Energy Balance

Economic News

22 Jul 2010
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Eleven weeks after snap parliamentary elections, Ukraine still does not have a fully functioning parliament. On December 11, Yulia Tymoshenko narrowly failed to secure backing from the parliament to become prime minister - one vote short of the required majority.

Ukraine's new government coalition - comprised of NU-NS (Our Ukraine-People's Self-Defense) - and the eponymous Bloc of Yulia Tymoshenko - is perhaps the most tenuous government since Ukraine's independence. In the 450-seat parliament, the orange coalition holds a razor-thin majority of 227 deputies, three of whom openly do not support the candidacy of Tymoshenko.

During her short tenure as prime minister in 2005, Tymoshenko shook the investment climate in Ukraine, promising to re-privatise industries and tinker with the nascent free-market economy. Since then, she has promised to address energy security as one of the main tasks for the new government.

"I want a national team to be born so that we are able to turn Ukraine into a strong European state," Tymoshenko said this week. Despite her pro-Western intentions, Tymoshenko would have much to address in Ukraine's relations with Russia, which are dominated by energy issues.

On December 6, Gazprom officially raised natural gas prices for Ukraine to $179.50 per thousand cubic metres after intense negotiations. In turn, Ukraine bumped up transit fees to $1.70 per one thousand cubic metres to counterbalance the price rise. According to a Russian daily, the rise in gas prices will cost Ukraine an additional $2.71bn, as the government budgeted for prices of $160.

Minister of Energy Yuriy Boiko announced that this year Ukraine has consumed around 65bn cubic metres of natural gas, of which 50bn cubic metres were imported from Russia and Central Asia. While domestic production has leveled at about 18bn cubic metres, around 3bn cubic metres are available for lucrative re-exports to Europe - the main money earner for RosUkrEnergo.

Around 80% of Europe's gas supply flows through Ukraine, making the country a crucial transit state for Russia, but leaving the nation dependent on energy policy from Moscow. Natural gas sold to Europe is roughly six times more expensive than gas sold to Ukrainian industries and eleven times more expensive than average Ukrainian residential gas prices), this re-export is a key profit producer for Ukraine.

Tymoshenko decried the gas deal, which allows intermediary RosUkrEnergo to retain its place as the coordinator of the Russian-Ukrainian gas trade. She expressed that the new price regime was a result of "empty-headed politics when RosUkrEnergy entered as a middleman." Tymoshenko has pledged to dismantle the company due to its lack of transparency and direct ties to Gazprom.

But Ukraine's energy woes do not rest solely on RosUkrEnergo or the Kremlin. Late last month, Turkmenistan - which now supplies the bulk of Ukraine's domestic consumption - decided to boost prices from $100 per one thousand cubic metres to $130 for the first six months of next year. After July 2008, Ukraine will pay $150 for every one thousand cubic metres of Turkmen gas, straining the country's energy budget and denting prospects for optimistic GDP growth.

From the view of Moscow and Ashgabat, new price hikes are a way to reduce continued subsidies. Future price rises for Ukraine are not a matter of negotiation but a matter of time. Nonetheless, Tymoshenko is expected to renegotiate natural gas terms with Gazprom as well as exporters in Turkmenistan if she secures the post of premier.

Gazprom is keen to purchase Ukrainian assets. Tymoshenko would be forced to sell off gas transmission systems to Gazprom in favour for lower prices. A conflict will arise between members of the orange coalition who regard Ukrainian ownership of energy infrastructure as a national security concern, and those members hoping to keep their constituents warm at a cheaper price.

Considering that the phrases "social welfare" and "energy security" are used to describe Tymoshenko's future programme, the choice will be difficult. The new government's ability to carry forward with a united energy policy and sustainable programme of diversification from Russian oil and natural gas

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