As economic battles heat up in Ukraine, Tymoshenko is at odds with teammates (05/22/05)

As economic battles heat up in Ukraine, Tymoshenko is at odds with teammates

by Zenon Zawada
Kyiv Press Bureau

KYIV - Prime Minister Yulia Tymoshenko was on the front lines of two critical economic battles this week, at times finding herself at odds with fellow Cabinet ministers and President Viktor Yushchenko.

At a press conference on Monday, May 16, to discuss the Cabinet of Ministers' first 100 days in office, she accused Russian oil companies of conspiring to sabotage the Ukrainian economy by creating a fuel crisis in which gas prices shot up between 10 and 15 percent in recent months.

Two days later, Ms. Tymoshenko revealed her frustration with First Vice Prime Minister Anatolii Kinakh after he insisted that the government had drawn up a "black list" of 29 Ukrainian companies targeted for re-privatization.

She insisted that such a black list had never existed and was never approved by government officials, and the mere suggestion of such a list "reeked of corruption."

The conflicts involve economic issues that deeply concern not only Ukraine's entrepreneurs and oligarchs, but also observers abroad, who are trying to gauge whether the new government is properly handling the fragile economy.

In regard to the fuel crisis, Ms. Tymoshenko said two or three Russian oil companies dominate 90 percent of the Ukrainian oil market, or basically the entire market, Ms. Tymoshenko said. Those companies include primarily LUKoil and TNK, or Tyumenskaya Nyeftanaya Kompaniya.

"Just when the new government came to power, this monopoly, or cartel conspiracy, raised prices for oil products in Ukraine significantly - significantly higher than what was agreed to for the increase in oil prices," Ms. Tymoshenko said.

No one at these companies has reconciled with President Viktor Yushchenko's victory, she commented, and no one has reconciled with the fact that there is a new government trying to rid the economy of all its shady components.

After the Russian conspiracy boosted fuel prices, the government decided to make an agreement with three Ukrainian refineries to take up the burden, she said. They are the Nadarnianskyi, Halychyna and Kremenchuk refineries. In these negotiations, they were able to set prices that offer reasonable profitability and the oil market stabilized, she said.

In response, TNK shut down oil production in Ukraine immediately, she said, and has yet to restart it. LUKoil and TNK, which had promised to keep reasonable prices until June 1 and to not stop delivery of oil products to its stations, broke their agreement and on precisely the 100th day of the new government, May 3, Ms. Tymoshenko said.

On May 7, despite signed contracts and active pumps, Russian oil suppliers ceased deliveries to the massive Kremenchuk refinery, which is so large that it handles most of Ukraine's oil-refining needs, she said.

When production is derailed at such a large refinery, then it's quite apparent the crisis was hatched, Ms. Tymoshenko said. "It's an absolutely artificial crisis," she said. "It's simply a conspiracy. It's simply sabotage. It's simply meant to put Ukraine in its place."

The government managed to renew oil deliveries from Russia to their regular levels only by May 12, or five days later, she said.

"We are now faced with the consequences of this artificial crisis, which for an entire week was a full blockade," Ms. Tymoshenko added.

Higher fuel prices are not related to the decision to fix prices for profitability, Ms. Tymoshenko said, because if that had not been done, another crisis would have arisen.

Namely gas prices would have multiplied instantly by 2.5 times, she said. As for LUKoil and TNK's "gift on the 100th day," Ms. Tymoshenko said she expects the government will resolve the situation during the next two weeks.

The most important way to resolve the situation, Ms. Tymoshenko said, is for the Verkhovna Rada to pass a bill to widen the import of oil products. "Because when 90 percent of production is dependent on non-Ukrainian producers who monopolize the market, we must have diversification," Ms. Tymoshenko said.

Diversification needs to occur at a quick pace, which requires simplification of import procedures and the tax system to fill the market with oil products, she said.

Also, at a more complicated level, Ukraine needs to expand its sources of oil delivery, she said. Ukraine can't import Caspian or Black Sea oil because the pipelines don't exist to pump it to the refineries, she said.

Plans are under way to expand pipelines and improve the Kremenchuk refinery's ability to receive oil by rail in three months' time, Ms. Tymoshenko said.

Starting July 1, the Kremenchuk refinery will increase production by 1.5 times to 900,000 tons a month, she said, enough for Ukraine to achieve a serious level of oil independence.

Ms. Tymoshenko also announced a government project to construct a new oil refinery in the Odesa Oblast that would process strictly non-Russian oil. Gasoline from this refinery would be less expensive because it won't require any significant transportation, she said.

Construction would take a year and a half to complete, she noted.

"I think that some things require not just treatment with pills, but certain surgical procedures," Ms. Tymoshenko said. "Ukrainian society, which has lived with such implemented conditions, will have to wake up. I think we will wake up now."

Later that day however, Mr. Yushchenko struck a much more moderate tone when commenting on the fuel crisis with Russia.

"I am sure that it's possible today to agree with the Russian side to settle this conflict with a change in Ukraine's position - as to assessments, expectations and more clarity - in this delicate matter of price-setting," Mr. Yushchenko said.

He added that the Ukrainian leadership did not behave in the best way in dealing with the fuel-price crisis, a likely reference to Ms. Tymoshenko's comments.

The Verkhovna Rada responded to Ms. Tymoshenko's request the next day, with 310 of 410 national deputies voting to ratify a bill that canceled import duties on high-octane gasoline and diesel fuel.

Then on Wednesday, May 18, Mr. Yushchenko issued an order in which he blamed the Cabinet of Ministers, not Russian oil entrepreneurs, for the fuel crisis.

"In May this year, a sharp deficit in high-octane grades of gasoline arose in the domestic market of fuel products," the order said. "This crisis arose because the Cabinet of Ministers, in its price-setting, excessively regulated the gas and fuel market."

Regulating prices on the gasoline market doesn't conform to free-market principles, Mr. Yushchenko stated, and he forbid similar actions in the future.

The president also stated in the order that he would take personal responsibility for the future stability and functioning of markets.

While Ms. Tymoshenko's public conflict with Mr. Kinakh made a few headlines, more importantly it revealed a rift within the government on how to deal with re-privatization.

After insisting the Ukrainian government had not created any black list, that it had not discussed or voted for any such list, Ms. Tymoshenko then revealed her distaste for how Mr. Kinakh, with the president's support, is leading the re-privatization efforts.

"When there's one minister putting together a list in the ruling regime, I want to ask, 'Why do certain enterprises fall into this list, and others don't?' " Ms. Tymoshenko said, "without any rulings from a court, or conclusions from any other institutions."

Ms. Tymoshenko said she favors handling re-privatization through legislation, which would establish the grounds and criteria for repossessing a property from private ownership and then putting it up for auction again.

Mr. Kinakh and Mr. Yushchenko instead favor a public process of creating a list that consists of properties that became privatized in violation of Ukrainian law or tender (which refers to the process of bidding for a contract).

Incidentally, the Russian newspaper Kommersant published the list of 29 companies that had been obtained from a government official, most likely tied to Mr. Kinakh, who Ms. Tymoshenko suggested was its author.

Kommersant had published the list just days before President Yushchenko was ready to make it public. The government was still making the final adjustments to the re-privatization process.

Among the companies on the list, seven of which are owned, partly owned or controlled by Donetsk oligarch Rynat Akhmetov. Five are owned or partly owned by Viktor Pinchuk, former President Leonid Kuchma's son-in-law.

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