IS UKRAINE ON THE BRINK OF AN ENERGY CRISIS?

Come January 2009 Ukraine will, in all likelihood, begin paying Russia’s Gazprom in the range of $400 per 1,000 cubic meters for natural gas or $22 billion per year. Presently the country pays $179 per 1,000 cubic meters, or $9.9 billion per year. Will it be able to survive the new price?

For years Ukraine has been hard pressed to pay its debts to Gazprom and has regularly been indebted to Gazprom to the tune of about $1 billion per year.

Gazprom CEO Alexei Miller stated that by July 2008 Ukraine had hoarded 1 billion cubic meters of gas—destined for sale to European customers—into its underground gas storage facilities, withholding it from RosUkrEnergo, the Swiss-based intermediary company that sells Central Asian gas to a number of European companies (Kommersant, July 21). Miller explained that this was a maneuver by Naftogaz Ukraine, the Ukrainian state-owned oil and gas monopoly, to stock up on cheaper gas in order to reduce costly imports in 2009.

All indications point to the fact that Ukraine is decidedly unprepared for such a dramatic increase in energy costs and few believe it will be able to convince Central Asian leaders to lessen the blow by reducing the price at which they sell their gas to Gazprom or to make the increase incremental over a span of five years.

Yulia Tymoshenko, the Ukrainian prime minister, held out hope by saying that during her meeting with Russian Prime Minister Vladimir Putin in June 2008, Putin promised to distribute the price increase over a five-year span (Ukrayinska Pravda, June 28). Earlier, however, Putin told the Ukrainian leadership that Russian “subsidies” for their energy imports had come to an end.

Both sides in the ongoing negotiations have been careful thus far in their comments and have avoided confrontational remarks—the sole exception being Ukrainian Economics Minister Bohdan Danylyshyn, who stated that if the price of gas were to jump to $400, Ukraine should block Russia’s entry into the World Trade Organization.

Gazprom could, conceivably, agree to an incremental price increase for Ukraine over a span of five years, thus allowing the country to radically improve its highly energy-wasteful economy and reduce yearly gas imports from the current 55 billion cubic meters (bcm) to 40 bcm or less and to develop alternative energy sources. In the end, however, Ukraine will need to pay the accumulated debt.

The worst case scenario would be for Gazprom to refuse to grant the Ukrainians debt postponement and demand cash up front for gas deliveries. This could be a death blow to Ukrainian industry and agriculture which are highly reliant on gas for manufacturing and fertilizer production.

Such a price increase could have unpredictable consequences for Ukrainian politics. Many industrialists might blame President Viktor Yushchenko and Prime Minister Tymoshenko for not preparing the country for such a predictable escalation of energy costs and might not support them in the 2009 presidential election.

Voters in Eastern Ukraine could lose some of their pro-Russian enthusiasm if higher gas prices lead to wide-scale unemployment in their region. Some would place the blame on Russia for “squeezing” Ukraine—and them—into an economic crisis.

Others however might argue that if Ukraine were part of Russia, they would pay low Russian domestic prices for gas and thus avoid a crisis.

The opposition pro-Russian Party of the Regions has maintained a silence about the price increase knowing that it shares full responsibility with the ruling coalition for Ukraine’s inability to cope with rising energy costs. Nonetheless, if the increase is not modified, Viktor Yanukovych, the leader of the Party of the Regions, will in all probability benefit most and be elected president.

Gazprom and the Kremlin might be tempted to play the “gas card” in order to see Yanukovych elected and to gain control—if not direct ownership—of the Ukrainian trunk gas pipeline, a long-time objective of Russian policy meant to give Gazprom the ultimate say over the largest supply route of Russian gas to Europe.

With a possible debt of over $10 billion by late 2009, the new Ukrainian government might be forced to sell the pipeline to Gazprom—as well as a substantial part of its industrial base, maintain the Russian Black Sea Fleet in Sevastopol and renounce its intention to join NATO.