Kuwait Times

Published Date: March 09, 2009
By Sabina Zawadzki

An economic crisis in Ukraine compounded by a power struggle between the president and prime minister could trigger a fresh clash over gas with neighbouring Russia and disrupt supplies to European customers. Tensions rose last week when Ukraine's elite forces raided the headquarters of Naftogaz, the state energy firm that imports Russian gas and that has in the past had problems paying for the commodity, saying they were pursuing a criminal inquiry.

In Kiev, there was no doubt that the raid, days before Naftogaz had to make a crucial payment to Gazprom for February's gas supplies, constituted a fresh battle between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. Naftogaz had settled the bulk of the bill before Russian Prime Minister Vladimir Putin entered the row by threatening supply cuts, and a row like the three-week stand-off in January that cut gas off to millions in Europe was avoided.

Within hours of Putin's intervention, Gazprom said its neighbour had paid its bill in full and a row was averted. Ukraine is the main transit route for Russian gas exports to Europe, and a dispute over prices with Russia in January disrupted supplies to many countries at the height of winter. With the economy in turmoil, Yushchenko and Tymoshenko are expected to fight right up to a presidential election in which both are expected to stand in a year's time, and gas could once again become the subject of con
flict. "Quite obviously it is only a matter of when, rather than if, the dispute flares up again," said Chris Weafer, chief strategist with UralSib bank.

Gazprom and Naftogaz signed a 10-year contract at the end of January's dispute, hiking the price Ukraine pays for gas in the first quarter to $360 per 1,000 cubic metres from $179.5. Tymoshenko said it was the best deal going in Europe, and based on a 20 percent discount to European prices, Ukraine would pay no more than $230 per tcm on average in 2009. But the president disagreed and called the contract a "defeat" for Ukraine.

The raid on Naftogaz centred on 11 billion cubic metres of gas, over 15 percent of Ukraine's total gas use, claimed by RosUkrEnergo, a gas intermediary despised by Tymoshenko and eliminated from Ukrainian-Russian trade by January's contract. Tymoshenko, addressing her cabinet, said the security forces were out of control and acting at the behest of the president who said they had acted within the law.

Media portrayed the raid as a tug-of-war between Tymoshenko and Yushchenko, pitting the SBU Security Services responsible to the president against government-controlled Naftogaz, which acquired control of the gas just several days earlier. "Tymoshenko needs to take this gas whatever it takes, otherwise she can't claim the average yearly price is $228," said Petr Grishin, chief credit analyst at Renaissance Capital. "Yushchenko will do whatever it takes to ensure that this gas is not taken by Naftogaz. This
political mess in Ukraine is really the number one risk," he said.

The political elite has to deal with an economy that shrank by up to 20 percent and industrial output that fell almost 35 percent in January. This means less tax revenues, and unless Tymoshenko's policies change, more social expenditure. But with a $16.4 billion IMF loan program still on hold due to unresolved issues surrounding a large budget deficit, the government's resources are dwindling.

The government has always had to spend billions supporting Naftogaz as the price it pays for Russian gas has for years been higher than that at which it sells to most of its consumers. And those that pay more than the wholesale price, the industry, have slashed consumption. Naftogaz says utilities have racked up huge debts to it and the hryvnia currency plummeted making it more expensive to pay for dollar-denominated gas.

The risk is of course is that over the course of the year, Naftogaz will find it increasingly difficult to make timely payments," said Tanya Costello, Director, Europe and Eurasia at the Eurasia Group think-tank. "This is an issue of their ability to acquire dollars on time and to gather payments domestically.

A good sign may be an apparent change in Gazprom's attitude, as it deals with a global fall in demand and prices. Gazprom has allowed Naftogaz to pay for the amount of gas it actually took in February and not the contracted amount, a far higher figure. Naftogaz officials have also indicated that Gazprom would agree to reduce the amount of gas sold to Ukraine this year to 33 bcm from 40 bcm that had been pencilled into the contract.

And analysts agree, after Yushchenko slammed the Russians for their war in Georgia last year, Moscow would far rather deal with Tymoshenko, whose statements on the war were milder. As the election approaches, Yushchenko could bring up a number of issues that irk Russia - a 1930s engineered famine which he calls genocide, and NATO membership. But if she keeps ties with Moscow unstrained, she may be the winner. "It is extremely likely that some day this year Naftogaz won't pay on time," Grishin said. "Then i
t's down to what the political situation is at the time. If it is problematic, the Russians will use it again to first do something bad, and then to portray Tymoshenko as a saviour." - Reuters