PREVIEW-Gas merger will be hard sell for Medvedev in Kiev

* Medvedev to visit Kiev on May 17-18

* Recent thaw in relations

* Ukraine opposes Gazprom-Naftogaz merger

By Denis Dyomkin

MOSCOW, May 16 (BestGrowthStock) – Russian President Dmitry Medvedev
visits Kiev this week on an almost impossible mission: talking
Ukraine into surrendering control of its cherished gas pipeline
system to Russian energy giant Gazprom (GAZP.MM: ).

The proposal, mooted by Russian Prime Minister Vladimir
Putin last month at an intergovernmental meeting in Sochi, was
far from welcomed by Ukrainian leaders eager to retain control
of the network that serves as a conduit for 80 percent of
Russian gas supplies to the European Union.

“It (Putin’s offer) was an unexpected step for Ukraine and
it does not mean that this question will be considered by
Ukraine and resolved,” Ukrainian President Viktor Yanukovich’s
press service quoted him as saying earlier this month.
[ID:nLDE6451AC]

Yanukovich’s reluctance is a sign the rapprochement between
Kiev and Moscow has its limits, though the two leaders are
expected to sign agreements on border demarcation, nuclear
cooperation, aircraft development and other matters.

Since Yanukovich’s election in February, ties with Moscow
have rapidly improved with accords on gas pricing and a lease
extension for a key Russian naval base on Ukraine’s Crimea
peninsula already signed. [ID:nLDE63Q0NL]

CROWN JEWEL

Russia has long coveted Naftogaz’s pipeline network, which
is part of the Soviet-era system that supplied natural gas to
Eastern Bloc allies as well as clients on the other side of the
Iron Curtain.

The issue has become more acute in recent years after Russia
cut or reduced gas supplies on several occasions during pricing
and storage disputes with the state-owned Ukrainian gas company.

Earlier this year, Yanukovich’s government proposed the
creation of a gas consortium with Russia and the European Union
that would modernise the ageing pipelines, though this has yet
to come to fruition. [ID:nLDE62L0VN]

But Putin’s proposal to merge Gazprom and Naftogaz appears
to be a step too far for Ukrainian politicians.

Ukrainian First Deputy Prime Minister Andriy Klyuev has also
ruled out any energy deals with Russia during Medvedev’s visit
next week.

“No sensations are expected,” Ukraine’s presidential chief
of staff, Sergiy Levochkin, told reporters in Kiev when asked
about the possible outcome of the Russian-Ukrainian talks.

The head of Kiev-based political think-tank Penta, Volodymyr
Fesenko, told Reuters that Yanukovich was not keen on Russia’s
proposals and instead promptly proposed the involvement of
European Union in the possible deal. [ID:nLDE64C1JB]

While the chance of a gas merger looks remote, progress on
nuclear cooperation is likely during Medvedev’s visit to Kiev.

Putin has separately suggested unifying assets in the
nuclear energy industry and said Russia might lend $5-6 billion
to its ex-Soviet neighbour to build two new nuclear reactors at
its Rivne and Khmelnytsky plants.

“We are now working on these contracts. The conditions are a
straightforward loan and no transfer of property,” Klyuev, the
Ukrainian first deputy prime minister, said on May 12.
[ID:nLDE64B0VH]

For a Factbox on Ukrainian state energy company Naftogaz,
see [ID:nLDE63T22S]

For a separate Factbox on Ukraine’s role as a gas transit
state see [ID:nLDE6200KE].

Stock Market

(Additional reporting by Yury Kulikov in Kiev, writing by
Alfred Kueppers and Vladimir Soldatkin; Editing by Matthew
Jones)

PREVIEW-Gas merger will be hard sell for Medvedev in Kiev