Oil and Gas: Not a lot to watch on any channel

Some progress on oil and gas agreements was expected from the talks in Kyiv with Azerbaijani officials last week. The most promising progress would have been on an end-around oil deal to circumvent Russia's near monopoly on fuel transport out of Central Asia. The plan calls for oil to be transported by boat across the Black Sea to Odesa, and then up the Odesa Brody pipeline (using an as-yet-nonexistent extension into Poland) and on to Europe. Actual gains appear to be modest, with Yushchenko saying the usual nice things about how relations are so nice now and signing the usual meaningless cooperation agreements. The not very big news on energy concerns was talk about jointly creating a new refining plant (without commitment).

It may mean progress was made behind the scenes that the next day (Friday, May 23), Yushchenko called Russian fuel transport tactics "blackmail" while meeting with President Mikheil Saakashvili of Georgia. Admittedly the Georgian president is a very sympathetic audience for this kind of statement, but Yushchenko has always been much more circumspect in his criticism of Russia than Tymoshenko, especially about energy issues. If he feels confident enough to make such statements now, it may mean that the Azerbaijanis have given him good reason for it.

This all makes it difficult to determine if Yushchenko's recent decree to pump oil from Odesa to Brody (currently it's being used by Russia in the opposite direction, because Ukraine has had no oil to fill it with in the forward direction).  It could be an indication that he expects oil soon, or could be one of his many "say nice things" decrees, which lacks a proper basis and is meant more like a marketing statement than an expression of political will.

Tymoshenko vs. Vanco

One battle that may have repercussions is Tymoshenko's fight with Vanco over Black Sea shelf drilling rights the company bought in 2005. This has been the topic she's criticized Yushchenko the most directly and strongly about, that I've seen. And, as EDM describes, she has recently engineered to have the company's license revoked.

Tymoshenko seems to have a lot less justification for this overturn than she and Yushchenko had regarding the Kryvoryzhstal privatization of 2004. The Kryvoryzhstal privatization had been for far less than the amount offered by the highest bidder, and hinged on a requirement in the terms of the tender that eliminated all potential buyers except the winning bidder (Akhmetov and Pinchuk). It only went through because it was carried through by Kuchma with help from SPDU(o), his main supporting party.

In contrast, the Vanco deal was not won by such large margins. It took place in October 2005, after Tymoshenko's government was fired by Yushchenko, and NU had gotten its own Prime Minister in place (Yekhanurov) at the cost of allying themselves with Party of Regions to do so. The part of the deal that is Tymshenko's focus is the product sharing agreement that was later signed in 2007, when Yanukovych was Prime Minister. This was signed with a Vanco subsidiary that has partners (only revealed after Tymshenko revoked its license) linked both to Akhmetov (again) and to Russia. She claims this is "selling out" Ukraine's interests.

It is true that Yanukovych's action, selling to partnership of which his own party is a major stakeholder, is highly suspicious and shady, Tymoshenko may not win this one. The business community opinion likely matches that of Forbes: US Driller Falls Victim To Ukraine Political Rivalry. Unlike Akhmetov's threats to go to European courts over Kryvoryzhstal, Vanco's statements that it will seek arbitration or go to court are not idle. She can try to blithely dismiss them, but they remain a real possibility---perhaps an educational one for a woman as gung-ho as Tymoshenko.

The legality of Tymoshenko's move may even be moot: The Prosecutor General's Office has just overturned  the revocation of Vanco's license.  

Inflation and a Strengthening Currency?

A word about inflation before closing: it continue, largely unabated. A group of officials from the World Bank and IMF issued a warning two weeks ago. Last week Yushchenko recently met with the National Bank governor, Volodymyr Stelmakh, to discuss the issue. And, counterintuitively, the inflation is accompanied by a strengthening of the hryvnia against the dollar. The hryvnia has been within a (National Bank-defined) band of about 5 to 5.1 to the dollar since 2005, but this spring broke through and has dropped to about 4.5 to the dollar, so far. Experts also expect the trend to continue.

How exactly Ukraine can be experiencing such strong inflation (30% yoy to April) and still be appreciating against the dollar is a mystery to me. Sources and acquaintances have blamed any number of factors:

Collapse of the Housing Bubble in the US: It may have collapsed, but certainly not enough to explain away this discrepancy.

Government Machinations: According to this argument, in an effort to clamp down on the semi-legal gray economy (which avoid taxes by paying unreported amounts under the table, usually in dollars), and make inflation seem less onerous by comparison (something Tymoshenko is obviously keen to do), the government is somehow engineering the strengthening of the hryvnia. This argument seems to founder when one considers how many analysts and organizations believe the strengthening of the hrynia is inevitable: a market-driven, not government-driven change.

Opportunist Exchange Dealers: This theory has it that when the hryvnia first broke $5, people on the streets panicked, and exchange dealers have simply been taking advantage of their fear. This also seems suspect, in that many of the exchanges have had 4.6-4.7 rates off and on since mid-April. In any case, the foreign exchange dealers almost always get the flack for "opportunism" since they're the last ones holding the hot potatoes. The situation is analogous to the way grain producers get tied up in export restrictions amidst accusations of "speculation" when grain prices are high.

At the end of the day, I haven't been able to understand how a currency could be inflating wildly and still be increasing in strength against foreign exchange. If any of you have an explanation, I'd love to hear it.