Top Ukrainian official warns Tymoshenko's return could trigger stiff gas price hikes

By bne IntelliNews October 18, 2007

Roman Olearchyk in Kyiv -

A top Ukrainian official warned that his country could face stiff price increases imposed by Russia's Gazprom on natural gas imports if the fiery Yulia Tymoshenko becomes premier and pursues plans to remove intermediary companies from the multi-billion-dollar gas trade between Kyiv, Russia and energy-rich Central Asian producers.

"Tymoshenko is making these big announcements that she will remove the intermediaries and everything will be better, " said Serhiy Lovochkin, chief of staff for Viktor Yanukovych, the outgoing Ukrainian prime minister.

"But I predict that her policies may lead to a sharp price increase for gas supplied to Ukraine. We will be getting gas not at the $130 rate as we have today, but at something like $230 per 1,000 cubic meters," added Lovochkin, who served as chief of staff under former Ukrainian president Leonid Kuchma.

Tymoshenko, poised to become Kyiv's next prime minister after a strong showing by her party in snap parliamentary elections held on Sept. 30, has repeated vow to remove intermediaries from the gas trade business supplying Ukraine. Her radical reform plans have been viewed as a move that would strain relations between Russia and Ukraine, whose vast pipeline system serves as the main artery for Russian supplies to Europe. Early this week, Tymoshenko's BYuT political bloc and the Our Ukraine -People's Self Defense grouping backing Kyiv's pro-western president, Viktor Yushchenko, inked a preliminary agreement to form coalition government. Their coalition will, however, be razor-thin, just 2 seats more than a majority in the 450-seat legislature. What's more, rumors are spreading that a handful of lawmakers from the Our Ukraine grouping might not support Tymoshenko's candidacy. The stakes are high and pressure against Tymoshenko's candidacy is building.

Another top Ukrainian official, First Deputy Prime Minister Mykola Azarov, warned on Oct 16 that Tymoshenko's agenda could spark a repeat of the gas price dispute between Kyiv and Moscow in 2006 which escalated into to several-day crisis. Europe experienced supply shortages during the standoff.

Lovochkin, who attended Yanukovych's meeting last week with Russian President Vladimir Putin and Prime Minister Viktor Zubkov, agrees.

Ukraine, which consumes some 70 billion cubic meters of gas annually, has seen the price of gas upon import surge since 2006 from some $50 per 1,000 cubic meters to a current rate of $130. During the 2006 gas price dispute, Gazprom offered Kyiv to buy gas directly at a rate of $230, or to accept RosUkrEnergo's less expensive offer.

"In such a situation everything has to be done very carefully. Any action from the Ukrainian side which could cause higher prices will negatively affect the economy of Ukraine. We see a situation here where Ukrainian politicians are not ready to find consensus on the formation of a new government and this can hurt Ukraine's position in trade and economic relations with gas suppliers, Moscow and Central Asia," Lovochkin added.

Despite Lovochkin's words, recent comments by Tymoshenko and high-ranking Russian officials suggest her energy transparency cause may be gaining support in Moscow.

Speaking on Germany's ARD television station on Oct. 15, Dmitry Medvedev, chairman of Gazprom's board of Directors and Russia's First Deputy Prime Minister, said: "We will probably revise the scheme of our relations [with Ukraine] and give up any intermediary structures that are not clearly understandable."

"It is very good that the Russian Federation confirmed such a position of ours in building relations," Tymoshenko said a day later referring to Medvedev's comments.

Tymoshenko also brushed off fears of price hikes in retaliation to her becoming prime minister saying: "I am convinced that the price of gas will be absolutely balanced, moderate. We will find mutual understanding with the Russian Federation."

The exchange between Tymoshenko and Medvedev came just two weeks after Gazprom threatened to cut Kyiv off from supplies in return for more than $1bn in gas debt owed by the very intermediaries Tymoshenko wants to cut out. While an agreement has since been reached on settling the debt, the timing of Gazprom's warning - two days after Kyiv's election - appeared to signal Moscow's unease with a Tymoshenko-government. Informed source said relations between Gazprom management and the intermediaries had worsened as of late. Whether she truly has mustered support in Moscow for her energy reforms remains uncertain.

If she succeeds, the position of Ukrainian billionaire Dmytro Firtash is at risk. Firtash owns a major interest in the Ukraine-Russia-Central Asian gas trade through Swiss-registered trader RosUkrEnergo, with a 45 per cent stake. A five percent stake in this monopoly supplier of gas to Ukraine is owned by his partner, Ivan Fursin. Gazprom owns 50 percent of the company.

Firtash and his representatives have remained tight-lipped on Medvedev's comments and Tymoshenko's pledge to oust RosUkrEnergo from its current position as monopoly supplier to Ukraine.

Andrei Knutov, a spokesperson for RosUkrEnergo, said: "Our company continues to work within the framework of long-term contracts inked earlier."

An informed source close to RosUkrEnergo said that Gazprom had adopted a well-planned strategy to play Ukraine's opposing political groups off each other. The sole intention of Gazprom, according to the source, was to create a situation allowing it to raise gas price tariffs for Ukraine, with or without intermediaries.

The price Ukraine currently pays for gas is pegged to the price Gazprom pays for Central Asian gas from Turkmenistan, Uzbekistan and Kazakhstan. All three countries have expressed an interest in raisin their export prices for next year. RosUkrEnergo, which supplies Ukraine gas from these three countries, also buys large volumes of Russian gas at a higher price (above $200 per 1,000 cubic metres), which is intended for export to European consumers.

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