2009: time for Ukraine’s gas sector to become european

Kyiv needs to switch to using a formula to calculate the price of imported natural gas and revise its transit rates. The immediate transition to European prices should take place in 2009, as world prices for energy are likely to be even higher in the coming years. Continuing talk of “special” conditions and transition periods means that Kyiv will continue to carry out the Kremlin’s economic and political will and that opaque, potentially corrupt schemes will remain the norm.

The gas conflict between Kyiv and Moscow once more reveals Russia’s desire to increase its control over post-soviet countries in general and Ukraine’s energy sector assets in particular. The situation in which Ukraine finds itself illustrates yet again the ineffectiveness of the country’s domestic energy policy. Still, there are major differences between the two gas wars, in 2005–6 and in 2008–9.

The decline in oil prices that began in August 2008 and the global economic recession have radically shifted the positions of suppliers and consumers of resources. Russia’s influence as an energy giant has weakened. 2008 may well be the last year that Moscow could throw its weight around by reminding the world about how dependent it was on Russia. Although falling prices on world commodity markets have caused Ukraine’s economy to take a hit as well, Kyiv has to stop, once and for all, its “special” gas relationship with Moscow.

Ukrainian consumers are able to pay the European rate of US $250-300/1,000 cu m for for Russian gas anticipated in 2009. Ukraine’s energy intensive businesses currently have power to spare, as they enjoyed super profits for a time. Meanwhile, rises in residential utility rates will not be as radical as earlier and a more effective social security policy should soften the negative impact of growing utility costs. However, Naftogaz is in no position to subsidize ordinary consumers any more and the material state of the country’s households will inevitably grow worse.

The external shock of a switch to new gas terms should force government and business alike to start acting on useful energy policy measures that, so far, have not been taken seriously. Ukraine has to reduce its energy consumption more actively, to attract investors to the extraction of hydrocarbons, and to improve the targeting of its social policies. This is a matter of strictly domestic policy—which means that responsibility for lack of progress can no longer be blamed on an external enemy.

For additional information, contact ICPS Senior Economist Ildar Gazizullin at (38044) 4844400 or via email at igazizullin@icps.kiev.ua