The Orange Circle briefing focuses on gas crisis (02/19/06)

The Orange Circle briefing focuses on gas crisis

by Adriana Melnyk

NEW YORK - On the first day of 2006, following an unprecedented gas dispute, Russia cut off natural gas supplies to Ukraine, disrupting their delivery to other European nations dependent on gas from Russia. And so, as the New Year began, Europe saw a new chapter being written in the economically and politically strategic natural gas sector.

Observers and experts who have been following the constantly evolving gas crisis agree that its implications go well beyond the borders of the two countries most directly involved - Ukraine and Russia - what needs to be better understood is the nature of these implications.

On Wednesday, February 1, the New York-based non-governmental organization The Orange Circle held the first in a series of public briefings for media, business and policy-makers, this one titled "The Ukraine-Russia Gas Crisis: Lessons for Business and the International Community." The event took place at the Ukrainian Institute of America, and was attended by members of the investment banking and financial communities, journalists, United Nations officials, diplomats and members of the Ukrainian Institute of America.

Speakers at the briefing were Anders Aslund, Senior Fellow at the Institute for International Economics in Washington, and Marianna Kozintseva, associate director at Bear Stearns in New York. The discussion was opened and moderated by Adrian Karatnycky, founder and president of The Orange Circle, following introductory remarks by Adrianna Melnyk, The Orange Circle director of research and outreach, and the president of the Ukrainian Institute of America, Jaroslav Kryshtalsky.

The briefing centered on themes relevant to the business and investment communities. The presentations included the speakers' perspectives on the implications of the recent gas crisis for Ukraine's economic and political stability, and on the effect the crisis has had on Ukraine's relationship with Russia and with its European neighbors. Underlying the thread of the discussion was the impact of the gas crisis on Ukraine's upcoming parliamentary elections.

Having just returned from a trip to Kyiv, Dr. Aslund, emphasized the strength of Ukraine's position in negotiations with Russia, and reminded the audience that 80 percent of natural gas leaving Russia is transported through Ukraine, with the balance being transited through Belarus and Poland. According to him, Russia is not able to store this gas, but Ukraine is.

He underscored that there is little incentive for either side to cooperate with the other, mainly because Russia holds a monopoly on gas supplies, while Ukraine holds a monopoly on transit pipelines. His recommendation is that a multilateral agreement on gas delivery be reached by all major European consumers of gas.

Dr. Aslund also spoke of the enigmatic intermediary entity, RosUkrEnergo, through which all gas will be sold to Ukraine under the new deal. While in Kyiv in late January, Dr. Aslund met with two RosUkrEnergo officials who told him that they will not publicize the identity of the company's beneficiaries until after Ukraine's March 26 parliamentary elections. According to Dr. Aslund, it is the general view in Kyiv that President Vladimir Putin stands behind the secretive Swiss-registered joint venture company. Fifty percent of RUE is owned by Gazprom, through its Swiss-registered ARosgas Holding A.G., and another 50 percent by Centragas Holding, owned by the Austrian Raiffeisen Investment A.G.

Dr. Aslund stated his belief that the United States government considers itself to have a stake in the crisis, as evidenced by the fact that the U.S. secretary of the treasury has written a letter to Austrian President Heinz Fischer asking him to reveal who is behind RosUkrEnergo, which he has not done to date. President Fischer currently holds the rotating presidency of the Council of the European Union.

In terms of the impact of the gas crisis on foreign investment, Dr. Aslund shared his observations of Kyiv as awash with eager potential foreign investors who are laying the groundwork for future participation in Ukraine's economy. His belief is that the question investors ask is "not if, but when," and that the most booming sectors for investment are retail, banking and real estate.

Dr. Kozintseva painted a somewhat different picture of the investment climate in Ukraine. According to her, uncertainty over the gas pricing deal and the deal's intermediary - RosUkrEnergo - need to be resolved before foreign investors show significant interest in the Ukrainian market. She believes that, as a result of the gas crisis, Ukraine suffered a considerable loss in attractiveness as a market for investment. According to Dr. Kozintseva, the deal and the subsequent attempt by the Verkhovna Rada to dismiss the government of Prime Minister Yurii Yekhanurov have had four major impacts on the investment community's perception of Ukraine.

First, Dr. Kozinteva argued, the agreement has led to a political destabilization in Ukraine and has created major barriers to forming a stable pro-government coalition ahead of the March 26 parliamentary elections.

Second, the agreement raised major questions about corporate governance and transparency on the part of the Ukrainian government.

Third, higher gas prices for the first half of 2006 will have a substantial downward pressure on Ukraine's already stalled economy.

Finally, higher gas prices will result in lower margins and higher costs for energy-intensive Ukrainian export industries such as metallurgy, machine-building and chemicals.

As an illustration of her argument that the foreign investment community has negatively revised its perception of Ukraine as a result of the gas crisis, Dr. Kozintseva noted that Deutsche Bank, which had previously provided a 2 billion euro ($2.4 billion) credit to Naftohaz, suspended loans to the Ukrainian state-owned energy giant because of "political uncertainty."

Throughout the briefing, all three speakers alluded to the underlying political situation in Ukraine in the run-up to the parliamentary elections. Mr. Karatnycky stated that while the Orange Revolution had not met the high expectations of the public, polls suggest there is a steady majority that will support parties from the "Orange camp" in the March 26 parliamentary elections. "The divide is still roughly 55 percent in favor of the Orange groupings, and 45 percent opposed. This is roughly the same split as existed in December 2004, when President [Viktor] Yushchenko was elected," Mr. Karatnycky said.

He suggested that there is a high likelihood of an Orange coalition in the event that the Our Ukraine bloc receives the highest amount of support from among the "Orange" parties, an outcome that now appears increasingly probable.

The February 1 discussion was the first in a series of Orange Circle briefings that will focus on timely and relevant topics related to economic and political events in Ukraine.

* * *

Founded in the fall of 2005, The Orange Circle is a coalition of political, civic, cultural, educational and business leaders from the United States, Canada, and Europe. Its goals are to further democracy and economic reform within Ukraine and to promote Ukraine's integration into global and European economic and political structures, including the World Trade Organization, European Union and NATO.

As part of its mission, The Orange Circle promotes better international understanding of economic and political developments in Ukraine, builds public and official support for Ukraine in the United States, Europe and Canada, and organizes discussions and briefings with experts, government officials and business leaders from Ukraine, the United States, Canada and Europe.

The Orange Circle is a nonpartisan, U.S.-based not-for-profit organization with representatives in Canada, Ukraine and major European countries. It is governed by a board of directors made up of citizens from the U.S., Europe and Canada, and relies on financial support from private individual donors, corporations and membership fees.

Mr. Karatnycky, who has made the new organization his major arena of work, serves as its president and CEO. He also continues a relationship with Freedom House as a senior scholar.

Adriana Melnyk is The Orange Circle's director of research and outreach.

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