Open Joint Stock Company Gazprom

The FSUHistorically, Gazprom has had, and continues to have, a dominant position in the supply of naturalgas to the FSU. In 2001, Gazprom exported 39.6 bcm of natural gas (43.4 bcm in 2000) whichconstituted approximately 8.9% of the total natural gas supplied by Gazprom in 2001) to six countriesof the FSU: the Ukraine, Belarus, Moldova, Lithuania, Latvia and Estonia. During the six months ended30 June 2002, Gazprom delivered a further 23.1 bcm of natural gas to the FSU countries. Ukraineaccounted for over 60% of these deliveries during this period.The following table sets out natural gas export volumes to the FSU countries (excluding Russia)for the periods indicated:Year Ended 31 December6 monthperiodended30 JuneCountry 1999 2000 2001 2002(bcm) (bcm) (bcm) (bcm)Ukraine 29.5 27.2 21.9 13.9Belarus 12.2 10.8 11.6 6.0Lithuania 1.8 2.0 2.2 1.2Moldova 2.2 1.8 2.1 1.2Latvia 1.0 1.0 1.1 0.5Estonia 0.5 0.6 0.7 0.3Total 47.2 43.4 39.6 23.1Source: Gazprom.Current annual contract prices for natural gas supplied by Gazprom to the FSU countries arehigher than current Russian domestic prices and are settled on the level close to the world prices takinginto account prices for alternative kinds of fuel and intergovernmental agreements in existence withthese countries.In 1999-2001 Gazprom limited its export supplies to the FSU countries (which have experiencedeconomic decline over recent years) in order to avoid further exposure to non-paying customers.However, Gazprom expects these markets to recover and plans to supply 49.5 bcm of natural gas tothe FSU by 2005 and 45.8 bcm by 2010. In 2000 Gazprom signed long-term contracts with consumersin Lithuania, Latvia and Estonia (the "Baltic States") to supply 25.5 bcm of natural gas between 2000and 2005.The Ukraine, Gazprom's largest FSU customer, is traversed by major pipeline routes from thenatural gas fields of Western Siberia to export markets in Europe and is the source of substantialamounts of industrial supplies for Gazprom. Gas exports from Russia to the Ukraine are based onannual inter-governmental agreements with respect to prices and export volumes. Currently, Gazpromis dependent on the Ukraine for the transit of substantially all its natural gas sold in Western Europe.However, the Yamal-Europe and Blue Stream pipelines, which are nearing completion, will reduceGazprom's dependence on the Ukraine for the transportation of natural gas to Western Europe. On theother hand, the Ukraine is dependent on Gazprom to meet its domestic natural gas requirements. Thisinterdependence is taken into account in negotiations over a number of matters, including the terms ofpayment for natural gas supplied by Gazprom and transit fees charged by the Ukraine.Although the prices charged by Gazprom in the FSU are lower than those charged in WesternEurope, the failure of a number of FSU customers to pay Gazprom for supplies of natural gas hasresulted in substantial debts to Gazprom. As at 31 December 2001, natural gas with a sales value ofmore than U.S.$2.0 billion (including VAT levied in Russia but excluding charges for late payment) hadbeen supplied to customers in the FSU for which payment had not been received. The amounts owedwere due from customers in the Ukraine (U.S.$1.4 billion), Belarus (U.S.$157 million) and Moldova(U.S.$512 million), Gazprom's largest natural gas markets in the FSU. As at 30 June 2002, the amountsowed totalled U.S.$2.2 billion, with the amount owed by customers in Belarus having increased by33