Ukrainian Government Fears a New Winter Gas Crisis

Publication: Eurasia Daily Monitor Volume: 7 Issue: 1

In December Ukrainian officials descended on Washington with one overriding mission –to convince the Obama administration that without the financial help of the IMF, Ukraine might be unable to supply the EU with Russian gas this winter. This badly disguised attempt at blackmail on the part of both Petro Poroshenko, the confectionary oligarch and a member of President Viktor Yushchenko’s inner circle, and recently appointed foreign minister and Hryhoriy Nemyria, Prime Minister Yulia Tymoshenko’s right-hand man, was so transparent and brazen that few in Washington were inclined to believe them.

In a further sign of disenchantment and frustration with the current Ukrainian leadership, EU leaders speaking at the 13th EU-Ukraine summit in Kyiv on December 4, blasted the lack of promised constitutional reforms in the country, its erratic gas policies and placed part of the blame for past breakdowns in supplying Russian gas to Europe on Ukraine. Jose Barroso, the head of the European Commission was blunt in his criticism of Yushchenko: “Mr. President, I will speak honestly with you. We are often led to believe that Ukrainian promises about reforms are only partially fulfilled and that words are not followed by deeds” (Kommersant, December 7).

Yushchenko hastily rejected these charges and placed the blame for the lack of reform on the government of Yulia Tymoshenko and the parliament. He also defended Ukraine’s record as a reliable transit country for Russian gas and assured the summit that there would be no disruptions in gas supplies this winter (www.unian.net, December 17). Despite Yushchenko’s calming words, Poroshenko sang a different tune during his later visit to Washington: “Ukraine is confident Europe will not see another winter of gas supply disruptions, but there will be a “higher risk” if the IMF does not resume lending to its distressed economy,” Poroshenko stated (www.unian.net,December 13). His use of the words “higher risk” in describing the situation was deceptively close to blackmail. The same can be said of Ukrainian Deputy Prime Minister Hryhoriy Nemyrya’s statement reported in the Financial Times on December 11. “The next three months are crucial,” he claimed. One day after returning from a mission to the IMF’s headquarters in Washington Nemyria asserted: “Wait and see is not an option. The cost of inaction is greater than the cost of action and may aggravate the situation in the wider region.” Apparently the IMF had a number of good reasons to stop lending money to Ukraine.

According to an article by analyst Tammy Lynch in the Jamestown Foundation blog on Eurasia on December 10, in the wake of the freezing of IMF and World Bank funding, and following repeated statements by Yushchenko calling for the renegotiation of a Russia-Ukraine gas deal supported by the EU, there was little to discuss. It seems EU leaders believe Ukraine has not lived up to its side of the negotiated bargain. This is true –but the EU has not been in a collaborative mood itself (www.isria.com, December 10; www.ukrainianjournal.com, November 19).

The EU’s refusal to even mention the far distant possibility of EU membership for Ukraine has consistently irked the country’s leadership, who several years ago needed some hope on which to develop its reforms. More recently, the EU and Ukraine signed a joint declaration at the EU-Ukraine International Investment Conference on the Modernization of Ukraine’s Gas Transit System. Among other things, the declaration commits Ukraine to ensure transparent operation of its gas network, and set tariffs at a rate that will “reflect actual costs incurred” (http://ec.europa.eu/external_relations/energy/events/eu_ukraine_2009/joint_declaration_en.pdf).

In return, the European Commission, Ukraine, and “creditors” commit to “cooperate in seeking to establish a technical coordinating (sic) council unit within Naftohaz of Ukraine.” This council would create an EU-approved “full modernization business plan” for the Ukrainian gas transportation system, and would help arrange the funding to undertake the system’s modernization. But the main problems with the IMF were linked to Yulia Tymoshenko reneging on a promise to raise gas prices for domestic consumers. After having promised to increase prices by 25 percent in September, she had a sudden change of heart.

Yushchenko was not blameless in these pre-election machinations and pushed for an increase in the minimum wage and pension payments, which the IMF was set against, fearing that its money would be squandered for Yushchenko’s election campaign promises. According to the November issue of the Warsaw-based publication East Week: “The Ukrainian state-owned oil and gas monopoly, Naftohaz, has only twice been able to raise the funds to pay punctually for the monthly gas supplies on its own. In the remaining months, it benefited from support provided by the government and the National Bank of Ukraine (NBU).” Yet, the means it has employed so far to raise funds for gas settlements are becoming more and more desperate. State-owned banks would have to violate the guidelines regulating their activities in order to grant Naftohaz further loans.

The state budget is not only experiencing problems financing its own spending, but has also already used almost all the legal options available to support Naftohaz; in September, it reimbursed the company’s VAT for all current, past and future (until the end of this year) settlements, and in August it issued 18.3 billion hryvnias worth of bonds to raise the company’s statutory capital.

The government had hoped to obtain loan support from European financial institutions ($1.7 billion negotiated in July with the support of the European Commission, to be spent on modernizing the network and partially financing gas purchases), but Ukraine failed to meet the basic requirements for that loan and the deal fell through.