Yulia Slams Gas Supply Agreement

KIEV, Ukraine -- Reacting to news of the stiff price hike on natural gas inked by Ukraine’s outgoing government, Yulia Tymoshenko, the opposition leader who is poised to return as Ukraine’s prime minister, lambasted the deal and vowed to eliminate middleman companies in negotiating energy deals.

Opposition leader Yulia Tymoshenko

“This is a result of an absolutely brainless policy of setting up RosUkrEnergo as a broker,” the Associated Press reported Tymoshenko as saying on Dec. 4, the day Russian energy giant Gazprom announced stiff price hikes for Ukraine.

“There is no logic here. This is corruption,” she was quoted as saying. “Undoubtedly, if our team comes to power, we will do all we can so that Ukraine and Russia have the opportunity to work without any go-betweens,” she added.

Late on Dec. 4, Gazprom announced Ukraine would pay nearly $180 per 1,000 cubic meters of Russian natural gas beginning next year, a 40 percent increase over current prices.

Nearly all the gas Ukraine uses is imported via Russia from the energy-rich Central Asian nation of Turkmenistan. Some of the gas is also of Uzbek and Kazakh origin. The gas is imported through a Swiss-based trading company, RosUkrEnergo, half of which is owned by Gazprom and half by two Ukrainian businessmen.

RosUkrEnergo spokesman Andrei Knutov said no official documents have been signed, but that was expected to happen in the coming days.

Ukraine’s energy minister said a final deal could be inked on Dec. 5.

The deal comes one week after Gazprom announced it would pay up to 30 percent more beginning next year for natural gas from Turkmenistan, which Gazprom resells to Ukraine.

The increased price that Russia will pay for Turkmen gas was seen as a concession by Moscow in an effort to spur Turkmenistan to speed up construction of a Caspian shoreline pipeline. In accepting the price hike and passing it on to Ukraine, Moscow moved to thwart efforts by Brussels and Washington in lobbying support from Central Asian producers to build pipelines bypassing Russian turf. The new pipeline system would preserve Moscow’s control over Central Asian gas exports to western markets.

Recently, both Uzbekistan and Kazakhstan have sought to increase the price for their gas.

As a result, the new $179.5 price tag that Ukraine will have to pay for gas next year, up from $130, is higher than Ukrainian officials had expected. Officials in Kyiv last month predicted Ukraine would pay around $150-160 per 1,000 cubic meters in the first half of 2008, and $180 in the second.

The deal comes after months of negotiations between Moscow and Kyiv and is part of what Russia describes as an effort to end its practice of providing energy supplies to former Soviet republics at cut-rate prices.

That effort escalated into a full-blown dispute two years ago, during which Russia cut supplies to Ukraine, triggering supply shortages in Europe. The dispute raised worries about Russia’s reliability as Europe’s main energy supplier, and Ukraine’s reliability as a transit country.

In addition to the new price that Ukraine will pay for natural gas, Gazprom said in a statement that, under the deal, transit prices for gas pumped through Ukraine to Europe would be increased slightly to $1.70 for 1,000 cubic meters per 100 kilometers from the current $1.60 rate. Transit of gas destined for Ukraine through Russian turf was also set at a $1.70 rate.

Economic impact

While Ukraine’s economy has put in a strong performance in the last few years, it has also been saddled with annual inflation of around 13 percent, and the new hike in gas prices is expected to put additional upward pressure on this indicator.

The higher gas price also puts the Naftogaz Ukrainy state oil and gas monopoly at greater risk of a potential Eurobond default, according to analysts.

On Dec. 5, state gas production company Ukrgazvydobuvannya called for subsidized prices on domestic gas produced and resold to households and state-controlled public utilities to be raised. Ukraine has in recent years kept gas prices for the public below market prices to protect citizens from price shocks.

Industry, which consumes imported gas, however, has felt the brunt of the price hikes.

According to Kyiv-based investment bank Dragon Capital, any sharp gas price hike will be negative for gas-intensive chemical and cement companies.

“Mining and metal industries should feel a minor impact, as gas accounts for only up to 10 percent of their input costs,” Dragon said in a Dec. 5 report.

“The announced gas price increase will widen Ukraine’s 2008 trade deficit to an estimated $8.9 billion, up 47 percent year-on-year, up from $6.9 billion we currently forecast. However, we think even this wider gap will be covered by foreign currency inflows through the financial account,” Dragon added.

Ukrainian industry has made great strides in the last two years in improving its energy-efficiency, although public utilities and communal services continue to be energy-devouring holdovers from the Soviet era.

“The majority of industrial consumers will be able to deal with the higher price for gas,” said the director of the European Bank for Reconstruction and Development in Ukraine, Kamen Zakhariev.

“The problems could arise only in the chemical industry. For the same reasons, communal utility services, in fact, is that sector, in which the biggest problems exist,” he told journalists Dec 5.

Zakhariev said that generally speaking, the EBRD sees no reason to revise its economic forecast for Ukraine for 2008.

“I do not see any radical changes in the situation. Gas prices were on the rise, and everyone knew that they would go up. That they grew a bit more than expected doesn’t change anything. Our forecast for GDP growth was around 6.5 percent for next year. I think that for now there is no basis for revising it,” he said.

ING analysts in Kyiv said in a Dec. 5 report that with a $180 price for gas, the bank concludes that Ukraine’s current account deficit would rise, “but not dramatically, to 4.2 percent of GDP from the 3.8 percent expected for 2007, mainly because global steel prices would grow in 2008 as demand, especially from the continued industrialization of large emerging economies in Asia, should continue to be firm.”

Source: Kyiv Post

Comments

Marek J. said…
I hope, Mrs. Julia Timoshenko will be the Prime Minister second time. All the best for her and all Ukrain.
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