Tymoshenko’s government begins work in Ukraine as Yanokovich leads rival “shadow cabinet”

The parliament chamber in Ukraine - From itar-tass.comLast Tuesday saw Yulia Tymoshenko elected as new Prime Minister of Ukraine after several failed Rada (parliament) votes. Eventually resorting to an individual hand-raising / oral -confirmation voting procedure, however, ensured that she passed with the required majority — barely. Only one vote carried her into the new post, which paved the way for the new Bloc of Yulia Tymoshenko (BYuT) and Our Ukraine – People’s Self Defense (NUNS) coalition government. However, her slim majority has left her with less political capital than her impressive parliamentary election results (gaining over 8 percentage points between elections) would have otherwise suggested.

Recognizing this, the Party of Regions has resolved to occupy its new role as opposition with relish, and has already formed its own “shadow cabinet” in response to the government just formed by Tymoshenko and her allies.

The opposition Minister of Economics Irina Akimova told Ekonomicheskie Izvestia that the Party of Regions sees the oppositional cabinet of ministers as a springboard for criticizing the actions of Yulia Tymoshenko’s government in parliament: “Also, participants in the oppositional cabinet will acquire certain skills, if they don’t already have them, in order to follow the work of this or that ministry. When the power changes, they will come with prepared presentations about what their ministries need to contribute into the strategy of the country.”

Ousted PM Viktor Yanukovich has taken on the role of “shadow” Prime Minister, while former Fuel and Energy Minister Yuri Boyko has reclaimed that role in this Party of Regions-organized endeavor.

His counterpart in the real government — the one that occupies the ministry buildings and official government offices rather than the Zoyarny movie theater — is Yuri Prodan, a NUNS representative with a history in the Fuel and Energy Ministry and a former deputy in the President-controlled National Security and Defense Council (NSDC).

Oleg Dubina, a veteran of the Dnipropetrovsk industrial sector, has been named as the new chairman of Naftogaz. He has already been holding talks with Uzbek representatives about the possibility of arranging direct sales of natural gas from the Central Asian country to Ukraine, which currently relies on RosUkrEnergo (RUE) for its gas import needs. Dubina is connected to the powerful Industrial Union of Donbas (IUD), which has a history of direct sales of Uzbek gas, so this relationship may help establish something on a larger scale. However, Uzbekistan is reportedly seeking a price of $180 per thousand cubic meters from Gazprom, and any counter offer from Naftogaz would have to be higher. Adding in transport costs would put the Ukraine border price closer to $220, higher than the $179.50 agreed upon with RUE.

Naftogaz is facing an increased tax burden for next year — up from 26% to 30% — along with a government regulation freezing the residential consumer price of gas at current levels. The sale price of domestically produced gas, another opportunity for Naftogaz to potentially turn a profit, is expected to remain at the same depressed level as well. While industrial prices are expected to rise 30%, much of the sales to this sector are controlled by UkrGaz-Energo, a joint venture between Naftogaz and RUE, which dilutes any profits coming to the embattled state energy firm.

In another move by the new government within Ukraine’s energy sector, the Ministry of Finance has called for a 25% increase in the rental rates (up to about $400 per ton) applied to domestic oil production next year. This largely affects Ukrnafta (not to be confused the Ukrtatnafta), the majority state-owned oil production company that accounted for about 95% of Ukrainian oil production last year. However, while 50%+1 of the shares are controlled by the government, the Privat Group owns over 40% of the shares, and therefore effectively guides the actions of the company. This ownership structure made the announcement of the tariff increase more surprising, given that Privat is seen to be connected to the current government and supported NUNS in the last election (Igor Palitsa, a former Ukrnafta chairman, is on the NUNS list).

According to NUNS deputy Viktor Topolov, the current price for oil is about $580 per ton, and the cost of extraction is about $175. Adding the $396 proposed tariff negates all but a few dollars in profits, hardly enough for any re-investment or development — and well below the $300 average world profits on a ton of oil. Typical oil production rental prices (in Europe and Russia, for example) are determined as a percentage of world oil prices (usually around 12-15%), which would come out to closer to $100 per ton.

Viktor Pinzenik, a BYuT deputy, is Ukraine’s new finance minister, and this surprising tariff increase (the previous government had assured Ukrnafta it would keep the charge the same) may be an early fissure between the BYuT and NUNS coalition. However, Privat has also spearheaded a court procedure relating to a recent Dniproenergo deal in what appears to be an attempt to gain more control over the regional energy firm. (A key decision was made by the same court that was central in the move that brought about the “management dispute” at the Kremenchuk refinery.) Analysts for this article cite alleged closeness between Privat and Tymoshenko as a possible reason behind this latest move, contradicting the assertions that Privat is now moving closer to the NUNS sphere.

According to the director of the International Institute of Privatization, Property and Investment, Alexander Rybchenko, Privat holds an edge in the unfolding case due to the current political situation:

“The Privat Group once again, as with NZF [nickel and ironworks factory], benefited from the coming to power of Yulia Tymoshenko. Therefore, now the political protection is on the side of the group, but if president Viktor Yushchenko or the new secretary of the NSDC Raisa Bogatyryova [see below] does not change the situation, Privat will have an advantage in the form of government support.”

It is unclear at this point just which factions will emerge more powerful withing the new government, and how exactly major business players will utilize the new structure.

As referenced above, Yushchenko unexpectedly named Raisa Bogatyryova, the second deputy on the rival Party of Regions (POR) parliament list, as secretary of the powerful NSDC on Monday. POR-head Yanukovich has stated that no party member will serve high-level positions in the BYuT -NUNS government and meetings between POR members in the past two days have apparently been contentious regarding whether or not she should accept the offer. As of the evening of the 25th, however, it appears that she accepted the invitation and will become the new NSDC secretary. It remains to be seen whether she will be cut from the POR list now, as she apparently made the decision against the wishes of most high-ranking members.

The announcement also caught off-guard members of the new coalition government, who apparently only learned of the offer through the press. According to Taras Stetskiv, a NUNS deputy:

“At a minimum, we are surprised. Never in the civilized world has the opposition — a political opponent — been given such a key post like the position of secretary of the NSDC.”

Apparently, such a move had been in the works since immediately after Tymoshenko was elected PM, with Boris Kolesnikov being the first POR name suggested. The choice of Bogatyryova, a professor from Donetsk with a background in medicine, apparently only happened on the 24th. This appears to be an attempt by Yushchenko to balance Tymoshenko’s ascent into the top of Ukraine’s government by promoting a key figure in her (and his, not to be forgotten) opposition party. Some POR deputies — before Yanukovich’s statements on remaining strictly in the opposition surfaced — praised the choice as an example of pragmatic bipartisanship. Tymoshenko has diplomatically stated that she will agree to work with all high-level presidential appointees in the government. Bogatyryova’s potential impact will likely affect coordination efforts between the president and parliament, but losing her POR position would alter the relationship.

Meanwhile, Yushchenko is planning a visit to Moscow to meet with Putin in the near future, and the topic of gas negotiations is likely to come up — regardless of what actions Tymoshenko may take in the meantime. The “specter” of Dimitry Medvedev — current Gazprom chairman and favorite to win Russia’s March presidential elections — will likely temper such talks. While Medvedev has been open to the idea of restructuring the gas supply scheme, outspoken Russian political analyst Stanislav Belkovsky suggests that Medvedev will champion for RosUkrEnergo, pointing out that he attended law school with Konstantin Chuychenko, one of RUE’s current executive directors.

Tymoshenko’s government has finished a re-worked 2008 budget that incorporates increases in social spending as well as the newly-finalized $179.50 price for natural gas. The budget must still pass POR approval, and the window for enacting it before Jan. 1st is rapidly closing. Nevertheless, it appears that Tymoshenko is willing to live with the current gas price — or at least, fully prepare for its likely existence — rather than attempt a last-minute negotiating blitz. Not only would this move have cost her political capital even as she is working on getting the budget passed, but it also would have worried gas consumers in Europe who remember the drop in downstream gas pressure caused by the contentious negotiations around January 1st of 2006.

All in all, it has been a busy and interesting start for Ukraine’s new government. Passing the budget will be a key first step, as will establishing the new centers of power and important relationships. With any luck, this government will be productive for Ukraine in general, and not resort to the bickering and deadlocks that have marked some of the country’s recent political incarnations.

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2 responses to “Tymoshenko’s government begins work in Ukraine as Yanokovich leads rival “shadow cabinet”

  1. Pingback: Kremlin, Inc » More on Ukraine’s gas transit tariff issue

  2. Pingback: Kremlin, Inc » Privat making moves in Ukraine’s oil sphere

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