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:
[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.