A Gas Deal

Economic News

22 Jul 2010
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In a week that saw more government shuffling in Ukraine, with the break up of the "Anti-Crisis" coalition, a period of intense speculation ended with the signing of a gas contract with Russia.

On October 17, five government ministers from the Our Ukraine party of President Viktor Yushchenko tendered their resignations and announced that the party would be moving into opposition. This followed the failure of moves by Yushchenko to create a broad ruling coalition encompassing Our Ukraine, Party of Regions, Socialists and Communists, a collection of parties with little or no common ideological base or shared policies.

Roman Bezsmertny, who led the Our Ukraine bloc in government noted "The government is conducting a policy of economic absurdity. It was under such conditions that Our Ukraine withdrew from the negotiating process." Bezsmertny has called for the existing opposition in the Rada led by Yulia Tymoshenko, together with opposition forces throughout Ukraine, to form a confederation under the name "European Ukraine".

A complicated mix of parties and politically active groups now exist in Ukraine in addition to the government of Prime Minister Viktor Yanukovich. Without the formation of a stronger alliance four areas of opposition are emerging: Bloc of Yulia Tymoshenko, Our Ukraine, the increasingly influential Presidential Secretariat and the National Security and Defence Council (NSDC). Both the Secretariat and the NSDC have recently undergone significant changes in leadership, seen as an attempt by a weakened Viktor Yushchenko to form a new power base to replace an ineffective Our Ukraine.

It was against this backdrop that Russian Prime Minister Mikhail Fradkov met Yanukovich on October 24 with a subsequent announcement of an agreement fixing gas import prices at not more than $130 per 1000 cubic metres. The agreement also fixes the volume at minimum 55bn cubic metres, which together with the 20bn cubic metres produced in Ukraine meets average annual domestic consumption. Both Fradkov and Yanukovich stated that the issue had become overly politicised and noted that they had attempted to hand the negotiations to the import companies.

The current price for gas imported to Ukraine is $95 with the new price set to come into force in January 2007. All of the gas coming into Ukraine is supplied through the controversial RosUkrEnergo and is bought by a joint venture with Naftogaz Ukrainy - UkrGaz-Energo.

RosUkrEnergo is a company registered in Switzerland in which Gazprombank holds a 50% stake. The deal has also seen no change in the current transit price of $1.6 per 1000 cubic metres over 100 km, with Yanukovich seeking to reassure European governments that the settlement will provide them with stability. Some 80% of Russian gas supplies to Europe pass through Ukrainian pipelines.

International media have reported that Ukraine has made several political and economic concessions in order to secure the price. These include a re-evaluation of the terms under which Russia leases the Crimean port for her Black Sea Fleet and an agreement to hold a referendum in the near future on the question of whether Ukraine should join NATO. With around 60% of the population thought to be opposed to an early entry, this could put membership on hold for the short-term. Local media has said that the other facets of the deal include an agreement that Ukraine will import Central Asian gas only via Russia, foregoing the possibility of conducting direct negotiations with such countries, and that Ukraine must not change the price for transit of Russian gas across the country. Deputy Prime Minister Andriy Klyuyev has denied these reports.

Ukrainian business leaders see long-term advantages in integration with the west, which would boost their financial assets and assist with moves towards public offerings. However, they also see no immediate desire on the part of the EU for Ukrainian entry, and as such wish to capitalise on short-term benefits from Moscow in the form of cheap energy. Such industrialists, who form the basis of support for Yanukovich, will therefore have been pushing for a lower price and will see additional concessions as necessary. The opposition under Tymoshenko have objected to any price rises as they see this as reneging on the deal agreed in January 2006, fixing prices at $95 until 2010.

The $130 price of gas remains below that paid by other countries in the region, with Moldova paying $160 and other Baltic states up to $200. The average European price is $230. The transit price for gas passing through Ukraine is also significantly lower than world rates ($2.40-3.20). The WTO recently stated that it is in the long-term interests of post-Soviet states to purchase gas at world market rates as this will work to improve the efficiency of their economies.

It is clear that the price of energy is going to continue to rise and will eventually reach world market prices. Industrialists and large businesses are therefore making decisions to invest in energy-efficient technologies, investments they did not consider in the past because gas was cheap and there was no economic incentive.

An additional advantage of Ukraine eventually paying global prices for gas is that it would reduce the political leverage Russia has over the country.

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