10. WILL YUSHCHENKO SURVIVE GAS ATTACK FROM MOSCOW?

ANALYSIS & COMMENTARY: Compiled by Jan Maksymiuk
RFE/RL Belarus, Ukraine, and Moldova Report, Vol. 7, No. 44
Prague, Czech Republic, Thursday, 29 December 2005

For Ukrainian President Viktor Yushchenko, Russia’s announced
intention to increase more than fourfold the price for gas supplies in
2006 represents the most serious challenge since his inauguration nearly
a year ago. If such a price hike was implemented, the pro-Yushchenko
camp would most likely suffer a severe defeat in the parliamentary
elections in March, while the decelerating Ukrainian economy could
grind to a halt.

Ukrainian Fuel and Energy Minister Ivan Plachkov met on the
evening of 28 December with his Russian counterpart, Viktor
Khristenko, in Moscow. However, their talks to resolve the ongoing
dispute over the price of gas exports to Ukraine in 2006 ended
inconclusively and were due to continue on 29 December.
On 28 December, Ukrainian Prime Minister Yuriy Yekhanurov
once again rejected Moscow’s demand to sign an agreement on
buying Russian gas in 2006 for $230 per 1,000 cubic meters, up
from the current level of $50 per 1,000 cubic meters.

“The Ukrainian side considers this to be an unacceptable
price…and direct economic pressure on the country,” Yekhanurov
said, adding that Kyiv has sent its own proposal to Moscow to settle
the gas-price row. “Should the Russian side refuse [to accept our
proposal], we have grounds to appeal to the Stockholm court
[Arbitration Institute of the Stockholm Chamber of Commerce].”
Yekhanurov did not provide any further details, but the
proposal he mentioned is apparently close to what Plachkov made
public on 27 December. Plachkov told journalists in Kyiv that Ukraine
wants Russia to charge $80 per 1,000 cubic meters of gas in the first
three to six months of 2006, with a gradual switch to a “market
price” in 2009. Plachkov did not say what price Kyiv could accept in
2009.

The spiraling war of words between Moscow and Kyiv over the
lack of an agreement on Russian gas supplies culminated on 27
December. Russian Defense Minister Sergei Ivanov responded to
Kyiv’s suggestion that it might change the terms for Russia’s
lease of a naval base in Sevastopol to compensate for the expected
gas price hike.

“The agreement on the division of the Soviet Union’s
Black Sea Fleet is an inseparable part of a larger Russian-Ukrainian
treaty, the second part of which contains recognition of each
other’s borders. Therefore, in my opinion, attempts to revise
that treaty would be fatal,” Ivanov said.

Ivanov’s pronouncements should not be taken at face
value, and one should not expect that Moscow could venture to revise
its borders with Ukraine, let alone launch a military intervention in
that country. But Ivanov’s comments well illustrate the intensity
of the Russian-Ukrainian gas dispute and indicate that Moscow is
firmly set on having its own way.

What could constitute a reasonable compromise for Moscow and
Kyiv? Some economic experts have suggested a compromise price
could be agreed at $150-$160 per 1,000 cubic meters of gas, adding that
Ukraine could simultaneously increase its gas-transit tariff from the
current $1.09 to some $2-$2.50 per 1,000 cubic meters of gas per 100
kilometers.

But even such a compromise would increase Ukraine’s
present gas bill — some $2.2 billion in 2005 — at least threefold,
depending on the terms of Turkmen gas supplies to Ukraine in 2006.

As a result, the impact of such a rise could be painful for the
Ukrainian economy and Ukrainians in the upcoming year.
According to experts from the Economist Intelligence Unit, if
the Ukrainian government decided to cushion this impact, it would
have to raise household gas tariffs by 50-100 percent and double gas
tariffs for industrial consumers. Such moves would be fraught with
grave political and economic consequences.

[1] First, the Ukrainian electorate could offset such a gas price
shock by voting overwhelmingly for forces opposing the government
of President Yushchenko, primarily the Party of Regions led by his
unsuccessful presidential rival, Viktor Yanukovych. Current polls
indicate that the Party of Regions is supported by some 25 percent of
voters, while the pro-Yushchenko Our Ukraine bloc is backed by 15
percent of Ukrainians.

[2] Second, the industrial base of the Ukrainian economy —
particularly its energy-intensive metallurgical and chemical branches
— would certainly shrink, spawning unemployment and possibly
consumer price hikes.

The economy is already decelerating, from a growth rate of 12
percent in 2004 to 3 percent in 2005. The Economist Intelligence
Unit has said the economy could be close to stagnation in 2006.
Kyiv seems to be well aware of such unpleasant consequences
of the gas row with Moscow and has already taken or declared
that it will take some precautions and countermeasures.

Prime Minister Yekhanurov announced on 28 December that
household gas tariffs would rise by 25 percent on 1 January, or
by some $1.20 monthly for the average Ukrainian family.

Earlier this week, Fuel and Energy Minister Plachkov returned
from Ashgabat, saying that he signed a contract for Turkmen gas
supplies for 2006. However, he has not disclosed either the
contracted volume of gas or its price. It is also not known how
much the operators of Russian gas pipelines will charge Ukraine for
Turkmen gas transit next year.

In addition, Yekhanurov publicly warned Moscow that if
Gazprom reduces its gas flow across Ukraine in 2006 only to transit
volumes, Ukraine will take 150 cubic meters of gas from every 1,000
cubic meters as payment for transit. Gazprom responded that such a
practice would be treated as theft. However, Gazprom did not go as
far as to say that it will stop sending gas via Ukrainian pipelines
to Europe in 2006 altogether.

In theory, government measures could help the Ukrainian
economy survive at a relatively stable level until the 26 March vote
even without a gas-supply contract for 2006. But it is anybody’s
guess as to whether President Yushchenko and his allies can maintain
their current political weight for that long. -30-

“RFE/RL Belarus, Ukraine, and Moldova Report” is prepared by Jan
Maksymiuk on the basis of a variety of sources including reporting by
“RFE/RL Newsline” and RFE/RL’s broadcast services. It is distributed
every Tuesday. Direct comments to Jan Maksymiuk at
maksymiukj@rferl.org. HOW TO SUBSCRIBE: Send an e-mail to
pbureport-subscribe@list.rferl.org

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