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UNFORTUNATE BUT INEVITABLE: MOLDOVA’S GAS SUPPLY AGREEMENT WITH THE KREMLIN AND GAZPROM

On October 29, Moscow and Chisinau agreed on a conditional resumption of Russian natural gas supplies to Moldova as of October 30. The Russian side had curtailed gas supplies to Moldova by one third in October, and threatened to discontinue the supplies altogether by December 1 (see EDM, October 28), compelling Moldova to accept Russia’s conditions for prolonging the multi-year contract. These conditions are designed to ensure Moldova’s continuing exclusive dependence on Gazprom. This, moreover, entails dependence on electricity generated in Transnistria with Gazprom’s gas nominally supplied (as heretofore) to Moldovagaz. Breaking out of…

Eurasia Daily Monitor

By: Vladimir Socor

November 3, 2021

 

On October 29, Moscow and Chisinau agreed on a conditional resumption of Russian natural gas supplies to Moldova as of October 30. The Russian side had curtailed gas supplies to Moldova by one third in October, and threatened to discontinue the supplies altogether by December 1 (see EDM, October 28), compelling Moldova to accept Russia’s conditions for prolonging the multi-year contract.

 

These conditions are designed to ensure Moldova’s continuing exclusive dependence on Gazprom. This, moreover, entails dependence on electricity generated in Transnistria with Gazprom’s gas nominally supplied (as heretofore) to Moldovagaz. Breaking out of these dependencies will be a daunting challenge to Moldova in the years ahead.

 

The deal just signed is unfortunate but inevitable for Moldova at this stage. Chisinau has no realistic alternative options at hand. The country’s new, Western-oriented authorities have inherited this situation from the predecessor governments. Russia had tolerated those governments’ indebtedness and malfeasance (even at Gazprom’s expense) for many years, but it decided to strike at Moldova’s new, clean government.

 

Chisinau has released the Russian-language Protocol for publication in Moldovan media, but it is not allowed to publish the terms of the updated supply contract without Gazprom’s approval. Moldova is, understandably, greeting the resumption of gas supplies on winter’s threshold with a deep collective sigh of relief. It overlooks, meanwhile, the fine print of the Protocol that has set Russia’s onerous conditions to prolonging the long-term contract.

 

Negotiated in multiple rounds during October, with Russian Presidential Administration deputy head Dmitry Kozak’s personal participation, the October 29 Protocol is signed by Gazprom CEO Aleksei Miller and five other Gazprom officials (none from the Russian government) opposite Moldovan Deputy Prime Minister and Infrastructure Minister Andrei Spinu and Moldovagaz CEO Vadim Ceban. Moldovagaz’s shareholding is 63 percent Russian (including Transnistria’s stake ceded to Gazprom) to 35 percent Moldovan; and its local CEO (without prejudice to loyalties) is Russian-approved by definition, thus not free to represent Moldova’s own interests. This whole structure of the negotiating process and of the signatory parties is deeply asymmetrical and replete with the kind of ambiguities that Russia habitually creates and exploits.

 

The Protocol’s preamble makes clear that the procedure for settling Moldovagaz’s arrears to Gazprom and a postponement of Moldovagaz’s “unbundling” (key step toward gas market liberalization) had to be negotiated and agreed upon before the decision on the

supply contract’s prolongation. This sequence amounts, in effect, to conditionality of Russian gas supply.

 

Gazprom claims more than $700 million of “historic debts” from Moldovagaz and the conversion of that sum from company debt into Moldovan state debt. That sum comes from the bookkeeping of the Gazprom-controlled Moldovagaz. The Moldovan government demands an independent audit. The Protocol just signed does not mention the sum of arrears. Instead, it allows the Moldovan government to commission an independent audit of Moldovagaz. However, the audit’s final report shall be subject to approval by Moldovagaz’s supervisory board, itself Gazprom-controlled. If approved, Moldovagaz and Gazprom shall then sign, before May 1, 2021, an agreement on reimbursing “the whole debt, including the penalties,” within the next five years.

 

Although the Protocol does not mention “state debts,” the Moldovan government becomes a party to this process, apparently no longer treating the debts (as it heretofore did) as a pure inter-company matter (as it heretofore did). Moscow long ago stopped threatening to charge Chisinau for Transnistria’s multi-billion-dollar gas debts. That threat was never to be taken at face value; but it could become serious if Moscow injects this issue into eventual negotiations on Transnistria’s reintegration with Moldova. The Moldovan government has already announced that it is preparing a tender to select a company for auditing Moldovagaz (Moldpres, November 1).

 

On Moldovagaz’s “unbundling,” the Russian and Moldovan sides agree in the Protocol that “Moldova’s international commitments stipulate ensuring the protection of the rights of investors”—a reference to Gazprom’s majority stake in Moldovagaz. However, “the Moldovan side assert[s] that the implementation of the European Union’s Third Package of Energy Legislation is an international commitment that Moldova has entered into.” Chisinau, in effect, introduces a unilateral reservation on this point after having conceded the previous point in the Protocol.

 

The document, therefore, entails a potential conflict between two sets of Moldovan commitments. In his briefings for Moldovan media, Spinu restated the government’s firm intention to proceed with unbundling (Ziarul National, October 30, 31; Moldpres, November 1). As a non-EU member, however, Moldova will be hard placed to invoke the supremacy of EU law on Moldovan territory as against Gazprom’s “investor rights,” particularly if Gazprom keeps wielding the leverage of its combined monopoly on supply and transportation.

 

Under the Protocol, Chisinau and Moscow agree to enter during 2022 into a further agreement, namely to “preserve the existing status of the Moldovagaz joint stock company, including abstention from enforcing a reorganization or sanctions on it, until the full settlement of the whole amount of debts to Gazprom.” Given the reimbursement deadline in 2027, Moscow is trying to exclude the possibility of unbundling—and, thus, rule out the liberalization of Moldova’s gas market—for a long time to come.

 

The Moldovan government agrees, in this Protocol, to initiate itself, as early as November 2021, a session of the Russian-Moldovan Inter-Governmental Commission on Economic Cooperation. There, the Moldovan side shall (again) itself propose to negotiate a Russian-Moldovan “inter-governmental cooperation agreement in the energy sphere.” This move seems designed to cement Moldova’s energy dependence on Russia. And Moscow is thereby trying to create the impression that Chisinau is itself asking to institutionalize that dependency.

 

Kozak is that Commission’s co-chairman for Russia and, concurrently, the Kremlin’s negotiator on Transnistria. Combining both processes in his hands will give the Kremlin economic leverage against Moldova in the negotiations on Transnistria (see EDM, October 28).

 

Premised on all of those stipulations (in practice: conditional on their imposition), Gazprom and Moldovagaz signed, on October 29, an agreement to update and prolong their long-term contract on gas supplies. The updated prolongation has gone into effect from November 1, 2021, for five years. The detailed terms are secret at Moscow’s insistence, but Gazprom has disclosed some general information on pricing. Accordingly, the price-calculation formula for pipeline-delivered gas to Moldova combines indexation to the basket of crude oil and oil derivatives with indexation to the natural gas price on European spot markets. It will, during the first and fourth quarters of the year (the heating season), use the oil indexation for 70 percent and the spot-market natural gas indexation for 30 percent of the volumes supplied to Moldova. Conversely, it will use the spot-market indexation for 70 percent and oil indexation for 30 percent of the volumes supplied to Moldova during the second and third quarters of the year. Gazprom apparently expects the price to oscillate between $450 and $600 per one thousand cubic meters during the months ahead (TASS, October 29, 30). For its part, the Moldovan government foresees the price at $450 in the first quarter of 2022 and it going down afterward (Ziarul National, October 30, 31; Moldpres, November 1). Whichever the case, it will be far more favorable than the spot-market price of $790 that Gazprom charged in October, which—combined with the threat to discontinue the supplies on December 1—broke Chisinau’s resistance.

 

Chisinau had no alternative in the short-to-medium term. The Romanian-built pipeline, Iasi–Ungheni–Chisinau, putatively operational since October 2021, fails to challenge Gazprom’s monopoly because it has no gas volumes available. This pipeline could only deliver volumes that Romanian companies would procure from the same Gazprom—or more expensively elsewhere—and re-sell those volumes to Moldova with a markup.