2006 Year in Review

Economic News

22 Jul 2010
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2006 was marked by three major developments in Ukraine. First on the energy front by the “gas war” with Russia, second on the political front with the presidential election. Lastly, on the agricultural side, the imposition of restrictive grain export quotas alarmed advocates of free market policies.

The beginning of 2006 saw the country shivering in the grip of a particularly cold winter. On January 1, Russia turned off the natural gas supply to Ukraine by doubling prices from $50 to $95 per 1000 cubic metres. The move was considered by many as a political tactic to bully energy-reliant Ukraine and to demonstrate the re-emergence of Russian political power. In February 2006, companies Naftogaz Ukraine and RosUkrEnergo established a joint venture called Ukrgaz-Energo on gas supply to Ukraine. RosUkrEnergo, a controversial subsidiary of Gazprom, now supplies all of Ukraine’s natural gas imports from Russia and other Central Asian countries including Turkmenistan.

The negotiations left Russia in a strong position and a revision of the deal was inked towards the end of 2006, during a visit of Russian Prime Minister Mikhail Fradkov to Ukraine, when he agreed to limit imported gas prices at no more than $130 per 1000 cubic metres, which is half of what Western European countries pay. The agreement also sealed the volume at a minimum 55bn cubic metres, which together with the 20bn cubic metres produced in Ukraine, meets the average annual domestic consumption. However, transit prices were not revised. Both Fradkov and Ukrainian Prime Minister Viktor Yanukovych stated that the issue had become overly politicised and noted that they had attempted to hand the negotiations over to the import companies. The new price came into force in January this year.

International media reported that Ukraine made several political and economic concessions to secure the agreed pricing. These include a re-evaluation of the terms under which Russia leases the port of Sevastopol for its Black Sea Fleet and an agreement to hold a referendum in the near future on the question of whether Ukraine should join NATO.

March saw a general election in the country and with it renewed political uncertainty. President Viktor Yushchenko’s “Our Ukraine” party gathered only a 13.95% share of the vote, putting it in third place. Ahead were The Party of Regions and Yulya Tymoshenko bloc with 32.24% and 22.29% of the vote respectively. Although the election resulted in the least fragmented parliament in the post-communist period, it left no clear party with a governing majority and gave rise to a protracted period of bargaining and horse-trading.

International media immediately predicted a reunion of the Orange Coalition. However, Tymoshenko demanded to be reinstated as Prime Minister, a concession other major coalition builders were not prepared to make. After a protracted period, the ‘Anti-Crisis Coalition’ was born, a broad coalition including The Party of Regions and Our Ukraine, with Viktor Yanukovich as Prime Minister.  As the year drew to a close the intrigue continued, with a much publicised power struggle between the president and the prime minister.

Despite these events, the business community remains positive about the more stable economic environment, and with no elections scheduled until 2009, it is expected to remain this way.

Ukraine has not entirely broken free from its past in what was seen as a blow to advocates of free market policies, when the government waved the protectionist flag in October 2006 with the imposition of export licences on grain and a resolution on restrictive grain export quotas.

With this quota, the government is trying to limit the export of grain in order to supply the domestic market. This year, world grain prices have jumped considerably because of a poor worldwide harvest and reduced grain reserves. As a result, it is currently more profitable to export wheat then to sell it internally on the Ukrainian market.

Still, the move caused concern among grain traders, including international traders such as German Topfer, US Cargill and Dutch Bunge, that the government was reverting to former soviet methodologies of pricing. Traders accused the government of blocking exports, and as grain exports from the country came to a standstill, they warned that the move could cripple the agricultural sector.

Nevertheless, the export quotas remain in place, with traders speaking of significant losses and the World Bank judging them ineffective in protecting domestic consumers against rising international grain prices. Agriculture is expected to generate significant revenue in 2007 and beyond, with foreign investors expressing much interest in developing the market.

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