17. THE RISE OF GAS PRICES IN UKRAINE: A NECESSITY TAINTED BY POLITICAL CALCULATIONS

ANALYSIS: by Alexandre Levy, Le Monde
Paris, France, Tuesday, 27 December 2005
Published in English by The Ukraine List (UKL) #374, Article #4
Translated by Catherine Beach for UKL
Ottawa, Ontario, Canada, Friday, December 30, 2005

As of January 1, 2006, the Russian giant Gazprom wants to charge Ukraine for
1000 m3 of gas between 220 and 230 US dollars (between 190 and 193 Euros)
up from 50 today (approximately 42 Euros). This tariff, which in Russia is
“domestic,” meaning that it applies within its territory, is now obsolete
according to Moscow for this ex-Soviet Republic that wishes to distance
itself from the Kremlin.

In reality, Kyiv never paid a price of 50 dollars per 1000 m3, but was in
the habit, according to an accord that was more or less formalized, of
paying Gazprom “in services,” giving transit rights to Russian gas through
Ukraine in the direction of the European Union. This means that they
deducted gas for their domestic consumption from the pipeline (the only one,
other than another in construction under the Baltic Sea that would connect
Germany directly to Russia) used by Gazprom. At the moment of the present
crisis, the Ukrainian authorities announced that this “commission” would
rise to 15% of the flow, a number immediately denied on the Russian side.

“There can be no question of 15%, or 10%, or even 2%,” declared the Russian
energy minister Viktor Khristenko, believing the Ukrainian declarations to
be “astonishing.” If an intergovernmental protocol is not signed between now
and the end of the year “all gas deductions by Ukraine as of 2006 will be
considered stealing. And with that, Ukraine will be stealing gas destined to
the European Union that it wishes to integrate,” added a Gazprom
spokesperson, Sergei Kuprianov.
A LAMB FOR AN AX
In addition, Gazprom is asking that gas from now on be paid in cash and not
“in services.” “The time when we exchanged a lamb for an ax is past.
Unfortunately, we must teach Ukraine the basics of a market economy,”
explains Mr. Kuprianov.

However, this agreement had been going on until the regime change in Kyiv,
and President Vladimir Putin has not ceased to declare during his visits to
the Ukrainian capital that the two “brother states” could find a way to work
things out. “You can send us lard and horilka, we can send you gas and oil,”
he joked one day alongside Leonid Kuchma, the former President of Ukraine,
referring to two Ukrainian specialties most appreciated in Russia: salted
meat and vodka. Since then, the defeat of the Kremlin-endorsed candidate,
Viktor Yanukovych, who tried in vain to falsify the elections, provoked the
“Orange Revolution,” which saw the election of a pro-European team led by
Viktor Yushchenko.

From Kyiv’s point of view the actual crisis is perceived as a retaliatory
measure by the Kremlin against an ex-Soviet republic who considered Ukraine
a “friend,” that decided to back away from its sphere of influence. Russian
authorities do not cease to declare that since Ukraine has been recognized
by the EU, which it wishes to integrate as a market economy, it is time that
it acts as such by paying for its gas at competitive prices. Three months
after the Ukrainian legislative elections, this crisis will only serve to
reinforce the pro-Russian opponents to the present government, whose
militants are multiplying their protests to explain that they do not wish to
“die of cold to adhere to NATO.”
STRUCTURAL REFORMS
In fact, an increase in gas prices is inevitable in the eyes of not only the
Russian party but of the Ukrainians as well, who admit that the present
circumstances can not last much longer, beginning with President Viktor
Yushchenko, who has tried many times to appease the situation. “The faster
we liberalize the price of gas, the faster we will become competitive,” Mr.
Yushchenko revealed. “Unfortunately, the Ukrainian industrial giants have
become accustomed to paying almost nothing for their energy and for that
reason have not invested in the modernization of equipment.”

This is an observation shared by many independent experts that hope that the
increase of gas prices will accelerate the pace of structural reforms in the
Ukrainian structural sector. “Until now, Ukraine had nothing to incite it to
reduce its energy consumption and to search for alternate sources of
energy,” assessed the World Bank in an end of year report on Ukraine.

“Access to subsidized energy allowed reforms to be pushed back,” explained
Paul Bermingham to AFP, Ukraine’s overseer for the World Bank. Currently,
“(Kyiv’s) intense energy consumption is probably the highest in the region,”
according to the Bank. “For each dollar of GDP, Ukraine consumes four

times the quantity of energy consumed in Germany.”

The industrial sector is one of the most wasteful, mainly because of
equipment that dates back to the Soviet era. “The state of the facilities is
such(S) that 70% of energy received is lost,” maintains another
representative from the World Bank, Dejan Ostojic.

To be able to begin these reforms, the Ukrainian government asks for the
increase in prices to be progressive and laid out over two or three years,
which Gazprom refuses to do while continuing to threaten to “cut the supply”
as of January 1. This is what Viktor Yushchenko would have had to ask for
when taking the initiative, on December 27 to phone Vladimir Putin, who
appears to be in his favorite position: that of a powerful arbitrator. -30-

UKL 374, 30 December 2005, Compiled by Dominique Arel, Chair of
Ukrainian Studies, University of Ottawa, 559 King Edward Ave., Ottawa
ON K1N 6N5, CANADA; 613 562 5800 ext. 3692, fax 613 562 5351
For a free subscription to UKL, write to darel@uottawa.ca

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