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Analysis & Opinion
14.12.11 Russo-Ukrainian Gas Tango
By Tai Adelaja

Next year promises to be quite a year, but not just for the euro zone's embattled economies. For millions of Ukrainian gas consumers, this may be less of a holly-jolly Christmas season as well. Kiev’s last minute scramble for a breakthrough in its gas price negotiations with Russia was scuttled on Tuesday, in the latest sign that the high gas prices Ukrainians are now paying for Russian gas will hold firm in the New Year.

Gazprom on Tuesday ruled out signing up to new commitments on the supply of natural gas to Ukraine before the New Year, a Ukrainian News Agency reported citing top Gazprom officials. “There will be no New Year's gifts,” Gazprom Chief Executive Alexei Miller was quoted by the agency as saying. Earlier, Gazprom issued a terse statement about Tuesday's meeting between Ukrainian Energy Minister Yury Boiko and the head of Russian gas giant that merely confirmed that “current and future cooperation has been discussed.” After similar meetings in October, both sides suggested that a new gas price reduction deal would be inked before the end of the year, prompting Ukraine's government to put off the 2012 budget approval in anticipation of the deal.

Ukraine's Prime Minister Mykola Azarov said Tuesday that the government would have to review its next-year budget without the lower gas price and submit it to the Parliament next week, Interfax reported. "If we have to pay $400 (per thousand cubic meters) we will pay, we have no choice," Azarov said when asked to forecast the gas price.

Ukraine has been seeking a reduction in the price it pays for Russian gas, which presently stands at about $400 per 1,000 cubic meters. Under the terms of a ten-year gas supply contract signed with Russia in 2009, the price Ukraine pays for gas is tied to world market prices for oil and gas. Kiev has complained several times in the past that the amount exceeds what is being paid by other European countries such as Germany. Ukraine's former Prime Minister Yulia Tymoshenko is currently serving a seven-year-long jail sentence on charges that she exceeded her authority when she signed the gas deal with Russia. The price of Russian gas is set to rise to $485 per thousand cubic meters in the first quarter of 2012, according to unnamed officials cited by Reuters.

Gas consumers in Ukraine have been relying heavily on Russian gas imports and the government has stimulated demand by offering gas to households at below-market prices often as a way to retain political support. Losses to state energy firm Naftogaz from such subsidies are expected to reach $2.3 billion, or 1.4 percent of the gross domestic product, this year, according to analysts cited by Reuters. But even as Moscow turns up the heat, Ukrainian government is in no position to remove such subsidies, as President Viktor Yanukovich's Party of the Regions faces parliamentary elections in October 2012. Ukraine imported 40.1 billion cubic meters of natural gas over 10.5 months in the year 2011, or 33.7 percent more than it did last year, analysts from Kiev-based Phoenix Capital said. Almost 90 percent of the supplies came from Russia, while the remaining was imported from Central Asia.

Gazprom has been holding out the prospect of significant gas price cuts in exchange for a full control over Ukraine's gas transportation system. A similar scheme was adopted by the gas monopolist in early December, when it announced that it took control of Beltransgaz as part of a revised energy deal with Belarus. Under the terms of the deal, Gazprom would charge $164 per 1,000 cubic meters of natural gas starting in 2012. That's down from the $280 per 1,000 cubic meters paid this year, and is less than half what European consumers pay the natural gas company.

Ukrainian weekly Zerkalo Tizhdny (Mirror of the Week) reported last week that Ukraine’s state-run NAK Naftogaz Ukrainy and Russia’s Gazprom had planned to create two equally owned joint venture companies, one for transit, the other for domestic distribution in Ukraine. Ukraine’s underground gas storage system was also expected to be placed under joint ownership, which Gazprom insists it will control, the paper said. Facing such a dilemma, the Ukrainian government caved in, asking a government delegation this week to finalize the agreement with Moscow, Interfax reported.

But such agreement, even if approved, could still run into hurdles as Moscow insists it must exclude the “participation of third parties," like the European Union. EU Energy Commissioner Guenther Oettinger has repeatedly insisted that control over Ukraine’s Soviet-era gas transportation system must be vested in a trilateral consortium, comprising Russia, Ukraine and the EU, Russia’s Kommersant Daily reported Tuesday. Europe, Oettinger said, is worried that Russia could tighten its grip on all of Europe’s gas pipelines, after Gazprom took total control of the Belarusian pipeline that runs from Russia to the European Union in November. Russia provides approximately a quarter of the natural gas consumed in the European Union and about 80 percent of those exports travel through pipelines across Ukraine, making the country an even bigger stake.
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