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19.01.2006

Russian gas: economy and policy

   

Gagik Ter-Harutyunyan 

One of the most remarkable events at the end of 2005 was the dispute over gas tariffs between Russia and Ukraine. It is above question that in spite of the seeming upshot the conflict between these two Slavonic republics will face new developments. The decision to dissolve the Ukrainian Supreme Rada’s government, which caused legal confusion on the threshold of parliamentary elections, has come to prove it. There is no doubt that the processes over energy carriers are multilevel and have political and economic interrelated elements.

The economic factor

Today natural gas is one of the most important raw materials of strategic importance. It is also one of the main energy carriers; 20% of electricity today is produced by means of gas, in 2020 this showing will reach up to 30%. At the same time it has an important role in chemical industry where for about 5% of the extracted gas is used. In particular, by processing ethane, the natural gas’s component part, we extract polyether, which is a material many everyday things and tubes are made of. Let’s point out that if the price of a ton of ethane is $80-90 then the price of polyether reaches up to $3700. At present there are 150 billion cubic meters of international gas reserves and the potential reserves are estimated to reach up to 280-300 billion cubic meters. Annually for about 2.5 trillion cubic meters of gas is extracted out of the lithosphere. However, in spite of the fact that this showing tends to rise, the experts think that gas resources will meet the humanity demands in the 21st century in comparison with oil resources. Let’s point out that the consumers get gas through gas pipelines the total length of which is 1 million kilometers.

Russia, with 33% of international gas resources, takes the first place in the world (Iran is in the second place 15.8%, in the Post Soviet area there are considerable gas resources in Turkmenistan-2%, Uzbekistan and Kazakhstan- 1.3%).With such enormous gas resources and quite developed gas exporting, transfer and supply infrastructures Russia, like the Soviet Union in the past, uses this row material as an important strategic factor. At present the main gas supplier in Russia, “Gasprom” controls more then 60% of Russian gas resources, 38% of the shares are state owned. The annual profit of this enterprise is $40 billion (“Gasprom” exports 150 billion cubic meters of gas only to Europe, the average price for 1000 cubic meters is $250).

As for the processes of gas supply in CIS area and especially to Ukraine, let’s point out that in those conflicts the Russian part proved to be quite tough, pragmatic and literate. On the 31st of December 2005 expires the agreement enabling Ukraine to buy Russian gas paying 50 dollars for 1000 cubic meters and for the gas transition to Europe that country gets $1.01 for each 100 kilometers of gas pipeline. The Russian-Ukrainian negotiations on the new price, $160 for 1000 cubic meters, began in spring. The Ukrainian part was strictly against this price, persisting that the reasonable price is not more then $60-65. On December the negotiation process reached deadlock and “Gasprom” announced that it will sell the gas only by $230. “Gasprom” threatened to close “the gas tap” if the agreement is not concluded till the 1st of January 2006. At the same time Russian authorities suggested Ukraine $3.6 billion on credit at preferential terms or/and to keep the old prices for the first three months but only after the agreement’s ratification. The Ukranian ““Naftohaz” refused that suggestion.

On the 1st of January 2006 “Gasprom” stopped the gas supply to Ukraine in answer to which “Naftohaz” began stealing it, which in its turn reduced the amount of gas supply to the European countries. “Gasprom” compensated Europe that losses though it was obvious that such state of affairs couldn’t last long. Berlin and the other European capitals began exerting pressure on Kiev: it turned out that energetic problems were more important than the ideas of “orange revolutions”.

In parallel, reconciling-mediation missions were carried out in Moscow (German’s ex-chancellor Schroeder has an important role in it). At last Oleksiy Ivchenko reached a five-year agreement on the 4th of January. It can be considered as the success of “Gazprom” and the whole Russian economy as:

  • Now “Gasprom” will annually have a profit of $4.5 billion for supplying 17 billion cubic meters of gas instead of $800-900 million that Ukraine used to pay in the past.
  • According to the same agreement the calculations will be made only by foreign currency, which will make the financial calculations more transparent and consequently will reduce corruption risks.
  • Not later then on the 1st of February must be established a new company under Russia’s control, which will undertake the issues of transferring, realizing and possible double export (for example Moldova) of Russian gas (in the past this function was carried out by “Rusukrenergo” organization).
  • The rise in gas prices will inevitably reduce the Ukrainian products’ (mainly power-consuming metallurgy and chemical industry) competitiveness in CIS and international markets. Accordingly it will raise Russian product’s attractiveness as the price of 1000 cubic meters of natural gas in Russia is $40 for.

After signing the agreement the chief of “Naftohaz”, Ivchenko, announced that the Ukranian part had made gains as “Gasprom” will sell gas for $230 to the above mentioned “Rusukrenergo” and the latter will supply it to Ukraine by $95. However it is just an informative “means”. The problem is that annually Ukraine consumes for about 50 billion cubic meters of Central Asian gas (by $55-65) and no more then 17 billion cubic meters of Russian gas (1/3 of the exported amount).

Ukraine is supplied by the “mixture” of “Russian” and “Central Asian” gas the averaged price of which is $95. Some commentators consider rise in prices for transit gas to be an achievement for Russian part: at present the Russian part pays $1.6 for 100 kilometers of transit ($1.01 in the past). Anyway, everything should be considered in comparison: In the past Ukraine got this payment as 10% of the transferred gas and at present it can’t even buy gas by the supplementary money.

The political context

As it is known at the end of March 2006 the parliamentary elections of Ukraine’s Supreme Rada are expected be held. The elections have acquired much importance as since the 1st of January 2006 the new constitution changes have been adopted according to which Ukraine has turned into a semi-presidential-semi-parliamentary Republic. In the context of all these Russian-Ukrainian conflicts on gas prices acquired political importance; all the Ukrainian political actors tried to make their own use of the given situation. It is also obvious that most of the processes progressing in Kiev were directed by Moscow.

Particularly it was not by chance that at the end of December 2005 Russian Prosecutor General’s Office refuted all the accusations brought against Yulia Timoshenko for corruptive operations. It is also not by chance that the president Yushcenko’s former associate was the first to destabilize the present political situation. In particular Timoshenko started litigation against “Naftohaz” head Ivchenko and the Supreme Rada made a decision to dissolve the government headed by Yury Yekhanurov. It was not accepted by the President Yuschenko, which led to legal crisis as it turned up that there wasn’t a formed Constitutional Court in Ukraine competent to make decisions on disputable issues. “Gas war” also stirred up the powers supporting the ex Prime Minister Yanukovich. There is an impression that the discrepancies in Ukrainian elite has become strained today and in the struggle adopted “all against everybody” principle. At present it is not possible to predict the political developments in that country. The foreign financial organizations immediately recorded the situation. “Fitch” international agency distinctly discredited Ukraine of course not without results. According to the predictions of the same agency’s experts in 2006 only 1-2% of GDP growth is expected in that republic.

The destabilization of Ukraine’s political system fosters Russian mass media campaign which depicts Yuschenko and his supporters as not serious politicians. It is also worth mentioning that the Ukrainian mass media in their turn try to represent Russia as an enemy empire.

According to other analysts the chaotic processes in Kiev are what Kremlin aims at. “In peace time” the Yuschenko administration was “alienating” the republic from Russia. The given chaos in the country will maybe provide a chance for Moscow to form in the neighboring country the political powers balancing Yuschenko’s “pro-western” tendencies in the first period and in the future will maybe help to “get rod of” the present pro-Western leader.

In the context of “geopolitical” orientations it must be pointed out that only the US supports Ukraine in “gas war”. According to some Ukrainian politicians and freelance analysts the Ukrainian uncompromising position on gas issue in the first period was conditioned by the American appropriate guarantees. In particular the articles appeared in informational field worded that at the US CIA director Goss and Yuschenko meeting in Crime certain agreement was reached between the parties.

It is also noteworthy that even after completing the agreement on gas the US State Secretary Condoleezza Rice appeared with a tough announcement against Russia. However Kremlin didn’t yield and expressed its dissatisfaction to the US. Such a steady position of Moscow is conditioned not only by partial re-establishment of Russian state system and economic growth: here first of all an importance should be attached to Russia’s new active and multilevel policy which made the ground for the country to get out of political isolation.


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