Tactics of behavior towards a monopolist

“One of the key priorities for Ukraine’s energy security is reduction of monopoly dependence on the supplies of energy resources,” says the president’s annual address the text of which can be found on the head of state’s website.

Viktor Yanukovych says that, although this priority was set at the very beginning of Ukraine’s independence in presidential decrees, decisions of the Cabinet and the National Security and Defense Council, etc., an opposite tendency has in fact been evident – “the increased external dependence of Ukraine on the supplies of fuel and energy resources from a monopolistic source” [Gazprom. – Author]. Moreover, the president notes that the Kharkiv Accords “sealed Ukraine’s dependence on the monopolized supplies of excessive quantities of natural gas from the Russian Federation at overrated prices for 10 years.”

A two-year-long “gas war” with Russia seems to have convinced the government that orientation to that country in the energy policy has no prospects. Ukraine has even persuaded the Customs Union (above all, Russia) to grant it the status of observer in this alliance of Russia, Belarus, and Kazakhstan with the sole goal of receiving cheap gas. While it is still an extremely bleak prospect to get cheap fuel from the East, the Customs Union is making too many demands.

It is obviously for this reason that the energy-related part of the head of state’s address (Chapter 1.4: “Energy Provision and Energy Efficiency,” pp. 78-89) says that Kyiv will be looking for energy resources in the West. “Deliveries from the EU remain the most realistic way to diversify natural gas supplies to Ukraine in the near future,” the address points out.

Yanukovych’s two-pronged strategy is to reduce energy dependence on Russia and to find alternative sources. In particular, the president suggested “considering again the White Stream gas pipeline project.” As is known, it is Yulia Tymoshenko who unveiled this project in 2005. The project envisages establishing an alternative route to receive natural gas from Azerbaijan and, in case of a successful implementation of the Transcaspian gas pipeline project, also from Turkmenistan and Kazakhstan. Yanukovych believes that Azerbaijani and Turkmen gas may become later a source of diversified supplies. The idea is to build a gas pipeline from Turkmenistan through Azerbaijan to the Georgian port Supsa and then – on the Black Sea bed – across the Crimea towards EU countries. Supposedly, among those interested in this project are the European Union and Azerbaijan which is keen on providing direct supplies of gas to Europe, bypassing Russia. The project is rather interesting, but it will have no future without EU participation.

As an alternative to White Stream, Yanukovych offers TANAP and Nabucco investors transit of up to 10 billon cubic meters of gas across the territory of Ukraine and the use of Ukrainian underground gas storages. The gas will be transported to Ukraine across Bulgaria and Romania to the Ukrainian underground storages and from the latter – across Slovakia – to the other EU countries. The underground gas storages are Ukraine’s main bargaining chip, for Europe is short of them and the construction of new ones is being funded by Gazprom.

In the president’s view, another way to diversify short-term natural gas supplies in the abovementioned quantities is implementation of the LNG terminal construction project. The most likely suppliers of liquefied gas to Ukraine are Qatar and the US, owing to considerable reserves of this fuel and favorable prices at the second stage after a necessary infrastructure has been set up on the territory of Georgia and Azerbaijan. All this requires a concerted effort to look for free natural gas resources, conclude future contracts, and draw up a feasibility report. The address suggests using a Turkish terminal in the Sea of Marmora to solve the problem of the passage of tankers through the Bosporus. 

These projects being a long-term prospect, the president believes that in the near future it is better to purchase gas on the EU spot market in the summer, when natural gas spot prices are lower than those under long-term contracts.

The president claims that the alternative sources of gas import can allow Ukraine to receive an annual 10 to 15 billion cubic meters.

Naturally, Yanukovych could not but mention the extraction of shale gas in Ukraine. He recalled that Ukraine is capable of extracting from an estimated 7-8 to 20-22 billion cubic meters of shale gas a year from its sandstones.

What may be regarded as another blow to the interests of Russian companies is Kyiv’s refusal to use Russian-made reactors at Ukrainian nuclear power plants. Ukraine intends to master reactor-building technologies and organize the production of these units in the foreseeable future.

To reduce the role of Russia in supplying oil to Ukraine, Yanukovych suggests turning to Kazakhstan and Azerbaijan. But this requires implementation of the Euro-Asian oil transportation corridor project.

Yanukovych also pointed out that it is necessity to boost the extraction of lignite and methane in Ukraine and pass a law on governmental regulation in Ukraine’s energy generation.

These proposals of Yanukovych only confirm the opinion once expressed by the well-known economist Oleksandr Paskhaver – the interest of the government coincides today with that of the state. In particular, those on top seem to be aware at last that integration into the EU is more beneficial for the country and for them than entry into the Customs Union. The West does not demand that Kyiv surrender its gas transportation system, make some concessions in the Crimea, or concede some of its sovereignty in favor of a supranational authority, whereas Moscow is openly speaking of this. In the present-day conditions, this can become a decisive factor in Ukraine’s geopolitical choice.

But there is one more factor to be taken into account: the impact that the Kremlin and Gazprom are having today on the Ukrainian domestic and energy-related policies, respectively. It is evidently the tissue of various and, above all, corruption-related ties that can explain why, declaring diversification of energy sources as a top-priority task, Ukraine has been moving in the opposite direction towards the monopolist. It is a paradox. Obviously, the interests of the government are really coinciding with those of the state: to retain the governing chair in an independent state, the Cabinet, the president, and parliament must create a stable socioeconomic situation, which they will hardly manage to do if they forge links with the Customs Union and closely cooperate with Gazprom. But what about the interests of each of our leaders?  Do they coincide with the interests of our state? Can a businessman, who has supposedly made a fortune on the profits from the extraction and sale of energy resources, negotiate a reduction of purchase prices for them? Can a bureaucrat, who signs the act of buying a state-run company at overrated prices, approve that this company will function on the conditions of transparency and open accountability?

Commenting on the brazen rhetoric of Gazprom general manager Aleksandr Medvedev in some of its previous issues, The Day asked a question: how should a country behave if its neighbor and partner is such a monopolist as Gazprom, a self-confident and influential entity that is accustomed to establishing relations by way of pressure and threats? And we named what we think is the first and foremost rule – to get rid of corruption-based links in the vertical chain of command. And here is what experts suggest.

COMMENTARIES

Oleksandr PASKHAVER, economist:

“This country must take actions aimed at receiving the necessary product from other sources. In this case, the very consistency and decisiveness of these actions is of importance even if we have not yet achieved de-monopolization. As a result, the monopolist will begin to be aware of his risks. And he will either trade legally in order to prevent a partner from seeking other suppliers or will begin to illegally intrude into and slow down this process of de-monopolization.

“Determination and decisiveness in this process of seeking other sources is in itself a positive thing. And, in the final analysis, if we stick to these simple rules, we can get rid of the monopoly dependence. We can in fact see this in the behavior of European countries. But Ukraine failed to do so. It is food for thought – why we failed and who stood in our way? Which schemers managed to thwart all our efforts?

“We are a poor country, and it does not take too much money to buy any of our officials or politicians, and such a rich monopolist [Gazprom. – Author] can afford to keep his affiliated ‘interested persons’ down here. Severing these links is by far the most formidable challenge to the young Ukrainian state because these links are deep-rooted in our history, mentality, and past woes. The other part of the problem is our societal character. I would say we have a very weak immunity against such a pathogenic bacterium as corruption which results from the very nature of every individual. Simply, other countries have a sufficiently strong public immunity. But our country has none. It is, above all, the fault of not the government but of society which accepts this process. We have had about a dozen and a half governments. We’ve had four presidents, but we cannot recall even one who was radically different from the viewpoint of corruption.”

Valerii BOROVYK, chairman, board of directors, New Energy of Ukraine Alliance:

“The tactic of behavior towards a monopolist is laid down in the Second and Third Energy Packages adopted by the European Energy Community. This means implementation of the legislative provisions to de-monopolize the transportation, sale, and extraction of energy resources, which were drawn up and adopted in the EU in spite of resistance from Gazprom-like monopolists. The EU also has a number of big companies, such as RWE and EDF, which control a considerable part of the energy market. They took a dim view of those energy packages. But the latter came up in spite of commercial resistance. The same should be done in Ukraine – to be more exact, to dismember the domestic monopolist (national joint-stock company Naftohaz Ukrainy) into the companies that will extract, transport, and sell energy resources. And these newly-formed companies should be independent from the state, big corporations, or the neighboring states. They should adhere to free-market principles, including those in price formation. Secondly, legislative conditions for de-monopolization should be created. We must get back to the Brussels Agreement signed by the previous government. It was about reforming the gas transportation system as well as about some other points in the functioning of a market.

“Is it possible to do so in Ukraine? It is. Is there a political will to do so? No. I think when the president declares de-monopolization he means, above all, the promotion of such domestic monopolists as Akhmetov’s DTEK or Firtash’s RosUkrEnergo. This will be done by way of attracting to this market the structures close to the president himself. We can already watch this process on the example of coal assets, and I think we will soon see this on the example of gas transportation assets.”