Publication: Eurasia Daily Monitor Volume: 3 Issue: 121

The gas deals, signed by Kyiv’s envoys with Gazprom and its offshoot RosUkrEnergo in January and February, are showing their damaging impact even faster than anticipated. The state oil and gas company Naftohaz Ukrainy is rapidly falling into arrears for gas delivered by Gazprom through RosUkrEnergo, Ukraine’s “exclusive supplier.” The growing indebtedness exposes Naftohaz and the country to the risk of losing control over the gas transit pipeline system — Ukraine’s most valuable economic and strategic asset — to Russian interests.

Naftohaz has incurred just under $600 million in debts to RosUkrEnergo for gas received in January-April 2006. In addition, Naftohaz owes $85 million to the Gazprom-devised joint venture UkrGazEnergo, making a subtotal of $680 million owed to Gazprom’s proxies after only four months. The official accounting does not yet include Ukraine’s unpaid gas bills for May and current consumption.

Moreover, Naftohaz needs to repay a $300 million loan received from Deutsche Bank in 2005 and misspent by Naftohaz on overhead and social expenditures, instead of technical modernization and investment. Deutsche Bank canceled the second $300 million tranche and, according to Ukrainian press reports earlier this year, may have authorized Gazprom to collect that debt from Naftohaz.

To pay its debt to RosUkrEnergo, Naftohaz is turning to the ABN AmRo Bank, which is known to be working closely with Gazprom. In mid-June, Naftohaz borrowed $200 million from ABN AmRo for immediate transfer to RosUkrEnergo. The same bank is now syndicating a $300 million loan on behalf of Naftohaz to pay the bill to the same RosUkrEnergo. The Ukrainian government hopes that RosUkrEnergo would at least agree to restructure the remaining $100 million, but RosUkrEnergo seems to turn a deaf ear.

ABN AmRo is also the lead manager of the $500 million in Eurobonds that Naftohaz issued in 2004 (when Gazprom inserted RosUkrEnergo in Ukraine) to help pay earlier Ukrainian arrears to Gazprom — a matter that is still pending.

Technically, RosUkrEnergo incurred a $600 million debt to Gazprom when buying gas for re-sale to Ukraine in January through April. Thus, Gazprom went through the motions of billing that amount to RosUkrEnergo, which in turn presented the bill to Naftohaz Ukrainy. On June 20 in Moscow, Alexander Ryazanov publicly gave Kyiv until July 15 to repay the debt in full. He spoke in his dual capacity as vice-chairman of Gazprom and member of the board of RosUkrEnergo — an overlap that helps illustrate the two firms’ single identity. RosUkrEnergo’s “Ukr” side has also been shown to be Gazprom-controlled de facto.

The next link down the chain of deals by proxy is UkrGazEnergo, a joint venture of Naftohaz with RosUkrEnergo, which is to say with Gazprom. The February agreement brought UkrGazEnergo into the most lucrative gas market in Ukraine: industrial enterprises, which pay for gas upfront. Naftohaz is being relegated mainly to the public sector, municipal utilities, and general population — the “communal gas” or “social gas” sector — which is far from solvent. This factor also undermines Naftohaz’s financial viability, not to speak of profits or capacity to invest.

The level of payment collection by Naftohaz from its consumers is “awful,” according to Prime Minister Yuriy Yekhanurov during the June 15 special session of the cabinet of ministers on this issue. The company’s collection levels are lowest in the industrialized eastern oblasts of Donetsk, Luhansk, Kharkiv, and Dnipropetrovsk (Interfax-Ukraine, June 15). There, the joint venture UkrGazEnergo stands to amass profits in the industrial sector while Naftohaz Ukrainy continues to incur losses in the communal sector.

Naftohaz had been subsidizing the “communal gas” sector even before Russia raised the price of gas to Ukraine from $50 to $95 per 1,000 cubic meters as of January 2006. Because the price hike came during Ukraine’s electoral campaign, the governing authorities postponed the inevitable decision to increase the price of gas to consumers. That increase will only be introduced on July 1, but will not yet offset the higher acquisition costs of gas from RosUkrEnergo. Moreover, the higher price to consumers may push the payment collection by Naftohaz even lower.

Thus, the position of Naftohaz Ukrainy seems set to further deteriorate after July 1. The process may even accelerate in the event that Gazprom and RosUkrEnergo raise the price of gas deliveries to Ukraine after July 1. They may do so either on Gazprom’s — that is, the Kremlin’s — initiative, or on the excuse that Turkmenistan has decided to raise the price on its gas, which forms the lion’s share in the Turkmen-Russian mix delivered to Ukraine. Although Gazprom has warned Ukraine several times that it would raise the price to “market levels” as of July 1, Moscow might await the formation of a governing coalition in Kyiv before making a decision on the price of gas primarily on political grounds.

(Interfax-Ukraine, June 6 – 21; Zerkalo nedeli, June 10-16, 17-23)