Gas Deal Endangers Ukraine's 2006 Budget

KIEV, Ukraine -- A deal with Russia sharply raising the price of imported gas is endangering the 2006 budget and threatening the solvency of the state oil and gas company Naftogaz, Finance Minister Viktor Pynzenyk said on Tuesday.

Finance Minister Viktor Pynzenyk

With Ukraine facing a parliamentary election next month, Pynzenyk told parliament the increases nearly doubling the price of gas meant around $600 million in additional state spending to offset higher costs for consumers.

That jeopardised budget targets and Naftogaz's ability to service credits and to invest.

"More serious is the risk related to covering losses from gas deliveries to thermal power stations. The finance ministry estimates these at 3.3 billion hryvnias, about $600 million," Pynzenyk told deputies.

"If other conditions do not change, this will allow us to cover operational expenditures of Naftogaz but there are no opportunities to service credits and make investments. It will have a considerable impact on the budget balance."

Parliament was discussing the gas deal between Ukraine and Russia signed in the New Year to end months of wrangling. The accord raised prices for Kiev to $95 per 1,000 cubic meters from $50 previously.

Gas will be sold at $110 inside Ukraine because of taxes and transport costs.

Pynzenyk said the government would be able to meet budget targets in the near future but risks would rise later in the year due to concerns that the gas price could further increase.

"Given that maximum prices will remain unchanged for consumers and the economy at large at $110 we can say that there is the chance to keep the budget balance under control in the months to come," Pynzenyk said.

"But we want at the same time to point out risks that could emerge by the end of the year."

Source: Reuters