Political Markup: A Possibility

No matter how much politicians may talk about this country’s real independence, their rhetoric always pursues a certain goal. In the ongoing heated discussions about independence, especially those that concern energy issues, experts have the last word. From this perspective, it is worth listening to the opinion of Serhiy Tulub, president of the Energoatom National Joint-Stock Company, who thinks that the commissioning of new power units at the Khmelnytsky and Rivne nuclear power plants has essentially reinforced Ukraine’s self-sufficiency in energy. Indeed, this country, once an importer of electricity, is now exporting it to European markets. The latest news in this sector is that on the Monday before last the Ukrenergo National Energy Company announced that it is now able to export an annual 370 million kWh of electricity to Romania.

A GAS “PLUS”

Among those who recently spoke about Ukraine’s energy independence was Yury Boiko, president of the Naftohaz Ukrayiny Company, who has become embroiled in a new scandal, this time in connection with Turkmen gas. In his view, Ukraine succeeded in achieving much-coveted self-sufficiency by signing a contract to import Turkmen gas at a 30% higher price, thus breaking the “Russian gas monopoly” over our market.

Mr. Boiko is undoubtedly one of our top-ranking managers. Turkmen gas is not just a component of this country’s gas system (45% of a total 80 billion cubic meters; 18 billion cu. m. are produced in Ukraine, while the rest is Russian gas delivered as payment for Europe-bound transit) but also a source of diversified fuel supplies to Ukraine. In the past, cheap Turkmen gas allowed Ukraine to curb Russian gas appetites. Today, it seems that a complete U-turn has been made, and it looks as though we are giving up our positions at the talks. In any case, a country needs energy self-sufficiency not just to flaunt it and reap a monopolized profit but to create normal and stable conditions for individuals and industry, i.e., providing light and heat at a reasonable price.

True, Naftohaz claims it will not raise the price of gas for industrial users as a result of the increased price of Turkmen gas. “I am categorically stating that we will under no circumstances be raising gas prices by a figure that exceeds inflation in this country,” he said, adding that the cost of Turkmen gas for Naftohaz on the Russian-Ukrainian border will be $60 per 1,000 cu. m. in 2005. He also promised that the price increase of 31.5 billion cu. m. of imported Turkmen gas from $44 to $58 per thousand cubic meters would be compensated for. Naftohaz has three sources for doing so. The first is increased supplies from Turmenistan of so- called investment gas (from 1.8 billion cu. m. in 2004 to 4.5 billion cu. m. in 2005) as payment for the services of Ukrainian construction businesses. The second is gas purchased from the RosUkrEnergo Company, currently the Turkmen gas transit operator in Central Asia and Russia. The third source is to maintain the present level of export, which is expected to fetch a $200 million profit. We could believe all this, with some reservations, if we were not aware of the Naftohaz executives’ true strategic objectives, which are aimed at raising tariffs for both industry and the population. Incidentally, the Antimonopoly Committee recently, if belatedly, fined this company 50,000 hryvnias for monopolist practices. Of course, this is a laughable amount for a monopolist because, according to Mr. Boiko, the net profit of Naftohaz in 2004 surpassed the UAH 1.2 billion it earned in 2003. Still, it’s a good beginning.

A POLITICAL MINUS

Meanwhile, Acting Prime Minister of Ukraine Mykola Azarov said almost immediately after Boiko signed contracts in Ashkhabad that the government of Ukraine had not empowered the Naftohaz chief to sign a supplementary agreement on the terms and conditions of Turkmen gas deliveries. Even more outspoken is Yuliya Tymoshenko, who is vying, not without success, for the post of prime minister in the future cabinet. She claims that Turkmenistan suddenly raised the price of its gas because Naftohaz Ukrayiny is allegedly selling Turkmen gas to Europe at the outrageous price of $170 per thousand cubic meters. Mr. Boiko has neither confirmed nor denied this information.

It has not been ruled out that these rumors will definitely not be confirmed, since the company’s well-informed Russian rivals are accusing it of just the opposite: dumping on the European gas market. It is clear that Boiko, who has far more black balls than white ones in his “energy independence basket,” is unlikely to come to terms with the Yushchenko government.

A “TASTE” OF OIL

Mr. Boiko obtained the largest number of black balls for his role in reversing the Odesa-Brody oil pipeline, a project that was lobbied by Russian oil barons. It will be recalled that in April 2003 the Naftohaz chief was one of those who signed a somewhat secret and in fact anti-Ukrainian protocol, for which the media nicknamed him “Comrade Reverse.” Instead of obtaining access to strategically important European markets, Ukraine received assurances from Boiko and Co. that 9 million tons of oil would be delivered in the reverse direction. Where are they? Some sources claim the pipeline is in fact “plugged” and Ukrtransnafta has been placed under the financial control of an offshore company. At the same time, other projects (including those with Russian participation) to deliver oil to Europe and the US, bypassing the Turkish straits, are being successfully implemented. The reverse pipeline story is sure to be the subject of a bitter debate in the nearest future.

Commenting on the role of Naftohaz’s top executives in “strengthening” this country’s energy independence, Serhiy Yermilov, former minister of fuel and energy (fired through the efforts of reverse pipeline advocates), the director of the Institute of Ecology and Energy Conservation, told The Day, “As for the new price of Turkmen gas, the assumption that this bolstered Ukraine’s energy self-sufficiency is absolute nonsense. As you are aware, our contract with Turkmenistan expires in 2007, whereas Russia has contracted Turkmen gas for the next 25 years. It would be wonderful if the oil price increase allowed us to buy out this contract from Russia. But such things should at least be coordinated with the government, because this is a matter of domestic financial and economic policy, and this gas means a lot to us. Remember the reaction of our country’s leadership to similar actions that were adopted in 2000 by Vice-Premier Tymoshenko, who was in charge of energy. A gas price is normally the government’s preserve. I could never understand whether Yury Boiko was working as a government official (no one repealed the decree appointing him first deputy minister for fuel and energy) or president of a joint-stock company.” Broaching the subject of the Odesa-Brody pipeline, Mr. Yermilov noted that intensive talks are underway about other, non-Ukrainian, routes. At the same time, the ex-minister believes that “the more we drag it out and delay, the fewer chances our project has.” “It should be immediately revived,” the expert said. “I believe the Odesa-Brody line still stands a fair chance [of working in the European direction].”

Ukraine may have even bigger problems with gas balance and gas prices on the “Russian Front.” Now is the time to pay for what Naftohaz Ukrainy did when they made onetime payments on the Ukrainian gas bonds. Back in 2001, Russian and Ukrainian Premiers Mikhail Kasyanov and Anatoly Kinakh signed an agreement restructuring Ukraine’s gas debt of $1.43 billion, spreading payments over 12 years. NU secured the deal by issuing bonds, but Russia’s Gazprom refused to enter them in their balance sheet, otherwise they would have to pay some $500 million to the Russian budget as tax returns. Last summer Boiko pushed through the Ukrainian cabinet an enactment determining the mechanism of settlements with Gazprom. The latter transferred $1.25 billion to NU’s account first, as down payment for gas transit to Europe in 2001-09. The money was then transferred to the Foreign Economic Bank (FEB) of Russia, authorized by Gazprom to collect payments on the Ukrainian gas company’s bonds, whereupon FEB made payments to Gazprom. “This way we can avoid tax payment losses; we can regulate the liabilities, and we can fix up transit terms till 2009, thus making available up to six billion cubic meters of gas to be supplied per annum, using an in- kind supply pattern,” Gazprom’s Press Secretary Sergey Lukyanov stated, emphasizing the deal’s advantages. It was thus Gazprom received a lump sum which the Russian company, if servicing the NU bonds, would have received by installments lasting till 2013.

This transaction was described as a good settlement of the problem in Russia. As for Ukraine, this gas transit deal will mean losing five billion cubic meters of gas in 2005-09. It was envisaged to make up for this loss by stepping up Turkmenian gas purchases, but we know that this issue remains a big problem, meaning that Ukraine will most likely buy this amount of gas from Russia. Considering the current supply shortages on the gas market, the prices will be dictated by the seller. Another possibility is that part of these prices will be determined by a political markup.