ANALYSIS: Gas-price increase for Ukraine could cause severe problems (06/18/06)

ANALYSIS

Gas-price increase for Ukraine could cause severe problems

by Roman Kupchinsky
RFE/RL Belarus, Ukraine and Moldova Report

Ukraine's energy problems seem to be never-ending. Now, less than half a year after Gazprom briefly cut off gas supplies to Ukraine, the Russian gas monopoly is threatening to raise the price again.

On May 22 Aleksandr Ryazanov, Gazprom's deputy CEO, told the Komersant Ukrayiny daily that on July 1 the price of gas to Ukraine is to be increased from $95 per 1,000 cubic meters to between $120 and $130.

The current price for a "mixed basket" of Russian and Central Asian gas was agreed upon in January during the course of tense negotiations that ended in the cut-off.

If Gazprom follows through on its threat, the impact on the Ukrainian economy could be huge.

And, the economy already is in trouble. A recent European Bank for Reconstruction and Development (EBRD) projection said that Ukraine's GDP growth rate could halve from 2.4 percent in 2005 to 1.2 percent in 2006. According to the report, the likely cause is the higher prices Ukraine is already paying to import gas. Add to that the growing disarray in the country's state-owned energy sector, which is sliding into greater debt.

If Gazprom manages to get its way and increase the price of gas, this might mean an additional bill of $625 million to $875 million from July through December.

On May 31 the Ukrainian government announced that beginning on July 1 domestic consumers will pay $82.80 for 1,000 cubic meters of gas - a 50 percent increase. Raising it again in the near future might prove difficult.

In the first six months of 2006, the increased cost of energy has seen consumer prices rising at an annualized rate of 19 percent. A further increase in the price of gas is likely to exacerbate inflation.

A severe economic downturn could bring down a pro-Yushchenko government and force the president to appoint a government from the pro-Russian Party of the Regions.

Ukraine has few, if any, options to avoid the price increase or to retaliate. The transit fee for Russian gas going through Ukrainian pipelines was set for 10 years in the January agreement and is unlikely to be raised before then.

Increasing the rent for the Russian Black Sea fleet based in Sevastopol is unlikely, largely due to President Yushchenko's reluctance to anger the Kremlin.

Some energy conservation efforts have only begun to be implemented and will not produce significant savings for another five to 10 years.

One option could be Ukraine handing over control of its pipeline system and underground storage system to Russia in return for cheaper gas. That, however, is highly unlikely to happen as Mr. Yushchenko has often stated that he will not give these up.

Why has Russia chosen to make the decision to raise prices now?

The simple answer is the fact that, according to Moscow, the contract signed in January is up for review in six months.

"In our contract, the price was agreed upon for the first half of 2006," Gazprom deputy head Aleksandr Medvedev told RIA Novosti on May 26. "The end of this period is approaching, and both sides will discuss the price for the following period."

But Ukraine seems to understand the terms of the contract a little differently. President Yushchenko has offered numerous assurances to his countrymen that the price agreed upon in January will remain at the $95 level for five years. Now that his promise has been challenged by Gazprom officials, the Ukrainian government might well feel the need to protect the image of the president and put up fierce resistance to any price increase.

It's also possible that policy-makers in the Kremlin are timing their decision to increase gas prices for Ukraine to coincide with the upcoming Group of Eight (G-8) industrialized economies meeting in July.

That could be Russia's signal to the West that it will conduct business in the CIS to promote its own geopolitical interests, regardless of how any of the G-8 members might react.

Another possible explanation for the thinly veiled threat to raise gas prices for Ukraine is that this is a form of pressure being applied by the Kremlin to prevent the appointment of Yulia Tymoshenko as prime minister. During her short term as prime minister in 2005, Ms. Tymoshenko was outspoken about the need to remove RosUkrEnergo, the controversial middleman for gas deliveries from Central Asia from the Ukrainian market.

After Ms. Tymoshenko left office, RosUkrEnergo, reportedly at the insistence of the Kremlin, was given a lucrative role to play in the delivery and sale of gas to Ukraine. The January contract provided for RosUkrEnergo to create a joint venture company with Naftohaz Ukrayiny, the state-owned oil and gas monopoly, named UkrHazEnergo. The newly created company recently announced that it is expanding and intends to drill for gas in Ukraine and Russia.

If Ms. Tymoshenko is appointed prime minister, Moscow fears she might exclude UkrHazEnergo and RosUkrEnergo from the Ukrainian market.

On May 30 Russian Ambassador to Ukraine Viktor Chernomyrdin linked the gas issue with political relations. Mr. Chernomyrdin was quoted by Interfax as saying that Ukrainian-Russian relations were affected by relations between Ukraine and NATO, the problems with the Russian Black Sea Fleet, Kyiv's "search for democracy" and the creation last month of the Organization for Democracy and Economic Development-GUAM.

He also said that Kyiv and Moscow could settle the problem of a possible gas-price rise with an improvement in political relations.

Roman Kupchinsky is the organized crime and terrorism analyst for RFE/RL.

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