Russia repeals VAT on gas and oil to Ukraine and gains long-term use of Brody pipeline (08/22/04)

Russia repeals VAT on gas and oil to Ukraine and gains long-term use of Brody pipeline

by Roman Woronowycz

KYIV - Russia agreed to cancel an 18 percent tax on the export of gas and oil to Ukraine on August 18 in exchange for an agreement on exclusive long-term access to Ukraine's oil and gas pipelines to Europe.

Ukraine's President Leonid Kuchma and his Russian counterpart, President Vladimir Putin announced the separate agreements during a one-day summit in the Black Sea resort town of Sochi, Russia.

"For Russia it was a rather difficult step, but we made it realizing this," explained President Putin, according to Interfax-Ukraine.

By revoking the tax, Russia's budget would lose approximately $800 million in revenues annually. Mr. Putin said the decision was made on the presumption that closer relations and better prices for its neighbor would increase volume and take up the slack.

Ukraine has long sought the cancellation of the Russian value added tax to the countries of the Commonwealth of Independent States. Yet Russia's parliamentary body, the State Duma, was slow in repealing the burdensome value added tax, even after Ukraine joined Russia, Belarus and Kazakstan in signing a memorandum of intent to form a regional common market dubbed the "Single Economic Space." The VAT was finally repealed in early August. President Putin signed the bill into law on August 18.

Repeal of the oil and gas VAT has been held to be a keystone in the development of a free trade zone in the region, a critical first stage in the development of the SES. President Kuchma had repeatedly stated that without a free trade zone no SES could exist.

Mr. Putin called the decision "a milestone in forming a single economic space."

Ukraine took a step in accommodating Russia as well and announced that it had agreed to allow for the transport of up to 85 million tons of Russian oil over a 15-year period as part of a comprehensive oil and gas agreement signed between Ukraine's Prime Minister Viktor Yanukovych and Russian Prime Minister Mikhail Fradkov. The document noted that annual amounts, rates and directions would be assigned by Ukraine's Ministry of Fuel and Energy in cooperation with Russia's Ministry of Industry and Energy.

The agreement basically rejected any possibility of transporting oil from the Caspian Sea region via the Odesa-Brody line. President Kuchma said that the Odesa-Brody pipeline would now be utilized for the transport of Russian oil.

"Now a line has finally been drawn under all these discussion," explained Mr. Kuchma. "Long-term prospects are opening up for Ukraine. Its main pipelines will remain busy for many, many years, and we will only have to think about developing them further."

The agreement also stipulates the construction of a new natural gas pipeline through the Carpathian Mountains to move Russian natural gas to Western Europe. The International Gas Transport Consortium, a joint venture between Naftohaz Ukrainy and Russia's Gazprom, will build the new natural gas line, which will travel from Bohorodchany to Uzhhorod. Gazprom said it would guarantee the initial supply of an additional 5 billion cubic meters for transit through Ukraine to Western Europe, which would grow to 19 billion cubic meters by 2010. The gas agreement would remain in effect until 2030 with a five-year option for extension.

The two presidents stated that they believed close Ukrainian-Russian relations would help both countries in becoming global economic players.

Mr. Kuchma added that relations between the two countries lately had become as close as they had ever been, a statement that Mr. Putin supported.

"I do not want to use stock phrases, but I have to touch on images of the past and state that our relations are nothing less than fraternal. We communicate as old and good friends," explained Mr. Putin.

| Home Page |