August 02, 2005

Russia tells Ukraine gas prices could triple

written by: Judy Dempsey, 01-Aug-05


Boris Nemtsov (left) and Viktor Yushchenko (right)
BERLIN Russia is planning to triple its gas prices to Ukraine, prompting fears that the measures could influence Ukraine's parliamentary election campaign, according to officials in both countries.

Alexiy Miller, chairman of Russia's state-owned gas monopoly, Gazprom, has told his Ukrainian counterparts that the price could rise threefold. The increases would match world market prices and provide Gazprom with more revenue to finance its ambitious investment plans.

Russia charges Ukraine around $80 for 1,000 cubic meters of gas, which is well below world market prices.

"Russia intends to raise prices threefold. I hope both sides can find a compromise before the winter," said Boris Nemtsov, a former deputy prime minister of Russia and now adviser to the Ukrainian president, Viktor Yushchenko. "It could be a very difficult time for Ukraine in the coming months," Nemtsov said in an interview.

Elections in Ukraine are due next March, but already the political parties have begun campaigning for a Parliament that for the first time will have genuine powers based on the Western Europe parliamentary system. The powerful role of president will be sharply reduced.

These changes were agreed to during last December's peaceful Orange Revolution, which swept Yushchenko to power after he promised to end corruption, introduce economic changes and implement a more open and democratic political system that could eventually allow Ukraine to join the World Trade Organization, the European Union and NATO.

But a jump in energy costs could immediately lead to higher domestic and industrial prices, which analysts said could erode the popularity of the parties led by Yushchenko's Our Ukraine Party.

Those prices could also be exploited by the nationalist and socialist parties, whose candidate for president, the pro-Russian Viktor Yanukovich, was defeated by Yushchenko.

Agata Loskot, an energy expert at the Center for Eastern Studies in Warsaw, said Russia had often used energy as a means of political pressure on neighbors that depend on Russia for their energy needs. Ukraine imports a third of its energy from Russia. Another third comes from Turkmenistan and the remainder is produced from Ukraine's own resources.

But what may harm Yushchenko's campaign in the short term may eventually help the Ukrainian economy become more effective and put relations with Russia on a more transparent and accountable basis.

Loskot confirmed that Russia's decision to increase its energy prices to Ukraine could lead to a more transparent system between both countries. She said that "higher energy prices could really push forward much-needed reforms in Ukraine's energy sector."

The Ukrainian government heavily subsidizes energy prices for home and industrial use. The domestic consumer pays $27 per 1,000 cubic meters, while industry pays $60 to $80 per 1,000 cubic meters.

The European Bank for Reconstruction and Development said such low prices encouraged waste and inefficiency. The bank published a report on the matter last May in which it said: "Improving energy efficiency remains a key issue in Ukraine. Energy intensity in 2002 is estimated to have been approximately three times higher than the average of the 25 European Union members."

Ivan Poltevets, an energy expert at the independent Institute for Economic Research and Policy Consulting in Kiev, said that for many years Russia's energy supplies to Ukraine were "paid in kind, not cash. Payments were usually offset by transit costs charged by Ukraine."

Over 90 percent of Russian gas destined for Europe is sent via Ukraine's transit route. If Russia raises its energy exports to Ukraine, Ukraine said it would also increase its transit fees.

Poltevets said costs for energy imports and transit charges "were never transparent. There was never a strong system of accountability." Last month, Ukraine admitted to hoarding 8 billion cubic meters of Russian gas that was supposed to be exported to Europe.

After Yushchenko was sworn in as president last January, he announced plans to "monetarize" the relationship between Gazprom and the Ukrainian side that would end the system of offsetting Russian energy imports against transit costs. So far, however, both countries have stuck with the old, opaque trading system.

Russia has in the past used its vast energy resources as one of its prime foreign policy instruments to exert pressure on neighboring countries.

Three years ago, it stopped gas supplies to Belarus as a means of putting pressure on Belarus to sell an important stake of its energy sector to Russia.

Russia earlier this year also threatened to cut off energy supplies to the government of Moldova in a bid to influence the outcome of parliamentary and presidential elections. The government in Moldova has for the past decade been trying to prevent the pro-Russian region of Transnistria from breaking away.

Published in: International Herald Tribune

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