6. UKRAINE TO BENEFIT FROM GAS PRICE HIKE IN THE LONG RUN

SAYS PRESIDENT VIKTOR YUSHCHENKO IN RADIO ADDRESS

Ukrainian Radio First Programme, Kiev,
in Ukrainian, 17 Dec 05
BBC Monitoring Service,UK, in English,
Saturday, Dec 17, 2005

Ukrainian President Viktor Yushchenko has said that his country will become
truly independent once it starts paying a market price for Russian gas and
charging a market rate for gas transit. Commenting on the ongoing difficult
gas talks with Russia in a weekly radio address, Yushchenko gave assurances
that the spat would be resolved and that no energy crisis was in offing.

Yushchenko reaffirmed Ukraine’s resolve to ensure uninterrupted gas supplies
to Europe across Ukraine, but reminded Russia of its obligations not to
jeopardize Ukraine’s national security. He stressed the need for national
industry to reduce energy consumption and to boost domestic gas production.

The following is the text of the radio address by Yushchenko carried by
Ukrainian radio on 17 December; subheadings inserted editorially:

Dear compatriots, esteemed Ukrainian society. Today I will speak on
Ukraine’s energy security. Each of you wants to be sure that our homes are
warm and cosy in winter while the prices of gas and coal remain affordable.

NO ENERGY CRISIS
I would like to state firmly – there will be no energy crisis in Ukraine. We
have indeed inherited an energy-dependent country. Almost 80 per cent of oil
and more than 75 per cent of gas are imported into Ukraine from Russia.

We have inherited another problem from the previous authorities – each
winter started with speculation on the gas issue. I want this practice to
become a thing of the past. I want economic ties with our neighbours to
develop on a pragmatic and mutually beneficial basis.

We have to admit – one has a price to pay for everything, first and foremost
for independence. If Ukraine truly wants to become economically independent,
sooner or later we will have to accept market relations in the energy field
and switch to rational energy consumption.

The problem is not about our importing energy resources. This is what dozens
of countries are doing. But their relations with partners are based on
market principles and, therefore, there is no room for economic pressure or
blackmail in their relations. We should not dramatize the situation today.

The main thing is to avoid speculation and unnecessary emotion which may
hinder both dialogue in the energy field and bilateral Ukrainian-Russian
ties. It is no secret that there are hotheads both in Kiev and Moscow who
would not mind capitalizing on the gas issue. It is not so much about the
economy as it is about the political kitchen.

I am convinced that we all have learnt lessons from the year 2004, and the
gas issue will not become a new Tuzla in Ukrainian-Russian relations. This
is my position as the president of Ukraine and this is the position that has
been declared by the president of the Russian Federation, Vladimir Putin.

During a telephone conversation on Friday [16 December], my Russian
counterpart and I agreed that the gas issue should be addressed on the
economic plane, and we should be guided purely by national interests.
Good-neighbourly bilateral relations, which have been developed for
centuries, are part and parcel of our strategic interests.

I think at the moment all political forces should realize the great
responsibility for the formation of friendly relations between the two
fraternal peoples. We should not make a single statement or act which could
provoke mistrust or disrespect in our relations. This is Ukraine’s stance in
negotiations with Russia.

UKRAINE TO BENEFIT FROM MARKET RELATIONS
At the moment, Ukraine’s gas balance is as follows. Annually Ukraine
receives 23bn cu.m. of blue fuel [gas] as payment for the transit of Russian
gas to Europe. Our own annual domestic production is 20bn cu.m. We
buy 37bn cu.m. of gas from Turkmenistan.

It is worth knowing the following. Ukraine ensures the transit of 115bn
cu.m. of Russian gas to Europe – at a discount rate, by the way.
Simultaneously, as payment for transit, Ukraine gets gas at a discount
price. An increase in the transit rate by one side and a rise in the gas
price by the other is undoubtedly a natural process. Ukraine is ready to
switch to monetary payment for gas. We stand for liberalization of fuel
prices and transit rates.

Both Ukraine and Russia would benefit from a switch to market relations.
Ukraine took the first step towards energy and, consequently, political
independence in 2000 when I had the honour of heading the Ukrainian
government. Back then we managed to steer clear of politicking in our gas
talks.

Once and for all we solved the issue of unauthorized siphoning of gas,
signing five accords that settled all the contentious energy issues between
Ukraine and Russia.

But we failed to solve the main problem – liberalizing prices on the energy
market and ending barter settlements for Ukrainian transit services. Barter
as a form of payment for energy resources contributed to creating obscure
schemes and enriching oligarchs.

For years the Ukrainian budget has not been receiving billions of dollars –
the money that should have been spent on wages, pensions, development of
science and technology, and loans for the countryside.

A switch to monetary settlements in the gas field is beneficial to the
national economy. I am convinced that the price should be increased
gradually – without shock therapy for national industry. Meanwhile, the
price of energy resources should be based on economic rather than political
factors.

A gradual switch to a new price would enable the utilities, budget-financed
and industrial sectors to adapt to new conditions. It is necessary to draft
and implement a transitional system of gas rates which would minimize
repercussions for the population.

The system of transitional rates should be in place for two or three years
and should gradually lead to a single rate which would reflect the real cost
of gas for Ukraine.

The new Ukrainian administration seeks to diversify the energy market and
increase domestic production of gas and oil. This week the Ukrainian
government held negotiations on attracting more than 2bn euros in investment
in prospecting for and extracting energy resources in the Kerch section of
the Black Sea shelf.

ENERGY SAVING
The main problem for Ukraine is not a shortage of energy resources, but
energy saving. Energy consumption in Ukrainian industry is the highest in
Europe. We use three times the amount of gas per unit of GDP that our
closest neighbours do.

Unfortunately, Ukrainian industrial giants are used to paying kopecks for
electricity and, therefore, no money has been invested in modernization for
years. Meanwhile, Europe strives to save every cubic metre of gas, every
kilowatt, every kopeck.

An agency for energy saving will be set up in Ukraine shortly. This
structure will concentrate all the projects associated with economical use
of energy resources, alternative sources of energy and the development of
the system of extracting oil and gas.

At the beginning of next year, the authorities will also unveil a new
blueprint for this country’s energy security. We should not only come up
with a new pattern for producing energy resources and paying for them, but
also have a clear scheme for protecting Ukraine’s national interests.

RUSSIA’S OBLIGATIONS

I would like to recall a historical fact. In 1994 Ukraine joined the Treaty
on the Non-Proliferation of Nuclear Weapons. At that time, the Russian
Federation, along with the USA, France, Great Britain and China, being
members of the nuclear club, pledged to refrain from pressure on Ukraine
which would endanger our national sovereignty. I would like to believe, as
the president of Ukraine, that Russia will never forget the commitments it
has undertaken.

Systemic and pragmatic approach should become the basis of Ukrainian-

Russian economic cooperation. I believe that we will manage to successfully
complete negotiations on gas deliveries. Ukraine, for its part, will meet all its
obligations to Russian and European partners as to guarantees of transit of
blue fuel.
NEW ENERGY STRATEGY

Ukraine needs a single and comprehensible roadmap for the development of
Ukrainian power engineering. We need a national energy strategy which would
set out directions and priorities in energy policy for the next decade. This
document is currently in the making. It will be adopted early next year.

I would like to assure you – the gas price will not increase radically for
the population. Domestically-produced gas will mainly be used for the needs
of the utilities and budget-financed sectors.

However, the liberalization of the gas market is a challenge. It is a
challenge to the nation, to the national economy and to the utilities
sector. In a way, it is a lesson – a lesson of how to live economically and
rationally, the way the whole civilized world lives.

Let’s trust in ourselves. May our homes always be light, warm and
comfortable. -30-

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