Publication: Eurasia Daily Monitor Volume: 2 Issue: 97

On May 17, Ukraine’s Verkhovna Rada passed a government-submitted bill eliminating import duties on high-octane gasoline and diesel fuel. The legislation aims to stimulate such imports in response to artificially induced shortages and steep price hikes by the informal cartel of Russian oil-product suppliers in Ukraine.

Six oil refineries in Ukraine, four of them owned or controlled by Russian companies and all operating on Russian crude, hold an aggregate 90% share of Ukraine’s oil product market. Lukoil and TNK-BP are by far the largest suppliers and refiners, and they also control a critical mass of retail outlets.

Russian crude oil is currently being sold to Ukraine at $340 per ton, compared to $318 for the same quality of Russian oil on other European markets (Interfax-Ukraine, May 11). Moreover, Russian refiners have increased product prices on the Ukrainian market by approximately 30% since April. The suppliers and refiners alike are exploiting their quasi-monopoly position in Ukraine to gain windfall profits. The price hikes have hit Ukraine’s economy particularly hard during spring planting work. On April 14, the Ukrainian government responded by introducing price controls on high-octane gasoline and diesel fuel.

Although the government relaxed those controls somewhat on May 12, the major Russian companies are retaliating with full force. They stopped operations at some refineries “for repairs” — e.g., the Kherson and the Lysychansk refineries (the latter accounts for one-third of refining output in Ukraine). They reduced crude oil supplies to the Kremenchug refinery, the sole Ukrainian government-controlled major refinery. And, as of May 16, Lukoil and TNK-BP have limited sales at the pump to a maximum of 10 liters per vehicle. Lukoil currently owns 177 filling stations in Ukraine and plans to raise that number to 300 by the end of 2006. TNK-BP owns 51 stations, plans to expand to 75 by the end of 2005, and subcontracts approximately 1,000 filling stations at present (Interfax-Ukraine, May 16).

The situation may further deteriorate after June 1, when Russia’s export duty on crude oil is scheduled to increase from $102 to $136 per ton, translating into another price hike in Ukraine.

Prime Minister Yulia Tymoshenko is working on a package of short- and medium-term measures that she outlined to the press on May 11, 16, and 17 (Interfax-Ukraine, UNIAN, Ukrainian TV Channels One and Five, May 11, 16, 17).

As an emergency measures, the government is arranging to bring in consignments of motor fuel from Belarus and Poland in the coming days and weeks. Meanwhile, the Ukrainian government is initiating negotiations with the governments of Kazakhstan and Iraq to import crude oil from those countries later this year.

According to some Ukrainian officials, crude oil from Kazakhstan can provide enough feedstock to produce one-third of Ukraine’s motor fuel requirements at Ukrainian refineries. Tymoshenko is recommending that the government build 1,000 new filling stations within the next three months. These would be owned and operated the Ukrnafta state company.

Tymoshenko proposes to re-equip the Kremenchug refinery for processing oil from Kazakhstan (instead of Russian oil) and increase its processing capacity to 900,000 tons of crude oil monthly, from 600,000 at present. Such expansion requires building a downloading ramp at Kremenchug to receive oil by railway tank-cars. This ramp can be built within three months in order to handle oil from Kazakhstan later this year, according to Tymoshenko.

Moreover, the prime minister proposes building a new refinery in Odessa to process non-Russian oil. According to her, such a plant can be commissioned within a year and a half. According to Transport Minister Yevhen Chervonenko, the Ukrainian tanker fleet is capable of transporting up to 2 million tons of oil to Ukraine monthly, for processing at Kremenchug and Odessa.

In all of her public statements, Tymoshenko underscores the need to extricate Ukraine from dependency on the de facto monopoly, exercised by Russian companies along the chain of supply, refining, and marketing. The May 16 legislation, eliminating import duties, is a first step toward supply diversification.

Tymoshenko’s political rival, National Security and Defense Council Petro Poroshenko, is criticizing the government’s proposals. According to him, “Ukraine is not going to switch refineries from Russian oil to Iraqi or Kazakhstani oil.” In contrast to Tymoshenko’s concern over the Russian monopoly, Poroshenko disapprovingly characterizes both the price controls and the elimination of import duties as a “trade war against Russia,” and calls for an early repeal of these measures (Inter TV, Interfax-Ukraine, May 17).