Finding the Balance

Economic News

22 Jul 2010
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Securing affordable and reliable gas supplies will be a high priority for the Ukrainian government over the coming months.



Newly approved Prime Minister Viktor Yanukovych, whose Party of the Regions won most of the votes in the March parliamentary elections, campaigned partly on a platform of improved ties with Russia. Yanukovych was forced to sign the Declaration of National Unity in order to win pro-Western President Viktor Yushchenko's approval as candidate for premier, compromising his previously tough stand on issues such as NATO membership. He is now the leader of the biggest bloc in parliament, which controls key cabinet posts, including the ministry of fuel and energy, headed by Yuriy Boyko.



In a meeting in the Russian Black Sea city of Sochi, the prime minister and Russian premier Mikhail Fradkov updated the agreement reached in January after the "gas wars" in which Russia cut off supplies to the country on January 1 following a dispute over a large price increase on Russian gas.



Although supplying the Ukrainian market with oil is profitable for Russia, the markets connected to the pipeline that passes through the country are the most lucrative. It is estimated that 85% of Russian gas arriving in Western Europe passes through the Ukraine.



In 2004, Ukraine charged just $1.09 per 100 cu metres per 100km for transit, which was considered very low by international standards. Russia's state-owned gas company Gazprom repaid this in kind by offering gas at the low rate of $50 per 1000 cu metres in 2005.



As a result of an agreement that followed the January "gas wars", Ukraine paid $95 per 1000 cu metres of gas at its border and Gazprom pays $1.60 in cash, per 100 cu metres per 100kms for transit.



Since 2005, the market price of Russian gas has been $230 per 1000 cu metres, but Ukraine pays less because its supplies are mixed with Turkmen gas that costs only $65 per 1000 cu metres. Even that subsidised figure is under threat as Turkmenistan has raised the prospect of increasing its price to $100 per 1000 cu metres and Gazprom has suggested that Ukraine ready itself for further price hikes in 2007.



On August 16, Ukraine and Russia agreed to extend the January agreement for the balance of 2006, which will allow the country to fill its storage tanks for the winter with some 24.5bn cu metres of gas. Deputy Prime Minister Andriy Klyuev said on August 17 that Ukraine currently has a gas deficit of 8bn cu metres.



After the meeting, the Ukrainian premier said that beginning in 2007, "(pricing) schemes will be market based, the pricing mechanism will be transparent, and it will correspond to the level of economic relations between Russia and Ukraine".



Several announcements have been made this week concerning energy as the new Ukrainian government works to prepare for the winter and to ensure continued economic growth.



While Yanukovych and his supporters are pro-Moscow, high gas prices have hit heavy industry, which is the main employer of the Party of the Regions' supporters, and increased the cost of living as the government has been forced to raise tariffs for household consumers and public transportation.



Moscow has hinted since the Orange Revolution that it would be easier to reach an understanding with Yanukovych than Yulia Tymoshenko, the former prime minister, who took an antagonistic stance towards Russia.



Securing oil supplies has also been a challenge as prices climb around the globe. In Ukraine, retail prices for petrol and diesel have risen about 10% in the last three weeks alone, according to the Kyiv Post. In the face of rising costs for all businesses and consumers, local oil businesses representing about 60% of the country's fuel market have agreed to cap gasoline prices at Hr4.7 ($0.93) per litre and diesel prices at Hr4.1 ($0.82) per litre, Boyko announced on August 14.



The government set these prices after many called for intervention to protect consumers. Fuel stations that do not abide by the agreement will be barred from receiving fuel shipments from refineries.



Meanwhile, Ukraine is looking to cooperate with Russia and other former Soviet countries to secure supply of up to 45bn cu metres of gas per year, according to UzReport. It would help Russia, Kazakhstan and Uzbekistan to develop gas deposits in exchange for preferential gas tariffs. It has also said it would help to modernise gas pipelines on Uzbek territory.



But the state-owned gas company, Naftogaz Ukrayiny is heavily indebted, and has not made payment on much of the gas bought from Russia in the first quarter of 2006.



Boyko has floated an "access for access" proposal, in which Russian gas suppliers are given greater direct access to Ukraine's internal market, in exchange for access to gas extraction projects in Russia. According to the Eurasia Daily Monitor, this would result in the permanent dependence of Ukraine on Russia for gas supplies.
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