Ukraine’s Energy Mess Threatens to Overshadow Presidential Election

As the Ukrainian government of Yulia Tymoshenko continues to struggle with the impact of the global economic crisis, its troubled energy sector has taken a number of new hits. The state-owned oil and gas monopoly, Naftohaz Ukrayiny, was degraded by Fitch Ratings to “restricted default” from C, the lowest grade before default level, after it missed a principal payment on Eurobonds on September 30. More positively, Naftogaz, the cash-strapped Ukrainian energy giant, announced on October 8 that 92 percent of note holders have agreed to restructure a $500 million Eurobond issue that matured on September 30. The vast majority of note holders accepted restructuring by an October 8 “early bird” cut-off deadline that included incentives (www.kyivpost.com, October 9). This represents a significant boost for the company, as it attempts to avoid default and restructure a $1.7 billion debt. Final approval is scheduled for October 19.

Ukrainian officials believe that rolling over Naftogaz’s debts should free up finances to reform the country’s debt-laden and murky gas sector. Naftogaz resells gas to households at a lower price than what it pays for Russian imports. “This will help keep Naftogaz afloat in the near term,” said Alexander Valchyshen, the head of research at Investment Capital Ukraine (www.kyivpost.com, October 9).

However, this was soon reversed when Tymoshenko announced that domestic prices would not be increased this year. Earlier the Ukrainian prime minister had pledged to increase domestic gas prices in 2009 by 20 percent in September in order to meet International Monetary Fund (IMF) requirements for a loan to bolster the Ukrainian energy sector and enable it to insure that the transit of Russian gas through Ukraine to E.U. consumers will not be interrupted. Speaking to residents of the village of Zhuraky in the Ivano-Frankivsk region, Tymoshenko stated: “Do not believe the claims that gas prices for people will be raised. I promise you that the price of gas will not increase by one kopeck under any circumstances” (www.kyivpost.com, October 4).

Her statement was seen by many Ukrainian analysts as a pre-election ploy. Tymoshenko announced her candidacy in the January 2010 presidential election and refusing to raise gas prices for domestic consumers is broadly seen as a populist move to maintain her popularity among the electorate. The Ukrainian news service UNIAN earlier reported that the national electricity regulation commission was unable to raise gas prices for the population by 20 percent on September 1, because of court bans and disagreements with trade unions. It was also unable to raise the maximum gas prices for heating utilities by 20 percent on October 1.

The Ukrainian presidential secretariat soon afterwards expressed doubt that the IMF will disburse the fourth tranche of its standby loan to Ukraine if gas prices for the population and heating utilities are not raised in accordance with its conditions (www.kyivpost.com, October 4). Nearly $11 billion in aid from the IMF has kept Kyiv afloat this year.

Ukrainian officials say that they need a fourth IMF disbursement of $4 billion to help cover a budget gap. Analysts suggest that the IMF might delay this, after Kyiv failed to meet key conditions, including increasing gas prices for households to bring them closer to European market levels.

Making matters worse, Russia’s Gazprom CEO Alexei Miller announced on October 7 that it will not lower the volume of gas deliveries to Ukraine in 2010 –as specified by the January 2009 long term contract. “We see that Ukraine is able to fulfill its contractual obligations” Miller stated, “and there will be no problems with Gazprom. We believe that Ukraine can, and is able to pay for gas –it has the money” (www2.pravda.com.ua, October 7).

Yet, the question arises: will Ukraine remain committed to the agreed quotas and price scheme it settled with Gazprom in January 2009, and if a serious price dispute were to arise between Kyiv and Moscow on the eve of the Ukrainian presidential election, how will this impact gas deliveries to Gazprom’s European customers?

Adding to increased tensions, on October 12 the Deputy Head of the Russian State Duma, Valeriy Yazev, stated: “Ukraine is not taking the full amount of gas it contracted for…and should be forced to pay penalties…It is possible that on January 1, 2010 this question will arise and it will be necessary to pay for the gas it did not take” (www.ua-energy.org, October 12). According to East European Gas Analysis, in 2010 Ukraine will be paying more for Russian gas than the European Union and Turkey. The prognosis is that the E.U. and Turkey will pay in the range of $199 to $250 for 1,000 cubic meters, while Ukraine will pay $230 to $288 (www.eegas.com, June 4).

If a new Ukrainian-Russian gas confrontation erupts in the weeks prior to the Ukrainian presidential election, it might have a significant impact on voters tempted to blame the incumbent Prime Minister Yulia Tymoshenko, who is also a presidential candidate, for signing the “take or pay” contract in January which Ukraine is unable to fulfill. This type of backlash would only benefit the pro-Russian Party of Regions and their presidential candidate Viktor Yanukovych.