RUSSIAN-UKRAINIAN OIL SUMMIT: AN UNEASY, FLEETING COMPROMISE

On May 19 in Kyiv, President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, and other senior Ukrainian officials met in an emergency conference with Russia’s Ambassador Viktor Chernomyrdin, Russian state pipeline monopoly Transneft chairman Semyon Vainshtok, and top executives of Russian oil companies and their branches in Ukraine, including: Lukoil’s President Vagit Alekperov, Lukoil Vice-President for Ukraine operations Nicolae Ciornai, TNK-BP Chairman and chief executive officer Robert Dudley, TNK-BP Ukraine President Oleksandr Horodetskiy, Alyans-Ukraine President Musa Bazhaev, Tatneft General Director Shafagat Takhautdinov, and Alyans-Kazakhoil-Ukraine chief representative Pyotr Miroshnikov.

The Ukrainian side in the conference sought immediate steps to alleviate the fuel crisis that has hit Ukraine particularly hard during the agricultural planting season (see EDM, May 18, 19). The Russian side sought to protect its inordinately high profit margins on high-octane gasoline and diesel fuel. Lukoil, TNK-BP, Alyans, and Tatneft account for the lion’s share of Russian oil supplies to Ukraine. They also own, respectively, the Odessa, Lysychansk, Kherson, and Kremenchug refineries in Ukraine, with an aggregate share of nearly 80% of Ukraine’s oil-product market.

In the conference, Yushchenko assumed the role of arbiter between Tymoshenko and the Russian crude oil suppliers and refiners, whom the prime minister had accused of taking advantage of the Russian monopoly to create artificial shortages and gain windfall profits. The president criticized Tymoshenko for resorting to “administrative, non-market” methods, such as price controls and anti-cartel investigations, to deal with the price escalation by Russian companies. But Yushchenko also criticized the Russian companies for choosing to slow down crude oil deliveries and refining operations precisely during the spring sowing in Ukraine and then scaling down the fuel retail sales even further in response to the price controls.

Yushchenko announced during the conference that government-imposed price ceilings are being canceled, effective immediately. The sides agreed to regulate the prices temporarily, at levels substantially lower than those ceilings. Prices per liter on the Ukrainian market have now been fixed at 3.2 hryvnias and 3 hryvnias, respectively, for two types of high-octane gasoline, and 2.85 hryvnias for diesel fuel. Price fluctuations are to be allowed within a 3% corridor.

Briefing the media after the conference, Yushchenko’s top aide Oleksandr Tretyakov, as well as Lukoil and TNK-BP executives, pronounced themselves satisfied with the compromise decision. Those executives, however, warned the Ukrainian side against using “non-market mechanisms” and offered the consolation that the prices would probably come down anyway after the agricultural planting season. For his part, Naftohaz Ukrainyi chairman Oleksyi Ivchenko noted that Russian companies had “played the wrong card” in slowing down refining operations in Ukraine during this season.

The compromise seems fleeting and uneasy. The sanctity of “market mechanisms” is hardly sustainable when the market is in the grip of a cartel. The conference itself resulted in a price-fixing arrangement between the state and an informal cartel, in this case a foreign one. Yushchenko himself implied during the conference that this is only a stopgap arrangement. For a durable solution in Ukraine’s interest, he urged the Russian participants to cooperate with Ukraine’s short- and medium-term policy goals: using Ukraine’s existing refining capacities to the full extent of 51 million tons of crude oil annually, instead of 22 million tons on average since the year 2000; and doubling the amount of crude oil delivered to and in transit via Ukraine to Europe, by making it possible for Kazakhstani oil to reach Ukraine.

The conference produced some political fallout from a lengthy polemical exchange between Yushchenko and Tymoshenko in front of the Russian participants. Tymoshenko rejected Yushchenko’s criticism of her price-control and anti-cartel initiatives. Press accounts, citing witnesses to the scene, differed as to whether the polemic indicated a deep rift between the two leaders or an agreement to disagree even publicly on policy.

(Interfax-Ukraine, UNIAN, Ukrainian Television Channels 1 and 5, May 19-22; Zerkalo Nedeli, May 21)