1. The Tymoshenko government plunges Ukraine into abyss of energy crisis!

Facts

A gas conflict between Ukraine and the Russian Federation has escalated. The Tymoshenko government represented through NAK Naftogaz of Ukraine can not settle a matter of debt to Gazprom for 1.8 billion of cubic meters of gas consumed by Ukraine from the beginning of this year. The situation is aggravated owing to absence of documentary agreements on gas supplies to Ukraine for 2008: gas is siphoned off by Naftogaz without authorization through signed contracts with the Russian party. For 2.5 months of work the Tymoshenko government has turned out to be unable to reach an acceptable agreement with the Russian Federation in a gas sphere, having exposed to a threat the stability of gas deliveries to Ukraine and Europe consumers. As a result the Russian side declared about a reduction by 25% of everyday volumes (38 million cubic meters a day) of gas shipments to Ukraine from March 3, 2008.

Comments

The Yanukovych government ensured stability of imported gas supplies to Ukraine for 2008 at a one of the lowest prices in Europe – $179 per one thousand of cubic meters. Having come in power, prime minister Tymoshenko initiated revision of gas agreements with the Russian Federation for 2008.

Having destroyed the previous scheme of deliveries, Tymoshenko did not manage to agree on new terms of imported gas purchasing for Ukraine under conditions, at least, not worst than those in force in early 2008.



Tymoshenko’s main requirement is to turn to direct gas deliveries between Gazprom and Naftogaz for $179/one thousand of cubic meters of gas without intermediaries (RosUkrEnergo and UkrGazEnergo). Such scheme is unacceptable for Gazprom. In this case, supplying gas to Ukraine at a price of 75% below a market one, Gazprom loses benefits from an intermediate under its control (RosUkrEnergo):
- greater access to the European markets passing over the EU Antimonopoly Law;
- reducing commercial risks of supplying gas to Ukraine;
- partial indemnification of losses in price margin due to access to a part of the Ukrainian domestic market and sale there cheaper Central Asian gas (through UkrGazEnergo, in which ‘Gazprom’ indirectly owns 25% shares).
Gazprom’s following counter responds: there are two possible scenarios of gas supply: a) direct gas deliveries to Naftogaz for $314 per one thousand of cubic meters on the Ukrainian frontier or b) shipments through two joint with Naftogaz enterprises for $179 but under a condition of Gazprom’s access to 50% of the Ukrainian gas market. This Gazprom’s position corresponds with the February 12, 2008 agreements reached by Russian president V.Putin and Ukrainian president V.Yuschenko concerning a new scheme of gas shipments to Ukraine.

Y.Tymoshenko wants to put her own intermediary at the place of RosUkrEnergo, purchase gas from Gazpromexport on the Turkmenistan boundary, deliver it to Ukraine and resale to the EU. It explains Naftogaz rejection to pump extra volumes of Central Asian gas by Gazprom through Gazpromexport/RosUkrEnergo across Ukraine in the EU. The government and Naftogaz line does not take into account that the owner of a resource is Gazprom, which had contracted the whole volume of Central Asian gas until 2017.

The government’s failure of making a constructive dialog, prevalence of Tymoshenko’s personal political interests over national ones, a refusal to execute presidents’ agreements entailed considerable exacerbation of the case concerning gas deliveries to Ukraine and Europe in late February – early March, 2008.

Dragging out with the time worsens Ukraine’s positions in the negotiations and fraught with larger expenses: Russia requires payments for gas that has been consumed beyond the contract since the beginning of this year at a price of $314 per one thousand cubic meters. Unauthorized gas extraction in 2008 may cost Ukraine extra $0.25 billion. Naftogaz is cornered financially. The company through income subsidizes gas prices for the population and heat utilities power stations. Payment discipline is declining in a sector of housing and communal services, the population expects current debt write-off, including the one for consumed gas on account of the Savings Bank lost deposits indemnification, that is provided for in the Tymoshenko budget.

Ukraine’s positions in a sphere of gas agreements with the Russian Federation for 2008 has worsened:
- Ukraine is exposed to risks of almost double rise in gas price and loss of a half of domestic gas sale market.
- Return to the previous scenario of gas supplies is impossible. Disagreeing with the compromise gas agreements between the presidents of Ukraine and the Russian Federation, Tymoshenko accelerates Ukraine’s transition to world prices for natural gas.

Having launched revision of gas shipments schemes, Tymoshenko originated threats for economic security of the country:

- Ukrainian enterprises will scarcely bear shock of 2.5-fold increase in a cost of energy carriers in 2008 (energy-intensive enterprises - of chemical industry and heat utilities power stations, will suffer mainly),
- Gazprom’ share at the domestic retail market will enlarge if two intermediaries with its ownership are established, - Naftogaz income and ability to invest in hydrothermal stations development and domestic recovery extension will diminish,
- Price dictate of Gazprom, which is interested in revenues windfall, will amplify.

$5 billion and extra 5% of inflation are possible costs of Y.Tymoshenko government’s gamble to review gas agreements for the budget and population:

- UAH 26 billion are extra subsidies for Naftogaz budget and local budgets to cover margin between domestic tariffs and imported gas cost. It automatically increases the 2008 state budget deficit by 3% GDP.
- 5% are extra inflation of costs owing to increase in power expenses of the economy (not taking into account inflationary effects of the budget deficit growth).

Ukraine’s image as a reliable gas transit country will be spoiled in case of gas conflict escalation. Naftogaz has already made statements about its willingness to siphon off the EU-bound gas provided steep cut of gas supplies by Gazprom to Ukraine. Y.Tymoshenko shows that she is ready to breach the Energy Charter signed by Ukraine in 1998. The Charter clauses stipulate unimpeded admission of transit volumes from a supplier (Gazprom) to a consumer (the EU).

A program of the Cabinet of Ministers of Ukraine ‘Ukrainian breakthrough’ pledges greater transparency and stability of gas deliveries. In practice, during 2.5 months of work the Tymoshenko government achieved reverse items:
- no transparency,
- accumulation of debts for gas consumed in 2008,
- unidentified import gas price, that amplifies uncertainty for business and the state,
- Ukraine is accused of siphoning off gas from a gas pipeline and Ukraine’s image as a transit country is spoiled.

Unfortunately, that is actual payment for irresponsible Tymoshenko’s policy in a gas sphere. These costs will be increased unless the government focuses its efforts on settling the gas issue. The following points are necessary for this purpose:

- to ensure an agreement on deliveries for 2008 through signing an agreement on supply provisions at a price of $179 per one thousand of cubic meters,
- to define a volume and structure of the debt for January-February 2007, to resolute the debt at a price of $179, valid early in the year;
- to agree about the future scheme of delivery, providing for Ukraine a transitional period during which gas prices will be increased gradually and predictably to the level of the world ones;
- to be strenuously engaged in the energy-saving program both in gas transportation sphere and in industry and housing and communal services;
- to reform the system of special purpose assistance for the population.

2. Launching re-privatization in power sector, the government undermines investors’ trust, who work in Ukraine, and deprives industry of resources for its development.

On March 4, 2008 the Supreme Court of Ukraine (SCU) will begin considering an appeal of investment company ‘Business-invest’ (Privat Group) concerning the recovery procedure of Dniproenergo. ‘Business-invest’ is a minority shareholder, it owns 0.00655% of Dniproenergo. The company contests legality of additional emission of Dniproenergo shares, due to which it was led out of bankruptcy. Under the recovery plan clauses a company-investor DTEK (SCM) in exchange for 26% shares of Dniproenergo paid off UAH 0.95 million of the company’s debt and assumed UAH 1 billion of investment liabilities, partially submitted in cash.

The day before consideration of appeal in the SCU the Tymoshenko government overtly backed Privat Group in an economic dispute on Dniproenergo. Governmental officials are engaged in attempts of undisguised pressure on the SCU with the purpose of accepting a decision favourable for the government and Privat.

Facts

From the moment the Tymoshenko government came to power, it has launched a campaign of Dniproenergo re-privatization. Without participating in a scheme directly, the Cabinet of Ministers promotes Dniproenergo re-privatization through submitting an appeal against the transaction legality by another business unit. In this conflict the state seconds Privat Group outright. On the eve of case investigation the Cabinet of Ministers escalates pressure on the SCU so that it accepted favourable decision for the government and Privat:

- On March 3, 2008 the ‘Economicheskiye izvestya’ newspaper published extracts from the governmental analytical report, not intended to be made public. A report introduces a new raiding scenario, allegedly used by DTEK in power industry. The scenario is implemented by means of seizing management and control over an enterprise as a result of obtaining the majority of votes in supervisory boards of power companies. Dniproenergo is presented as an obvious example, the supervisory board of which comprises, according to the Cabinet of Ministers, the state (50% + 1 share) with one vote, DTEK (44% shares) with six votes. The information is contrary to the fact: in the Dniproenergo supervisory board DTEK has 3 votes, and 4 votes belong to NAK EKU.
- On February 14, 2008 the Minister of Fuel and Energy Y.Prodan during a briefing on an extended meeting of the Ministry board publicly confessed that he worked for Privat Group. The minister declared that ‘we had appealed to courts in order to return completely that volume of shares which split the state’s share’. For the time being, except IC ‘Business-invest’ (Privat group), any legal subject, including the government, has not appealed to the courts. Without the SCU decision the high-post official let himself make a statement that Dniproenergo ‘was sold in the corridors’.
- The Ministry of Fuel and Energy forbade changing a registrar of Ukrnaftogaz (Privat), that conducts registers of shareholders for a number of power companies with NAK EKU shares (including Dniproenergo). In November, 2007 Ukrnaftogaz refused to implement a decision of Dniproenergo shareholders’ meeting to register additional emission of shares under recovery procedure, thus breaching the Ukraine’s law.

The Tymoshenko government did not take into account negative experience of the 2005 re-privatization. Re-privatization tools and performers were merely changed, the essence of the process remained the same. As in 2005, the Tymoshenko government requires funds to maintain her pro-social image. Being unable to create conditions for economy growth and raise social benefits for the population on this basis, this team is guided by a principle ‘to seize and divide’, bearing in mind, primarily, its business interests.


Creating stable and favourable environment for business is one of main sections in the Cabinet of Ministers program ‘Ukrainian breakthrough’. The Tymoshenko government declares that the basic priority in this direction will be ‘rigorous fulfillment of the Constitution clauses about ensuring protection for all kinds of ownership’. In practice government’s good intentions empty declarations.

In Dniproenergo case, the next attempt to set a dangerous precedent is undertaken, that leads to the possibility of revising any privatization competition. The Tymoshenko government boosts law breach and impairs investment climate in order to get short-term electoral benefits. The consequences of such step for Ukraine, as in 2005, will not be consoling: investors’ distrust, decline of international competitiveness, growth rate slowdown and worsening of prospects for stable development in the future.