In the last two months, the government has been under attack with such headlines: “Tomorrow, Ukrainian leaders will sell by national interests!” and worse. One of the most commonly criticized actions undertaken by the government was the “gas-for-fleet” deal signed on April 21.
I explained it to a friend from France in this way: At the beginning of the year, Ukraine received Russian natural gas for $330 per 1,000 cubic meters, almost $100 more than the $220-$230 most European countries were paying. Ukraine’s average monthly payment for gas was about $1 billion.
There was not enough money in the budget to cover the expense. Last year, Naftogaz charged 30-35 percent of the payment price to customers. In order to pay for gas, my country had to use its central bank reserves, which the cabinet “borrowed” every month. In fact, this money will never be paid back, according to the finance minister and the National Bank of Ukraine. If Ukraine had used International Monetary Fund money to cover the cost, then the money would have had to be paid back.
The expense each year accounted for about 10 percent of the gross domestic product. The gas-for-fleet agreement signed in Kharkiv [allowing the Russian Black Sea Fleet to stay in Crimea until at least 2042] decreased the monthly gas bill by $350 million. That means paying $650 million, instead of $1 billion, and decreasing gas payments from the deadly 10 percent to a manageable 6.5 percent of GDP.
And this means, by the way, that our economy will grow 3.5 percent more in 2010 than the predicted 3-4 percent (according to a conservative estimate).
But that’s not all the good news. Ukraine’s macroeconomic health received a similar “growth bonus” for 10 years, the term of the agreement. If the economy stutters, the fall will be 3 percent less than what it could have been and, correspondingly, if it grows, it will shoot 3 percent higher than it would otherwise do. This is a simple equation that any student of economics can solve.
And what do we give in return? Russia’s lease of the Black Sea Fleet in Sevastopol and its environs was due to expire in five years. I am neither a politician or a geo-politician and am not well-versed in issues concerning NATO or the nuances of the “reset” of U.S.-Russian relations. But as an economist, I can roughly estimate how much Ukraine would have had to invest in the ports in Sevastopol and the surrounding infrastructure in order for them to provide an annual $4 billion payment to the budget. I would like to point out that I am not talking about cash flow, net or gross income, but net profit, that is, net benefit for Ukraine’s annual budget.
And that profitability would have to be invariable and guaranteed for a minimum of the next 10 years. Do you know of any companies that would be willing to invest and build the necessary infrastructure to yield that money? A friend of mine who works for the economy section of Le Figaro, the French daily newspaper, agreed with me that no such companies exist.
Microsoft earned a $3.2 billion net profit in the first quarter of 2010. Before it could reach that level of profitability, it invested hundreds of billions of dollars over the course of three decades. Incidentally, no one can guarantee that the company can maintain its current level of profitability.
Russia provided some $40 billion in cash flow to allay its post-imperial fear of losing its outpost on the Black Sea. This is a giant lot of money not only for Ukraine and Russia, but for any country. The new government, which extracted the concession, today is criticized by the leaders of the “democratic and patriotic community,” who prefer the old cabinet, which had paid Russia 10 percent more than Ukraine could afford, and demanded nothing in return.
Mikhail Kukhar is the spokesman for the Ministry of Labor and Social Policy.
