Oleksiy Chernyavskiy writes: refineries, just like European ones, cannot complete with subsidized supplies of oil products into Ukraine.
On Jan. 1, Russia, Belarus and Kazakhstan united their markets under the umbrella of the common economic space, thus becoming equal members of the joint customs union.
The union envisages common import duties for the markets of all members, as well as coordinated policy of export duties on products.
The creation of this customs union has a direct impact on Ukraine as it distorts the competition environment on the motor fuel market of the region even further and presents a serious economic threat to the oil refining industries of Ukraine and some neighboring European Union states.
Now, appropriate counteractions need to be undertaken by Ukraine and the European Union to level the playing field and restore balanced economic conditions for its motor fuel producers against the ones in the customs union.
The oil refining industries in Russia, Belarus and Kazakhstan have been continuously subsidized by their states. Under the favorable conditions of the new customs union, the refineries will continue to receive Russian crude oil at a preferential price (minus the oil export duty), which is significantly lower than the market one set for Ukraine, the European Union and the rest of the world.
This gives their oil products an advantage of $130 per ton on average.
A key concern of the players at Ukrainian fuel market has been that countries of the customs union have been using this non-market advantage for mostly encouraging export of their petroleum products (mainly motor fuel) to Ukraine and neighboring EU markets.
With the common economic space now in place, their opportunities to continue doing so will only increase.
It is clear that such oil products produced with non-market leverage adversely affect both European and Ukrainian oil refining businesses.
First of all, it simply ousts EU fuel imports from the Ukrainian market. Today, over 70 percent of all imported fuel in Ukraine comes from the countries of the custom union, while imports from the EU varies from a modest 8 percent to 12 percent, though European refineries are the ones technologically most advanced and efficient in the region.
Of course “the success” of fuel from the Customs Union took place at the expense of oil products producers in the EU and Ukraine.
For instance, in 2011 alone the economic effect of the customs union membership for Belarus will amount to $4 billion of savings on export-duty-free Russian crude.
With even more encouraging conditions in place, the share of its non-market priced petroleum products on the Ukrainian market will continue to grow rapidly and may occupy up to 50 percent of the market in 2011, which in the future would almost entirely drive out European and Ukrainian oil products from the market, as already today they are not able to compete in such distorted conditions.
Second, non-market imports from the countries of the Customs Union damage foreign investment made in domestic refineries, which today amounts to billions of U.S. dollars.
The outcome for the investors now is that Ukrainian refineries, just like European ones, cannot compete with subsidized supplies of oil products into Ukraine.
It has already led to the current situation, where four of seven refineries situated in Ukraine are idle, while the remaining three are operating with a negative margin. Unless the situation changes, they may also be shut down shortly.
As a member of the World Trade Organization, Ukraine possesses a number of effective tools, which the country can utilize to secure a level playing field at its oil and fuel market for all players.
The country can combat subsidized imports from the customs union of Russia, Belarus and Kazakhstan by carrying out an investigation and introducing compensative measures, such as import duties, with the aim of eliminating unfair, non-market advantages in fuel pricing over Ukraine and the EU.
There is a sign that Ukrainian refineries’ concerns are finally being heard. The Energy Ministry on Jan. 19 said it was proposing antidumping duties of 130 euros ($180) per ton on imported petrol and 80 euros ($110) per ton on diesel fuel after the heads of six oil refineries sent a letter to the energy minister.
We hope the government takes the necessary steps to level the playing field.
Oleksiy Chernyavskiy is director of Energobusiness, a Kyiv-based consultancy and publication which focuses on Ukraine’s energy sector. He can be reached at [email protected].
Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact chief editor Brian Bonner at [email protected]
