but Yushchenko arrives with some common sense

In a recent entry, I postulated that the reason for recent price hikes on Russian oil was that Russia was merely correcting for artificially low rates it was charging Ukraine as a gesture of support for Yanukovych's presidential candidacy. However, in this article in Eurasia Daily Monitor, Vladimir Socor argues that it is simple exploitation of a monopoly. As evidence he states that oil in Ukraine is being sold at $340 a barrel compared to $318 in Europe. Russian companies reap pure profit, while Ukraine sits around with no other options.

Odesa-Brody

If this is true, then a lot of the blame for the current woes should be placed at the feet of the previous regime under Kuchma. If his government had put any effort into developing alternatives to Russian oil, this problem would not be a problem. As evidence that the Kuchma regime was uniterested in developing other oil options, just look to its obstinate behavior over the Odesa-Brody pipleline. That the obvious benefit to Ukraine of transporting oil from Odesan ports to Europe (verified by a government-hired expert commission) was never something Kuchma truly attempted to pursue proves that he wasn't interested in protecting the nation from possible Russian manipulation of monopoly position.

The argument for using the Odesa-Brody pipe backwards (such as it was) rested on promises of supply from the likes of TNK-BP. Since the new government is much more willing to consider other oil suppliers, TNK-BP now seems to expect to lose out to Ukraine's economic interest, so they've decided to milk their monopoly while they've still got it. And thus the mask comes off.

In order to twist the knife, they've just closed a bunch of refineries for "repairs". This irritates Ukrainian citizens, who will need to pay more at the pumps, but should make Ukraine's long term interests that much clearer. My vote is for super-fast-tracking that pipeline and getting some more oil floating into Odesa.

In Any Case, Price Controls are Bad Policy

In related news, I just found (via AUR) that Anders Aslund wrote a dynamite piece on the economic failings of the YuGov in the Washington Post. Some of the most important worries to Aslund have been Tymoshenko-supported price controls on certain food staples and on oil. I can only guess that Yushchenko is not exerting enough control to make the government fiscally and economically responsible, because he most certainly must know what price controls are doing to the country, regardless of why the price on oil, or meat or grain, is rising.

However, the late-breaking news is that Yushchenko has stepped in on the oil issue, bringing reason and sound economic policy with him.

At Last, Yushchenko Steps In

Here is a great report from Ukrayinska Pravda, via the Ukraine Daily Report:

 

Yushchenko Intervenes in Fuel Crisis that Revealed Divisions in His Cabinet

President Viktor Yushchenko has signed into law the bill that cancels import duties on light oil products. The President stated that the law will allow for the solution of the problem by saturating the fuel market within a few days with oil from the Baltic states, Belarus, and the Caucasus. "From now on no one will be regulating prices in Ukraine with administrative measures," Yushchenko stated. The same day President Yushchenko signed a separate decree on the stabilization of the fuel market. "The crisis was caused by the incorrect actions of the Cabinet in pricing policy and its overly administrative involvement into the market of oil and oil products," reads the decree.

The President ordered the Cabinet to conduct stable financial, pricing, tax, and customs policy towards oil and gas. Yushchenko also ordered the Cabinet to prepare within 2 weeks a bill that will cancel value added tax on oil transit through the territory of Ukraine. Yushchenko also ordered the Cabinet to develop a vertically integrated system of managing the state's corporate rights in oil companies and oil refineries, develop a program for creating a state reserve of oil products equal to 10% of annual consumption and create this reserve by Jan 1 2006, and to diversify oil supplies to break the dependency on oil from one country.

Commenting the decree Premier Yuliya Tymoshenko stated, "Criticism coming from the President is very important for the Cabinet and we [the Cabinet] will always listen to it… This is absolutely normal – President must keep a hand on the grip of power," Tymoshenko stated. However, she stated that among the President’s advisors there are people who are misinforming him about the activities of the Cabinet. "There are people who are trying to form a negative view by the President toward the Cabinet… And we should honestly admit that these people have a clear political goal," Tymoshenko stated. She went on and stated that certain high state officials in fact helped organize the oil crisis. "You know that not only old oligarchs are working against the Cabinet, but also current oligarchs also want to get rid of this Cabinet and use these instruments in administrations," Tymoshenko stated. Commenting on the fact that the Secretary of the National Security and Defense Council, Petro Poroshenko, was openly criticizing the Cabinet’s oil policy, Tymoshenko stated, "I've read Poroshenko’s criticism, and I am pleased that such high officials find a break between dealing with own businesses and take a look at what is happening in the country." [ Kyiv, May 18, Source: Ukrayinska Pravda ]

 

I am really happy to see Yushchenko stepping in on this one. And sure enough, with some good economic policy. It's still going to be a tough summer for Ukrainians, but  if Yushchenko's statements here are backed up, then at least his government will have done the right thing. What TNK-BP does is another matter.

[update: after a couple months, the oil crisis is no longer a crisis. Prices are still high, but Yushchenko's policy averted the biggest problems]