Calls by Ukraine’s new prime minister for Kyiv to deal directly with Gazprom over gas supplies are timely By Tom Nicholls Ukranian prime minister Yulia Tymoshenko wants to see greater transparency in the gas-trading arrangements between Ukraine and Russia. At present, RosUkrEnergo, a murky entity owned on a parity basis by Gazprom and a group of Ukrainian businessmen, handles gas sales to Ukraine from Russia. Tymoshenko, who took office in December, wants to cut out RosUkrEnergo and deal directly with Gazprom – one of her chief electoral campaign pledges. During a trip to Brussels this month, she said it was time to rid Ukraine of “shadowy intermediaries”.
The present lack of transparency exposes the system to corruption and was a factor in the recent spiralling of Ukraine’s gas debts to over $1 billion.There have been claims that Tymoshenko’s call for greater openness and the removal of RosUkrEnergo could destabilise relations between Russia and Ukraine. However, Andrew Neff, an analyst at Global Insight, a consultancy, claims there is support on both sides for reform and says moving to a more direct, open relationship would be unlikely to result in a rerun of the gas war of early 2006.It is self-evident that the present arrangements cannot continue: the recent catastrophic build-up in debt has left Naftogaz Ukrainy, Ukraine’s gas company, on the verge of bankruptcy. The lack of transparency exposes the trade partnership to corruption and makes it impossible to monitor the efficiency of existing arrangements.The big disadvantage in breaking up the present arrangement would be that it would leave Ukraine, or Naftogaz Ukrainy, dealing directly with Gazprom; that would result in an increase in the price that Ukraine is charged for gas imports.However, the price Ukraine pays is already on a rapid upward curve and will continue to increase until the country is on the same footing as consumers in Western Europe. A deal struck in December between Russia and Ukraine resulted in an increase in gas prices to Ukraine by almost 40% on the year to $179.5/1,000 cubic metres. In 2005, it paid just $50/1,000 cubic metres.One solution to rising wholesale natural gas prices would be for Naftogaz Ukrainy to charge Gazprom more for transiting Russian gas across Ukraine. But any aggressive move to boost fees – which are set to rise by 6% this year, partially offsetting the 40% increase in gas prices – would probably just prompt an escalation in the gas price at the Russian border. That is an argument that has been used by Ukraine’s President, Viktor Yushchenko, who is opposed to increases in tariffs.Tymoshenko has also been reported as saying she wants to see a fivefold increase in gas-transit tariffs across Ukraine, which are, at present, $1.70 per 1,000 cm per 100 km. However, such a massive hike is unrealistic and would threaten the fragile trading relationship between the two countries. Indeed, it is the fragility of that relationship that has led Gazprom to seek new export routes that avoid Ukraine and other transit states.“Tymoshenko’s effort to return to a direct gas supply deal between Russia and Ukraine is laudable,” says Neff. “But her plan to substantially hike transit tariffs for Russian gas exports to Europe is more likely to cause additional problems between the two countries than resolve existing issues.”The most effective way of stabilising Naftogaz Ukrainy and putting the Russia-Ukraine gas relationship onto a less confrontational, more sustainable footing would be to take the unpopular decision to pass increases in gas prices onto consumers – something that previous governments have avoided. However, it remains unclear whether Ukraine’s political leaders have the stomach for that decision in a presidential election year.Tymoshenko is due to visit Moscow on 21 February to discuss possible revisions to the gas transit and supply deals for 2008. It should be an interesting meeting.