What was the standoff about? Gas prices, geopolitics or access to lucrative gas contracts?
Analysts say all of these factors were at play. Russia is bracing for a big fall in revenues due to falling energy prices. Its petro-dollar driven economy is at risk, so the Kremlin wanted to squeeze more dollars for gas from Ukraine.
Analysts say Russia also aimed to smear Ukraine as an unreliable transit country to boost support in Europe for costly alternative pipelines. It has also been speculated that Russia aimed to prop up world energy prices. Experts say Russia also wanted to show, as in the Georgia war, that it is the main powerbroker in the region.
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Another aim was to play Ukraine’s rivaling political factions off each other. Some Ukrainian politicians have fought for access to lucrative gas trading deals sanctioned by Russia’s Gazprom.
How much gas does Ukraine consume in a year?
Ukraine last year consumed some 60 billion cubic meters of gas, or 5 percent less than in 2007. Wasteful consumption has gradually fallen since 2006 when Russia started sharply increasing gas prices for Kyiv. Ukraine used to consume up 70-80 billion cubic meters annually in the late 1990s.
How much does it import and at what cost?
Ukraine produces about 20 billion cubic meters of gas, importing the rest at a cost of $8.61 billion in 2008. Nearly $2 billion of this amount was last year offset through transit fees raised by pumping Russian gas to Europe. Ukraine could compensate more by tripling its tariffs for transit and gas storage to European levels. But raising tariffs this year would force Gazprom to renegotiate dozens of supply contracts to European customers.
What percentage of the nation’s gross domestic product is spent on gas imports?
About 5 percent of GDP, with consumption in recent years severalfold higher per capita than in European countries.
Why does Ukraine import so much gas?
Low prices proved addictive, and today Ukraine’s inefficient industries and government-run district heating plants burn vast quantities of the fuel. A 2007 report by Simon Pirani of the Oxford Institute for Energy Studies said Ukraine has “the world’s most energy-intensive economy.” In 2005, the report said, Ukraine consumed 73 billion cubic meters of gas, “an amount similar to Japan, Italy, Saudi Arabia or the entire African continent.”
Who has benefited from the murky gas trade in the past?
Swiss-registered RosUkrEnergo was the exclusive Ukrainian intermediary for imports of gas from 2006 until now, raising questions about who profits and why. Russia’s Gazprom owns 50 percent of RosUkrEnergo, while Ukrainian businessman Dmitry Firtash owns 45 percent and his partner, Ivan Fursin, owns the other 5 percent.
Why did the new gas agreement signed on Jan. 19 remove RosUkrEnergo?
Prime Minister Yulia Tymoshenko, most recently her Russian counterpart Vladimir Putin, and many others nationally and internationally say RosUkrEnergo is a corrupt front for the funneling of gas-import profits to favored politicians and insiders. The company and its Ukrainian shareholders have denied these allegations. But ex-energy minister Yuriy Boyko and lawmaker Serhiy Levochkin, a former first assistant to ex-president Leonid Kuchma, are close friends of Firtash and Fursin. Both Boyko and Levochkin are members of the Moscow-leaning Regions party led by ex-premier Victor Yanukovych.
How much did Ukraine pay for Russian gas in 2008?
$179.5 per 1,000 cubic meters.
What price did each side want for this year?
Russia’s price demands for this year have varied from $250 to $450 per 1,000 cubic meters of gas. President Victor Yushchenko said the fair price for Ukraine, taking into account the price of oil and a discount Russia promised, should be $210 per 1,000 cubic meters of gas.
What price did they settle on?
Not all details of the Jan. 19 agreement have been revealed, so it is hard to say exactly. The agreement pegs the price Ukraine pays for gas to oil prices, a formula which European Union officials say is transparent, standard in the west and should avoid future standoffs and corruption. The price will be adjusted quarterly. Gazprom insists Ukraine will pay a rate of $360 in the first quarter. But on Jan. 20, Tymoshenko said Ukraine has enough gas reserves stored up this year (still some 16 billion cubic meters) to minimize purchases in the first quarter. The lion’s share of purchases will be made later in the year when prices fall by about half, she said adding that the price will be around $228. Demand for gas is also expected to drop sharply with curtailing production of steel and other export commodities because of the world recession.
What will that do to the economy?
Estimates are that any gas import price increases will fuel additional inflationary pressures and contribute to decline in GDP of 4-5 percent for the nation. An import price of $450 might economically cripple Ukraine’s commodity-export driven economy and prolong recession by 1-2 years. Higher gas prices will also put pressure on Ukraine’s currency, which lost some 50 percent of its value last year.
Why do both nations have these annual price fights?
Russia has sold gas to Ukraine cheaply since the break-up of the Soviet Union, but has in recent years moved towards market prices for gas imports. However, market prices for its other customers are determined by a long-term pricing formula tied to the price of oil, which has declined by more than $100 a barrel since July and is expected to remain low throughout the 2009 recession. Experts say that with Ukraine now paying a de facto European price, Russia will loose its ability to exert political pressure on its neighbor. But if Ukraine struggles to pay its gas bills on time, it could sink into further debt problems and be forced to give up its gas pipeline system. The pipeline pumps 80 percent of Russia’s gas exports to Europe. Gazprom openly seeks control over it.
Who wins most from the gas agreement reached this week?
Both Ukraine and Russia suffered deeply in terms of their reputations as reliable suppliers and transit countries of gas. Regardless of the price it charges Ukraine, Russia will suffer this year due to falling prices on oil and gas, its main sources of hard currency. Ukraine and Europe seem to win by bringing transprency and predictability to the supply of gas to Ukraine and transit to Europe.
The introduction of a clear price formula should help avoid future price disputes and, as a result, disruptions of gas to Europe.
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