Ukrainian Government Examines Belarusian Model of Gas Trade With Russia

Ukraine’s newly elected President, Viktor Yanukovych, and the new government clamored for low-priced Russian gas from their first day in office. As an opening gambit they called for a price similar to that paid by Belarus; or in the worst case somewhat higher at $200 per one thousand cubic meters of Russian gas. Yanukovych himself, Prime Minister Nikolai Azarov, First Deputy Prime Minister Andriy Klyuyev, Deputy Prime Minister Serhiy Tyhypko, and officials from Yury Boyko’s fuel and energy ministry are among those who proceeded from this assumption in their public statements. To achieve that price level, they declared their readiness to share the Ukrainian gas transit system with the Russian Gazprom, through an as yet undefined consortium.

Russian Prime Minister, Vladimir Putin, claims that Belarus qualifies for a cut-rate gas price as a member country of the Russia-Belarus-Kazakhstan Customs Union. With that status, Belarus is seemingly entitled to Russian gas deliveries exempted from Russian export duties. According to Putin, this privilege reduces Minsk’s purchase price by 30 percent at one stroke (Interfax-Ukraine, March 26).

That argument is clearly designed to entice Ukraine’s new government into considering the possibility of joining the Russian-led Customs Union. This idea has few takers, however, even in this Donetsk-rooted government. Moscow could, at most, hope to introduce a degree of ambiguity in the Ukrainian government’s policy deliberations and external signals, weighing the advantages of the EU against those of the Russian-led Customs Union for Ukraine. Any such ambiguity, particularly if it delays the EU-assisted reform of the Ukrainian gas sector, would undermine Kyiv’s credibility and weaken its position vis-à-vis Moscow on gas and other major issues.

Belarus has qualified for a deep discount on Russian gas mainly by sharing ownership of the gas transit company, Beltransgas, with Gazprom. In practice, this means that Belarus pays one part of its gas bill to Russia in cash and another by transferring ownership shares in the national gas infrastructure to Gazprom. Thus, Belarus paid only $49 per one thousand cubic meters of Russian gas during 2009 (the average of four quarterly prices). Belarus is paying $168 in the first quarter of 2010 and it projects an annual average price of $171.5 per one thousand cubic meters of Russian gas for 2010 (Belapan, Interfax, March 26).

While low on the cash component, however, these prices are supplemented by the barter component in the form of infrastructure ownership shares. In 2006, Belarus agreed to transfer 50 percent of shares in Beltransgas to Gazprom, in four annual installments of 12.5 percent each.

On March 31, 2010, Gazprom completed officially the acquisition of 50 percent ownership in Beltransgas, and changed accordingly the composition of Beltransgas’ oversight board and board of directors. Gazprom now proposes to increase its stake beyond 50 percent in the near future, as part of its overall program of investment in export pipelines. It also proposes to switch from the US dollar to the Russian ruble in the Russian-Belarusian gas trade, ostensibly to reduce currency risks for both Belarus and Russia. However, the dollar-denominated oil products basket makes such a switch difficult for gas transactions (Interfax, Belapan, March 31).

The Ukrainian government hopes to persuade voters to accept a loss of control over the national gas transit system, if Russian gas can be bought at $200 per one thousand cubic meters in the cash component of the price. The barter component of the price in the form of assets would in that case become less visible; and the issue of transferring additional assets to pay for Russian gas in the future could be postponed.

At present, Russian gas deliveries to Ukraine and gas transit via the country are covered by agreements signed in January 2009, amended in November 2009, and valid until 2019. The Ukrainian government of Yulia Tymoshenko negotiated these agreements with Putin and Gazprom. Under the sale-and-purchase agreement, Ukraine paid $210 per one thousand cubic meters of Russian gas in 2009 –a 20 percent discount from what Gazprom defined as its netback price in Europe.

In 2010, and thereafter, the discount is removed, aligning Ukraine’s purchase price with that netback price, pegged to the oil products basket on a quarterly basis. Thus, Ukraine pays $306 per one thousand cubic meters of Russian gas in the first quarter of 2010, and will pay $320 in the second quarter (Interfax-Ukraine, March 19-25).

The new government’s first reflex seems to prefer sacrificing national assets for price relief, rather than proceeding to reform the energy sector with EU assistance, as the predecessor government had resolved to do before the recent elections.