With a great sigh of relief a shivering and exhausted Europe welcomed this week’s gas deal between Ukraine and Russia.
Triumphantly presented by prime ministers Vladimir Putin and Yulia Tymoshenko on Jan. 19, it ended weeks of bitter accusations and restarted Russian gas transit through Ukraine.
For the first time since Ukraine’s independence, both countries inked a transparent pricing agreement that pegs the cost of gas for Kyiv to oil, a widely-used European formula. Ukraine this year gets a 20 percent discount, moving to full market prices in 2010.
But from the few and contradictory details made public by both countries, it may be a bittersweet victory for Ukraine.
World oil prices have plummeted by more than $100 a barrel in six months, but because the price formula has a time lag, the Ukrainian economy will have to pay a whopping $360 per 1,000 cubic meters for gas imports in the first quarter of 2009. Last year’s rate was $179.5.
“Price rises in the first quarter of this year are likely to hit Ukraine’s economy when it is already heading for the worst recession in a decade,” a Reuters report said. The price will then drop sharply. The average price for the year should be below $235, Ukrainian government officials predicted. With more vast underground reserves of gas stockpiled, government officials said the country would import half the normal volumes during the first quarter, taking in more Russian gas later in the year when prices fall.
“The gas price in the middle of this year may drop by almost 50 percent (as oil did) and reach $225 per 1,000 cubic meters. Taking into consideration a 20 percent discount for Ukraine, the price of gas purchased from Russia may even go below the $200 level to $180-$190,” according to an optimistic ING Bank report.
Spinning her agreement in a positive light, Tymoshenko said on Jan. 21:“There is no need for us to buy much gas in the first quarter because we have vast amounts of gas in storage at last year’s prices.”
Ihor Didenko, deputy head of Naftogaz, said on Jan. 21 that the state-owned gas company had “more than 20 billion cubic meters” in storage, almost half of the country’s yearly import needs. The agreement with Russia’s Gazprom yielded Ukraine an additional 11 billion cubic meters for its reserves, stripping it away from Rosukrenergo, the intermediary company cut out of the new supply agreement.
Tymoshenko said Ukraine will remain competitive in terms of energy costs. She predicted that average import costs this year will be $228.8 per 1,000 cubic meters. In her words, the price is significantly lower than $399 paid by industry in the neighboring Poland.
The gas price increase will still affect the cost of goods and utilities for a population whose economy is already in deep trouble. Rising gas prices could put further pressure on a national currency which lost half of its value since summer. It could also further squeeze the pockets of citizens being laid off from work and struggling to pay their dollar-denominated loans.
Economist Ihor Burakovsky said the increase hurt the purchasing power of citizens, industry and the “general balance of the market.”
Ukraine’s ballooning current account deficit narrowed a bit late last year as a sliding currency curtailed imports. But with gas prices rising sharply again for the fourth year running, the deficit could remain high, putting additional pressure on the hryvnia, particularly with exports waning. According to a report by J.P. Morgan, Ukraine’s budget deficit is expected to grow by $4.4 billion, or 3.8 percent of the country’s gross domestic product, if the average price for Russian gas this year stands at a rate of $250.
If oil prices rebound, Ukraine will face even tougher challenges starting in 2010, when the 20 percent discount on gas prices ends. Experts said Ukraine’s gas-guzzling industry will have to finally switch to more efficient technologies if they are to survive.
“They have no other way out but to become more efficient,” Burakovsky said.
Yet if oil prices remain low, gas import prices for Ukraine could actually take a turn downward. Ukraine, whose vast pipeline pumps 80 percent of Russian gas exports to Europe, expects to more than double its gas transit tariffs next year, in accordance with the agreement. This will help compensate for a higher gas bill.
Regardless of its shortcomings, the new gas agreement was hailed as positive in one aspect: The removal of shady intermediaries between Gazprom and Naftogaz.