hundred percent.

DMITRY MEDVEDEV: We also discussed the idea of an irrevocable letter of credit. But having such a letter of credit or, more precisely, the issuing of such a letter of credit by one of the European banks, is no longer necessary because the gas is in transit and Ukraine has promised to pay in advance. This in principle is an even more powerful tool for protecting the interests of the seller than being covered or partially covered by a letter of credit.

ALEXEI MILLER: Yes, without a doubt we have been able to establish in the contract that was signed yesterday, in the long-term contract, the mechanism for the immediate transition to hundred percent advance payment if there is any disruption in the payments for Russian gas supplies. This mechanism is much tougher and much more efficient than the credit mechanism.

DMITRY MEDVEDEV: Good. And now I would like you to comment on one last thing, which is certainly not the least important thing.

When we met with the heads of state and government at this already mentioned event in Moscow, the basic position that I announced was that we must not only address the consequences of this crisis and, thank God, as a result of this meeting we managed to complete and sign all those documents and get back to work -- but prevent similar events in future. I have talked about this, but I would like to stress this issue once more, so that Gazprom work more actively on it.

We need to think about how international agreements, multilateral international agreements can protect the interests of the sellers, transit countries and consumers.

Why do I say this?

Everyone knows about the Energy Charter, which was in large measure conceived to protect the interests of consumers, and that is a good thing. But we must not forget the sellers, who are of course equal partners in this sort of contractual relationship, and their interests must be as fully protected as the interests of transit states.

In order to guarantee this sort of protection, we need new international mechanisms. I think that, with the consent of those countries who have signed it, we might think about changing the current version of the Energy Charter or about creating a new multilateral instrument which would be fully responsive to these problems, which would provide for procedural matters, technological issues and legal issues related to payments for gas and the enforcement of transit states responsibilities. This would help us avoid the sorts of problems that occurred with Ukraine late last year.

I think that the Russian government and our main supplier of gas, open joint-stock company Gazprom, need to think about what such mechanism should be prepared and suggested to the international community. I see this as our special task, bearing in mind the fact that Russia is the largest energy producer in the world.

As I said, I will be proposing all sorts of ideas during the meeting that will take place in London in early April and be devoted to overcoming the effects of the financial crisis, because the financial crisis could worsen and be affected by certain things, such as the conflict which just occurred. I will also make proposals during other events, including the meeting of the G8 heads of state. Do you have anything to add to this?

ALEXEI MILLER: With regard to Ukraines blockade of Russian gas transit to Europe, with regard to this situation, all of which took place in the space of a few weeks, we now need a new legal mechanism to protect the interests of consumer countries, transit countries and producer countries. There have been many criticisms, serious criticisms, directed at the agreement that became the Energy Charter. And we have seen that in a real, specific situation, this mechanism, the mechanism of the Energy Charter, has serious failings.

DMITRY MEDVEDEV: Once again, I would like to thank the Russian Cabinet and the open joint-stock company Gazprom for their help in protecting the national interests of the Russian Federation.


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