Oleksandr Danylyuk, advisor to Prime Minister Yuriy Yekhanurov, says government can take credit for solving gas crisis and putting privatization in order.
Oleksandr Danylyuk has served as an economic advisor to Ukrainian Prime Minister Yuriy Yekhnaurov since last fall, when the ally of President Viktor Yushchenko replaced Yulia Tymoshenko as head of the government. Danylyuk, 30, previously worked as a consultant at the London offices of the McKinsey & Company consulting firm. An MBA graduate with a degree from Indiana University, Danylyuk also gained experience working at the U.S.-funded investment company Western NIS Enterprise Fund, HSBC and Alfa Capital.
In a Feb. 7 interview with the Post, Danylyuk defends the Yekhanurov government while discussing the reform process in Ukraine and the controversial gas deal with Russia.
KP: What are the major achievements of the Yekhanurov government since taking over last fall?
OD: It is worth mentioning that Yekhanurov took over at a very unfortunate time. It was very difficult to implement important decisions, given the deconstructive position of parliament and opposition from many political opponents. It was a very difficult environment, but despite this he managed to achieve some major successes. He managed to put the brakes on the re-privatization campaign, which spooked investor confidence. It was in high momentum under the Tymoshenko government, but on the first day he clearly said there will be no massive re-privatization, and there was none. The only exception is the re-privatization of the Nikopol Ferroalloy Plant, which was started by Tymoshenko. There has been a court decision to return Nikopol, but this case was an exception under the Yekhanurov government, not the rule.
This was the main progress of the government, but then there was the unexpected situation with natural gas supplies, which refocused quite a bit of the Prime Minister’s attention.
KP: Does the government plan on reselling Nikopol this year, and if so, how much do you think it will sell for?
OD: Yes, the government does plan on reselling it this year, and the sooner the better. An open tender is an open tender where the highest bidder wins. Who would have been able to predict that Kryvorizhstal would have sold for almost $5 billion last fall? I would say that Nikopol will probably sell for anywhere from $700 million up to $1 billion. (It was sold years ago for under $100 million to companies controlled by Ukrainian tycoon Viktor Pinchuk through a controversial tender).
KP: Where has the Yekhanurov government fallen short?
OD: I wouldn’t say the government fell short. Let’s turn back to the gas crisis.
Would I call the solving of the gas crisis a successful achievement of the Prime Minister? Yes I would. It was a complex period. He could not rely on anyone in parliament. He was walking on a tight rope during negotiations with Russia, but every time difficult moments arose, oppositionist forces in parliament played against Ukraine’s interest, shaking him up. He and the government were forced to make some very tough decisions. Of course Russia waited until the cold winter period, making it more difficult for our side at the negotiation table. But I must say that more could have been done earlier. (Note: Tymoshenko has claimed that she was not authorized by President Viktor Yushchenko to handle gas talks while serving as prime minister).
KP: What are the positive and negative aspects for Ukraine concerning the gas accords reached this year with Russia and the Swiss-registered trading company RosUkrEnergo?
OD: I wouldn’t comment on finite details of the agreement, as there are still documents to be signed, and some have been signed in recent days. But if we talk about the process, and I view all agreements as a process, what is achieved is that we have at least fixed the price for six months. We postponed the final negotiations until after the March parliamentary elections, until warmer weather, when we and Europe become less dependent on gas imports from Russia and Central Asia. The tendency now is to fix all the details through agreements and contracts, but my personal opinion is that we should not do this. We have already signed a bunch of documents and there are already some doubts as to whether some top officials had authority to sign some of them, so what is the point of negotiating in the midst of such a difficult environment. Why not wait until later?
KP: Are you saying that there are questions about the legality of some documents due to the recent parliamentary vote of no-confidence in the government and key officials involved in the gas discussions?
OD: No. It is basically more like this. Every time a minister goes to sign such strategic agreements, there are questions as to what authority ministers at such a level have.
KP: Can you explain the positive and negative aspects of the establishment of a joint venture that would yield a share of Ukraine’s natural gas market to RosUkrEnergo? This market used to be controlled by state-owned oil and gas company Naftogaz Ukraine, which will now share the market with RosUkrEnergo, as both own parity stakes in the new joint venture.
OD: Once again, the positive aspects are that we bought time through the agreements and raised hope that the price could be fixed at $95 per 1,000 cubic meters of gas imported, which is a very attractive price if you compare it to prices on the market in this region. These are definite advantages.
But of course, when we talk about the agreements, you also need to understand what was given in exchange for it. To discuss this aspect in detail is difficult, as you really need access to all the documents which were signed. (Note: they have not been made public).
Having said this, it is relatively easy for economists to calculate the benefits of this joint venture, to calculate what the profits of the venture will be and to compare it to the price paid for gas. Everything comes down to the price paid for gas on the market. We say we achieved a price of $95 per 1,000 cm of gas, but the price is likely higher if you consider the profits that Ukraine is relinquishing by giving away a portion of the gas business on the internal market. We don’t yet know the prices that will be set for the internal market, for industry and households – they have not yet been set. In the end, however, I would rather a lower price for the local market than have a state company earning a lot of profits. The problem is that [Russian state-controlled gas company] Gazprom is not just interested in selling the gas. They have apparently much bigger plans, which is a concern. Their bigger plan is to get closer to the end customer in Ukraine, allowing it to influence particular plants. This is something they already managed to do with some plants in Ukraine without having direct access.
KP: How high do you think the government will raise the gas prices and electricity prices for industry and households this year? And how will the higher prices for gas affect Ukraine’s GDP growth rates?
OD: We need to differentiate between before and after the March parliamentary elections. Eventually, households and industry will have to pay more this year, but it will not likely happen until after the elections. Why are they not paying more now? Because the hikes were blocked by parliament. It is an extremely unpopular move ahead of the elections. But after the elections, regardless of who comes to power, the new government will need to think about the long term future of the country. Prices will likely increase. The price increases will, of course, affect growth. I don’t think it will be significant, however. My personal estimation is that it will reduce growth by some 1-2 percent maximum. But this is a problem that we all face in a market economy, where you never know what price you will pay. Of course industry needs to become more efficient, by implementing energy efficiency technologies. They should have done this years ago. There is currently about 60 percent less efficiency compared to Western counterparts. Their owners acquired them often for very low prices and earned large profits thanks to positive market conditions. But again, did industry ever get gas for $50 per 1,000 cm, [the price Ukraine paid on average for imports in recent years]? Of course … not. They were paying more in the area of $70-80 per 1,000 cm. The price will change by something like $20 per 1,000 cm. European industry is operating successfully and profitably at significantly higher prices.
KP: Currently, industry in Ukraine is paying a higher price for natural gas, essentially subsidizing households. Will there be an effort to even out the playing field, allowing industry to earn more, so that they could pay employees higher salaries and allow them to afford paying so-called market prices for gas?OD: Actually, in the current situation, the government is subsidizing everyone, industry and household consumers. It is really wrong to say that industry is subsidizing consumers. In the long term, buying gas should be part of the business of industry. They should reach an agreement with private suppliers. The government should not be in the middle. This is not changing at the moment because of the position that Russia is taking. It is a large player, but it is not playing according to world rules. If we had world market rules, then they should allow access to their gas transportation system. We would have been happy to do this. My future vision is that consumers would be able to buy capacity in the pipeline, to buy gas from Central Asian republics, for example. This is how it works in the whole world. In a competitive environment, you should have a choice, either Gazprom or Turkmenistan. At the moment, we are completely bound to the Russian pipe, as the market is not liberalized. If they change this, then the market will be completely different and it will benefit everyone.
