Market Relations Beats Ill-Defined Brotherhood
Let Natural Gas Prices Converge Towards World Standards
As it did the last time Ukraine had a major political event (during and before the Orange Revolution) Russia has renewed threats to increase the price it charges Ukraine for natural gas to $160/1,000 cu m, which is close to world levels, just as the Ukrainian parliamentary election campaign gets underway.
This is quite reasonable, economically speaking; Russia is currently charging Ukraine 1/4 the world price for natural gas exports (around $200/1,000 cu m). The deal is an advantageous one for Ukraine, although much of the advantage is compensated for by reduced transit fees Ukraine charges Russia for the energy exports that go through the country towards Europe (as 80% of Russia’s exports to Europe do).
Therefore, if Russia were to hike the price, even if Ukraine were to respond in kind, there would be bad economic times ahead. Specifically, the IMF calculated that it would reduce Ukraine’s enviable trade surplus by as much as 3.5% of GDP. (in this comprehensive report released at the end of November, page 38) A Ukraine magazine calculated that after increasing transit costs, Ukraine would still owe Russia an additional $2bn annually. Last I’ve written down, Ukraine was playing for time.
Despite the potential impact, the convergence of the price with world levels is a Good Thing.
Altogether Too Much Gas In the Air
As the Eurasia Daily Monitor describes, Russia has long used these preferential gas prices as a form of incentive for its neighbors to conduct more pro-Russian policy. As such, the threat of huge hikes represents a form of punishment for rapprochement with Western countries. The most telling quotations:
So the choice seems to be very simple: deal with Russia regarding gas based on “purely market mechanisms” or based on a Russian-defined notion of “allies”. Or, to put it another way, Ukraine’s relationship with Russia on this issue can either be a straightforward and transparent business relationship, or it can be a nebulous friendliness that Russia can feel free to threaten if ever it sees an interest in doing so.
And, as I said at the beginning, Russia does bring up the issue whenever it is feeling unfriendly or pushy, especially around election time. Even if it is not making threats itself, every time a financial report comes out on Ukraine, it will include the reasonable risk of just such a rise.
Therefore, the hardship Ukraine will suffer between when the normal market rate is charged and the nation adjusts to the change is much preferable to the hardship of having its big neighbor always able to wander in any time and scare it with threats. It would be much preferable if the change happened slowly, of course, to minimize the shock of the change, but the change should definitely take place.
Ultimately, nations do not do anything out of the goodness of their hearts. They are corporate entities and don’t have hearts. If a nation is giving you preferential treatment, you are going to have to pay for it somehow. Much better if you define the treatment and the payment in market terms, because then things are both clearer and easier to manage.
As it did the last time Ukraine had a major political event (during and before the Orange Revolution) Russia has renewed threats to increase the price it charges Ukraine for natural gas to $160/1,000 cu m, which is close to world levels, just as the Ukrainian parliamentary election campaign gets underway.
This is quite reasonable, economically speaking; Russia is currently charging Ukraine 1/4 the world price for natural gas exports (around $200/1,000 cu m). The deal is an advantageous one for Ukraine, although much of the advantage is compensated for by reduced transit fees Ukraine charges Russia for the energy exports that go through the country towards Europe (as 80% of Russia’s exports to Europe do).
Therefore, if Russia were to hike the price, even if Ukraine were to respond in kind, there would be bad economic times ahead. Specifically, the IMF calculated that it would reduce Ukraine’s enviable trade surplus by as much as 3.5% of GDP. (in this comprehensive report released at the end of November, page 38) A Ukraine magazine calculated that after increasing transit costs, Ukraine would still owe Russia an additional $2bn annually. Last I’ve written down, Ukraine was playing for time.
Despite the potential impact, the convergence of the price with world levels is a Good Thing.
Altogether Too Much Gas In the Air
As the Eurasia Daily Monitor describes, Russia has long used these preferential gas prices as a form of incentive for its neighbors to conduct more pro-Russian policy. As such, the threat of huge hikes represents a form of punishment for rapprochement with Western countries. The most telling quotations:
[Russian state natural gas monopoly] Gazprom explains the move by pointing to the rise of energy prices on global markets. (The average price for natural gas in Western Europe is currently about $200 per 1,000 cubic meters.) "This is not politics, Gazprom isn't under pressure from the government," Alexander Ryazanov, the company's deputy chief executive, said in Moscow on November 29. "This is simple economics."
But some key Russian policymakers have made it absolutely clear that the gas monopoly's Kremlin supervisors are being guided by more than an economic rationale. They bluntly say that Moscow will continue to subsidize energy supplies to its "allies." At the same time, it will promote "purely market mechanisms" in bilateral relations with those neighbors that are not sufficiently loyal and that display a "suspicious" geopolitical orientation. "We simply suggest applying market principles while doing business with those countries with which we don't have an alliance-type relationship," argues Konstantin Kosachev, chairman of the State Duma Foreign Affairs Committee.
So the choice seems to be very simple: deal with Russia regarding gas based on “purely market mechanisms” or based on a Russian-defined notion of “allies”. Or, to put it another way, Ukraine’s relationship with Russia on this issue can either be a straightforward and transparent business relationship, or it can be a nebulous friendliness that Russia can feel free to threaten if ever it sees an interest in doing so.
And, as I said at the beginning, Russia does bring up the issue whenever it is feeling unfriendly or pushy, especially around election time. Even if it is not making threats itself, every time a financial report comes out on Ukraine, it will include the reasonable risk of just such a rise.
Therefore, the hardship Ukraine will suffer between when the normal market rate is charged and the nation adjusts to the change is much preferable to the hardship of having its big neighbor always able to wander in any time and scare it with threats. It would be much preferable if the change happened slowly, of course, to minimize the shock of the change, but the change should definitely take place.
Ultimately, nations do not do anything out of the goodness of their hearts. They are corporate entities and don’t have hearts. If a nation is giving you preferential treatment, you are going to have to pay for it somehow. Much better if you define the treatment and the payment in market terms, because then things are both clearer and easier to manage.
Posted on Monday, December 5, 2005 at 09:24PM
by
Dan McMinn
in 01) Economics and Finance, 02) Foreign Policy - Russia, 08) Oil and Gas
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11 Comments
Dan McMinn
in 01) Economics and Finance, 02) Foreign Policy - Russia, 08) Oil and Gas
|
11 Comments
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Reader Comments (11)
Overall, Russia is no more/no less prone to making altruistic gestures.
Dan, there doesn't appear to be anything at your blog regarding Russian charges of Ukraine (particularly Tymoshenko) having been involved in syphoning some of the involved energy. Cahreges which a number of outsiders view with credibility.
On breaking a nation, those in the know are perfectly aware of what the US did to Chile back in the early 19 seventies.
thanks
It has been a long time since I’ve last visited here, but after doing so today, I almost wish I had continued to live with my uninformed vision of the future of Ukraine after the close of the OR. Now that has been blown apart by reality of words and events related here that I never thought would happen - Tymoshenko fired by Yushchenko, Yushchenko’s seeming near-complete disengagement and apparent disinterest... but, in view of what I’ve read, perhaps understandable. He has said (just a guess) what many would say after running into too many brick walls, “Screw it, I’m going fishing..” - or in his case, “I’m going home and tend my bees - you people can find someone else, I’ve had it.”
Even the anniversary of the OR apparently turned into a con-job - what a shame.
At least there is your “very modest progress.” It isn’t the grand future I hoped for, and I’m thankful it isn’t failure on a massive scale.
But, what most rankles me most, is that Kuchma and Yanukovych are still breathing oxygen, not pushing up daisies in some forgotten graveyard after paying the penalty of criminal conviction. Good God! What happened there?
If the worst criminals get a pass, how can the least be held accountable? Oh... that’s because they have no power, and they can therefore have the book thrown at them, it seems. Unfortunately, this isn’t justice, and Ukraine will continue to suffer, as it treats powerful criminals with timidity, tolerance and deference. Unbelievable...
Plenty of dirt to go around.
Closer relations with Russia and a guarantee of gas supplies to Ukraine will be a big card to play for Yanukovych and 'Partiya Regioniv' in next spring's parliamentary elections, but if Russia overplays its hand and acts too tough in negotiations, some votes may go to other political parties.
One of the reasons why Ukraine has had a special deal from Russia on gas supplies is that it made it easier to set up scams whereby huge sums of money were skimmed off via intermediary companies run by highly-placed persons in both the Russian and Ukrainian government. These scams have been mentioned by many commentators and analysts [eg in an article 'The Russian Energy Strategy and Energy Policy: Pipeline Diplomacy or Mutual Dependence?' at http://www.da.mod.uk/CSRC/documents/Russian/05%2841%29-MF.pdf/view?searchterm=russian%20energy%20strategy%20and%20energy%20policy and elsewhere.]
This year's September crisis in Ukraine which resulted in Yushchenko sacking the entire cabinet were partly precipitated by allegations that gas delivery 'arrangements' involving shady intermediary companies, organized in 2004 by Putin and Kuchma, where picked up and continued by Yushchenko's closest circle of friends after the Orange Revolution. [See http://www.rferl.org/featuresarticle/2005/9/46189B83-B037-4966-910C-89F5D78ADC96.html & http://www.rferl.org/featuresarticle/2005/9/0DF313C3-32FD-4B91-B524-0D022F46F2C2.html ]
As an aside, there are more and more stories coming to the fore about corruption in Putin's inner circle, e.g. as in last Friday's 'WSJ', [which can be seen at http://www.abdymok.net 's entry for 2nd December] involving Russian telecom companies. There are similar stories circulating in Ukraine where again both Yushchenko's and disgraced former President Kuchma's closest advisers are collaborating and scheming to run down the value of the Ukrtelekom monopoly and cash-in, prior to it being privatized.[http://www.svoboda.com.ua/index.php?Lev=archive&Id=2057 ].
In a recent article entitled 'Volodymyr Putin's Business', [reprinted in Ukrainian at http://www.unian.net/ukr/news/news-90358.html ] respected Russian commentator Stanislav Byelkovsky estimates that in various schemes and renationalizations, predominantly in oil and gas, the mind-boggling sum of 50 - 70 billion dollars may have been diverted into individual private bank accounts. This, according to the author, will eventually result in Russian citizens themselves having to pay much higher prices for fuel.
The party lists for both Yanukovych's 'Partiya Regioniv' and Yushchenko's NSNU block have now been published for the fully proportional vote in next spring's Parliamentary elections - they make dispiriting reading. Each contains lots of old long-compromised names - election fraudsters, greedy oligarchs, 'corruptioneers', 'reformed' gangsters - the lot. It looks as if the BYuT list will have its fair share of 'retreads' too. With the amount of money that persons in power can accumulate, is it any wonder that it will be the most ruthless and greedy who muscle themselves onto the lists?..As a bonus even immunity from criminal prosecution is thrown in...
Ukraine Still Refuses to Pay its Gas Bill
E.g. British PM Tony Blair is currently in dispute with the European Union about British EU budget rebates - this has been rumbling on since the days of Margaret Thatcher who famously 'hand bagged' European leaders to get her way.
This whole Russian gas business has now developed into mutual political posturing and brinkmanship - see http://www.jamestown.org/edm/article.php?article_id=2370585 for more info.
What Putin is finding it difficult to stomach is that while the Ukrainian budget recently received $4.8bn from the transparent privatization of Kryvorizhstal, which had been sold to Ukrainian regional clan bosses by Kuchma for $800m in 2004, Russian state coffers have been depleted by the already inefficient and bloated Gazprom paying an over-the-odds £13bn to purchase Sibneft. Is it any wonder Putin is putting on the squeeze on Ukraine?
This at a time when Gazprom's infrastructure is in desperate need of investment - 70% of Russia's high pressure gas pipelines, which pass over some extremely hostile terrain, were commissioned over 20 years ago. The oil transportation infrastructure is in a similarly ropy state. Losses due to leakages and clapped pumping equipment are doubly expensive at a time when gas and oil prices are increasing so much, but there is plenty of scope for Ukrainian-Russian barter arrangements to remedy this state of affairs.
Next year Rosneft is buying up a major part of Surgutneftegas for about $20bn, again its shares had been sold a few years ago for many times less. Money should be going into infrastructure improvement, and not the pockets of unseen shareholders. The long-suffering Russian people are being 'shafted' for second time, first time when state assets were sold off to favoured insiders for a song, and now, again, when they are unnecessarily being bought back by the state in opaque schemes where cash flows into private western bank accounts, and not into the Russian economy.
Are Putin's megaphone negotiations in the media with Ukraine just a smokescreen?
p.s. In the piece above posted by Micheal there is talk of Ukraine paying an ‘honest rate’ for gas. I don’t believe there is such a thing, even for ‘democratic governments’. Is it what Germany pays, or what the Russian consumer pays? Or is it between these? There is only a negotiated rate, which once agreed must be honestly adhered to.
LEvko: Great material as always. I don't have much to add. Except it's not really a matter of snuggling, as far as I can see. More like just meeting enough transparency requirements and democratic development benchmarks to get into good clubs like the WTO and improve economics and trade.
Ron: Welcome back! Yeah, things have been rather disappointing recently. One of the entries here that I'm most proud of is one I did a month ago about how the most backwards part of the government is the judicial branch. The Parliament and President have made some progress, more after the President loses some power in March, but the Judiciary has done nothing. Jack squat. It's pathetic. Without a real judiciary, you can't really prosecute anyone.
It will probably continue to drag down the rest of the country for a long time yet. My friends don't even bother to go to the police or courts when (and this has happened three times to my immediate family and friends in just recent history) they are mugged, clubbed over the head and left unconscious in the dirt.
The modest progress I talk about are improved transparency, reduced corruption and improved economic conditions which ameliorate the problems somewhat.
Curt: I do have an RSS feed... I have a bunch of subscribers even. I will check on how that works.
Which is why I don't get your comment, Michael:
"Overall, Russia is no more/no less prone to making altruistic gestures."
Are you trying to disagree with me? That was my whole point. The Russian government is not at all altruistic, the same as all governments. So the most we can hope for in international deals is transparency and clear explanations of interests. With the current deal in which Ukraine and Russia give each other a complicated group of deep discounts, there's loads of opportunities for playing the system, and you don't really know what you're paying.
Scrap that, bring up the price to market rates on both sides and bring the costs of things out into the open.
The siphoning problem was a big issue back in the 1990's last I remember. Either when Yushchenko was NBU Governor or PM, because he was the major figure pushing the monetization (as opposed to barter) arrangement with Russia. And Tymoshenko helped it along by cracking down on that siphoning.
Since they did their work back then, siphoning has never been a major issue - hence I don't talk about it. Neither does your RussiaBlog friend. Neither does EDM in LEvko's link, or here: http://www.jamestown.org/edm/article.php?article_id=2370571
Now, the allegations of recent scams in oil (again linked by LEvko) most directed at Poroshenko are worth looking into. Sadly, I don't put much faith in the current judiciary and police to do the investigating. So I would hope that it gets investigated, but admit that I'm not terribly optimistic.
here it is:
http://orangeukraine.squarespace.com/journal/atom.xml