Gov’t advisor says there is no reason to “panic”
Top officials at Russia’s Gazprom on Dec. 30 reiterated earlier threats to cut off natural gas supplies to Ukraine in the New Year if the later refuses to accept sharp price hikes.
As of early Dec. 31, no agreement had been reached between Russia and Ukraine, one of the largest natural gas guzzling countries in the world and a principle transit route for Russian gas to Europe.
In Lviv, a city of some 800,000 close to the Polish border, streets on Dec. 30 were crowded with traffic jams as citizens rushed to stores stocking up on vodka and food ahead of New Year celebrations. Much of the population heats their homes with natural gas, yet few seemed concerned with Russia’s threats.
“There is no panic,” said Oleksandr Danylyuk, advisor to Ukraine’s Prime Minister Yury Yekhanurov said. “Russia chose the wrong moment to try to make Ukraine panic. Ukraine is a positively thinking nation. There is no panic on the streets, nor in the halls of government.”
It was just over a year ago that massive street side protests against election fraud dubbed as the Orange Revolution lifted the western-minded Viktor Yushchenko to the country’s presidency.
Yushchenko on Dec. 30 pleaded to Russian counterpart Vladimir Putin, calling for a time out, adding that a moratorium on price hikes into early January would yield officials from both countries more time for cool-headed negotiations while preventing disruptions in the supply and transit of gas.
Yushchenko warned that use of non-market methods in settling the dispute – namely halts in gas supplies – could harm the reputation of both countries. Russia is, of course, a major supplier of gas; Ukraine is Russia’s major transit route for gas exports to Europe.
Russia has in recent months pressured Ukraine to accept so-called European prices, essentially a stiff price hike for natural gas, yet Ukraine has held firm rejecting the offer and pointing to existing contracts which envision a lower price.
Russian officials have promised to cut off gas supplies to Ukraine early on Jan. 1 if Ukraine refuses to sign a contract that would increase the price of gas imports from $50 per 1,000 cubic meters to some $250 per 1,000 cubic meters. What will actually happen on January 1 is a big question.
A bluff?
Konstantin Borodin, director of the Kyiv-based Center for Energy Research, described Russia’s threats to cut off gas as a bluff intended to boost their position at the bargaining table. Volodymyr Saprykin of the Razumkov Center for Economic and Political Studies expects Russia to symbolically reduce gas shipments to Ukraine, adding that it is unclear what exactly will happen on Jan. 1.
The stakes are high. Ukraine’s gas pipeline network supplies Europe with about 80 percent of gas supplied by Russia. Russian gas fills about a quarter of Europe’s gas needs. Ukraine produces some 20 billion cubic meters in house, importing the rest from Russia and Turkmenistan, the later of which raised prices for next year from $44 per 1,000 cubic meters to above $60. Ukraine currently imports almost 40 billion cubic meters annually from Turkmenistan and receives some 25 billion cubic meters from Russia as barter payment for transit fees on more than 110 billion cubic meters of annual Russian gas exports to Europe.
Ukraine has been using its monopoly control of Russian gas exports to Europe as leverage in the talks; Russia has leverage too – it controls the pipelines stretching from Turkmenistan to Ukraine.
Ukraine has cautioned Russia that it would take 15 percent of the gas Russia pumps onward to Europe as payment for transit if Russia reduces gas shipments through the pipeline. Russian officials have accused Ukraine of refusing to pay market prices. Ukrainian officials insist they are willing to pay more, but only after existing contracts run out.
“Russia is accusing us of not being wiling to move to market prices … of holding on to non transparent schemes,” Danylyuk said. “We are not against moving to market prices as Russia claims. The only difference between our positions is timing. Russia wants us to move to market prices in 2006. We can see this happening in 2010, when our existing contract with Gazprom expires.”
That contract envisions Ukraine paying the current rate of $50 per 1,000 cubic meters in the next several years.
“We are willing to move to market prices but we have an existing gas contract with Russia that our industry relies upon. This is a time horizon within which our industry should implement energy saving technologies and prepare to be competitive on world markets at new gas prices. From our point of view, it is not possible to reconsider prices at the moment, particularly as Russia gives us days notice. It takes time. We can not take such important steps within such short notice,” Danylyuk added.
If Ukraine accepts the higher prices demanded by Russia, the country’s export-oriented economy – largely dependent on steel and chemical exports – could wind down to a deep freeze. Both commodities account for the nation’s principle supply of hard currency. Russia’s attempts to raise gas prices has been seen as a fuel diplomacy ploy designed to pressure Ukraine into integrating closer with other former Soviet States rather than risking tough days for its economy while it integrates more with west.
Industry in the country currently pays just over $80 per 1,000 cubic meters for gas. If prices are raised significantly, Ukraine’s exporters could find themselves uncompetitive with Russian counterparts, namely steel and chemical producers, who have been competing for the same markets in recent years.
Ukraine in recent days reportedly offered a transition period with a price of $80 per 1,000 cubic meters, significantly less than the $230 rate Russia has been demanding. Late on Dec. 30, Gazprom officials trashed the idea.
Borodin predicted that neither side would budge before the New Year.
“There will be no agreement. The Russians will not accept this offer and the Ukrainians will not accept the Russian offers,” he said adding that neither side would allow for disruptions in supplies to Europe.
Gazprom could reduce the amount of gas it pumps through Ukraine starting Jan. 1 slightly as a symbolic gesture of its threats. The Ukrainian side could respond by taking a fraction of this gas as payment for transit.
Each side is bluffing to boost bargaining power, Borodin said adding that both sides will not settle the dispute until the first quarter of 2006, or after the March parliamentary elections.
Ukraine’s state oil and gas company Naftogaz Ukrainy has in recent weeks threatened to sue Russia’s Gazprom, dubbing the demand for price hikes to be in breach of earlier contracts. Borodin said that a compromise agreement could be signed in the first quarter of 2006, closer to Ukraine’s March 2006 parliamentary elections.
Big challenges ahead
Looking into the future, Ukraine’s aging Soviet designed industrial sector faces some serious challenges.
Borodin said that by accepting a price hike from $50 to $80, Ukraine might have to raise prices for industry to above $100, which “will definitely dent industry.”
Chemical businesses will operate at zero profitability if gas prices get as high as $130 per 1,000 cubic meters for them, he added.
Prices for gas will rise, but for now it remains unclear by how much and when.
Ukrainian officials have in recent weeks called for massive efforts to introduce energy efficiency technologies for the purpose of cutting down the nation’s dependency on Russian natural gas, petroleum imports and decreasing the wastefulness of the nation’s aging Soviet built industry.
Danylyuk said the country’s industry has accumulated enough funds in recent years to invest into energy efficiency technologies, adding that the process will take time.
