Monthly Archives: March 2008

Dip in Ukrainian exchange rate blamed on Ukrgazenergo, gas sphere shakeups

The exchange rate of Ukraine's gryvna unexpectedly dipped last week - From yahoo finance

Over the past week and a half, the exchange rate of the Ukrainian gryvna (UAH) versus the US dollar has fallen by about 5% at exchange stations across Kyiv. While the official central bank rate has remained at UAH 5.05 to $1, most of the exchange booths littered across the city have dropped their selling rate to around UAH 4.80.. The buying rate has remained closer to UAH 5.00.

Besides frustrating those of us who get paid in dollars, the dip in the rate has a significant effect on the large number of Ukrainians who keep their savings in dollar form. Indeed, much of the economy is based off the dollar benchmark, with distrust in the local currency stemming from wide rate fluctuations and high inflation in the 1990s. The continued heavy reliance on the dollar in Ukraine has remained despite a relatively long period of stability. (Inflation levels are excessively high now, however.)

When exchanging some dollars last week, I asked the woman working at the booth if she knew of the reason for the decline. “No one knows,” she said, shrugging her shoulders. Now it appears the adjusted exchange rate can be traced back to–what else–problems in Ukraine’s natural gas sphere.

The lowered exchange booth rate is a reflection of the decline interbank exchange rate (represented in the graph above), punctuated by a sharp drop on March 24th to nearly UAH 4.90. The fall began last week, as a source in the National Bank of Ukraine (NBU) told Kommersant:

The market was expecting on the 20th or 21st of March the traditional output (offering) of Ukrgazenergo for the purchase of currency on the bank exchange, but the expected offer of grynas didn’t happen.

From what I understand, Ukrgazenergo usually will convert the gryvnas it receives for its gas sales within Ukraine to dollars, which it pays to RosUkrEnergo for gas imports (which are calculated on dollars, i.e. $179.50). Because Ukrgazenergo appears to be on its way out of the gas supply scheme, this influx of grynas didn’t occur and pushed the exchange rate down.

In response, the NBU allowed the state oil and gas company Naftogaz to exchange currency on the market in the place of Ukrgazenergo. It now appears that Naftogaz is continuing its gradual takeover of Ukrgazenergo’s duties, key to PM Yulia Tymoshenko’s goal of ridding Ukrgazenergo and gas intermediaries from the supply scheme.

Recall that the latest gas contract between Naftogaz and Gazprom explicitly gave the duties of purchasing gas at the Ukrainian border to Naftogaz, a job previously held by Ukrgazenergo. (Who they buy it from–Gazprom or RosUkrEnergo–is not specified.) This transition, which appears to be happening even though we are still waiting for all the technical and commercial contracts to be signed which would make the agreement official, seems to be the reason for the currency’s tumult.

Ukrgazenergo asserts that the reason it didn’t follow its traditional pattern is that it lacked the currency to due so, and should no longer be expected to fill this role. Its press secretary Vitaly Kisel asserted that the company hadn’t been receiving payment from Naftogaz since January:

“In accordance with the external economic contract, since the new year Ukrgazenergo buys natural gas solely for the needs of the industrial sector,” he said. “Naftogaz Ukrainy in its turn uses gas from the external supplier RosUkrEnergo for the consumption of the gas transport system, budget consumers, and the communal heating plants. It’s clear that in the absence of a contract for these categories of consumers, Naftogaz has not settled accounts with RosUkrEnergo for the gas nor has it purchased currency for this goal,” asserted Mr. Kisel.

Because the relevant contracts have not been drawn up, Naftogaz being allowed to convert currency on the exchange market is technically illegal, as participants must have documented proof of their economic transactions. In the interest of financial stability and continued gas flow, however, it appears that the NBU and the government nonetheless will allow Naftogaz to undertake this task.

The entry of Naftogaz into the exchange market, however, may have cost the energy company a few million dollars due to the purchase of dollars at the depressed rate. The company is also in the process of restructuring its financial operations to go through the state-owned Oshchadbank, with the goal of streamlining payment procedures.

Naftogaz’s currency bailout is also being connected to Tymoshenko’s program–administered via Oshchadbank–of returning portions of lost savings from the former USSR’s savings bank (Oshchadbank’s predecessor). This populist program is about to enter its second wave of repayments, and Tymoshenko was worried that the exchange rate dip would have resulted in uneven results. The original repayments of $200 were calibrated on a UAH 5.05 exchange, so Tymoshenko apparently demanded this next round also adhere to this same rate. Enter Naftogaz to drive the rate back up again, essentially killing two birds with one stone.

Tymoshenko and the current government have hinted at a gryva re-evaluation, strengthening its worth against the dollar in an effort to fight inflation. While they may eventually wish to drop the exchange rate to around UAH 4.80, now is apparently not the right time.

Meanwhile, the Ministry of Fuel and Energy put in price caps on gasoline, which has risen by about 20% in the past month or so. The price increases stem both from rising global oil prices as well as internal problems. Kremenchug’s output is still down, refineries are struggling to adapt to new quality control laws, and Ukrnafta–Ukraine’s largest oil producer–halted deliveries to its filling station network (the country’s largest) in late February.

Based on the oil sphere problems and the natural gas situation, it’s reasonable to suggest that stability in the energy sphere could help the country’s economy. Assuming, of course, that populist measures don’t tank it even further.

Note: Interesting commentary from current and former officials at the Kyiv International Energy Club Q-Club, a lobbying group concerned with promoting general increased energy sphere performance along with greater energy security for Ukraine.


Tymoshenko moves against Ukrtatnafta

Tymoshenko and Naftogaz are reaching for a score with Ukrtatnafta - From / Getty

Even as the government of Ukrainian Prime Minister Yulia Tymoshenko is working to shake up the country’s electricity sphere, she is also attempting to reassert control over the country’s largest oil refinery. However, this move is deepening a rift between her and the financial group Privat, a relationship she is depending on for support in her electricity moves.

A March 18th ruling by Ukraine’s Supreme Court nullified a series of lower court decisions concerning the status of an 18% piece of the downstream oil company Ukrtatnafta. Dispute over the ownership of these shares erupted into a forceful seizure of the company’s Kremenchug refinery in October 2007.

Tatarstan believes the 18% should be under its control, which would give it a majority. Lower court decisions have supported this interpretation.

The latest Supreme Court ruling, however, annulled Tatarstan’s claim to the shares, putting them back into play. Tymoshenko seized the opportunity to assert that the shares are rightfully under Ukrainian government control (likely by Naftogaz), giving her side a majority stake. She announced the government’s plans to insert new leadership, replacing the management put in place by the seizure alleged to have been orchestrated by Privat.

Korsan, a Privat-affiliated company that owns just over 1% of Ukrtatnafta, joined Tatarstan in objecting to the ruling and the moves by Tymoshenko. This puts Privat and Tatarstan into an uneasy partnership with the aim of prolonging the status quo at Ukrtatnafta.

Tatarstan had earlier halted crude shipments to the refinery in protest of the seizure, and recently opened an international arbitration case over the raid. Tatneft, Tatarstan’s government-owned oil firm and a partner in Ukrtatnafta, alleges that it never received payment for crude in the refinery at the time of the seizure and is now seeking hundreds of millions of dollars.

Naftogaz had earlier this month tried to call an Ukrtatnafta shareholders meeting with the aim of replacing the company’s leadership. Ukrtatnafta contested the legality of the proposed meeting, however, and it did not take place.

The fate of Ukrtatnafta is still in dispute...A further meeting attempt by Naftogaz on March 14th at Kremenchug was supported Ukrtatnafta’s shareholders register–in the hands of the Privat-controlled Ukrneftegaz–showing the state energy firm with a 62% holding in the company. Naftogaz and Tymoshenko assert that the meeting was successfully opened on company property, with proceedings immediately transfered to a new meeting to be held on March 18th at Naftogaz’s premises in Kyiv. However, the legality of this meeting was disputed by the regional shareholders and securities government commission.

Nonetheless, Naftogaz proceeded as a legitimate meeting had taken place. The March 18th meeting was further delayed to March 28th (tomorrow), likely giving the government time to secure a favorable ruling from the Supreme Court on the disputed shares. With that decision in hand, it appears poised to attempt to insert its own management team.

Tymoshenko allegedly discussed the fate of Ukrtatnafta with Putin during her visit to Moscow last month. She also apparently recently held a closed-door meeting with President Viktor Yushchenko to discuss the situation, possibly to clear her strategy for resolving the conflict with him. The Supreme Court ruling may be an attempt to insert a semblance of the rule of law into the dispute, giving her enough justification to proceed with her version of a resolution.

Perhaps she is aiming for a compromise: ceding control of the disputed shares to Ukraine in exchange for removing Privat–the alleged instigators of the corporate raid–from the picture. If this is the case, expect a decrease in the protests lodged by Tatarstan, especially if they receive a favorable ruling on the arbitration case.

(Tatneft has learned to survive without its direct oil shipments to Kremenchug, instead boosting its Novorossiysk deliveries and exports to central Europe via the Druzhba pipeline. It is also increasing its own local refinery production. Given this mixed output, Tatarstan may be willing to simply subsist on earnings from its current Ukrtatnafta share and not push for a further development.)

However, the effect of these moves with Ukrtatnafta may lead to consequences in Ukraine’s electricity sphere because there is an overlap of key players in both dramas.

As I wrote on Tuesday, Privat and the Electricity Company of Ukraine (EKU) have partnered up in an attempt to change the leadership of the power generating company Dniproenergo. Tymoshenko’s privatization plan for the firm–and three other major generators–relies on the same interpretation of the company’s disputed shareholding used by the attempted raiders.

It is unclear exactly how Ukrneftegaz, the shareholder registrar for both Dniproenergo and Ukrtatnafta, will behave as these conflicts deepen. Privat and Naftogaz already have a strained relationship over Ukrnafta, the majority state-owned oil company effectively controlled by Privat due to its 42% stake. The outcome of these disputes will go a long way in predicting how their future relationship will turn out.

I’ll try to follow tomorrow’s meeting and update accordingly.


Note: Igor Kolomoisky, a key owner of Privat, recently suggested (English) he was interested in buying out the interests of both Dmitry Firtash and Ivan Fursin from the maligned gas intermediary RosUkrEnergo. Such a move would add a further nuanced wrinkle to Privat’s relationship to the Ukrainian government.

Update (3/28/08): A Gazprom source told Kommersant that Kolomoisky’s overtures toward RUE are “childish and not serious.”  Konstantin Chuychenko, a member of Gazprom’s board and an executive at RUE pointed out that Gazprom has a right of first refusal should Firtash and Fursin decide sell their stakes.  The source said that in this event, Gazprom would go ahead and buy the shares. However, Kolomoisky maneuvered past a similar clause in picking up a significant stake in the 1+1 TV station through a court case decided last year, suggesting he has experience in this type of operation.

Privat-led seizure of Dniproenergo rebuffed

Privat's grab at Dniproenergo was rejected last week; still waiting for officials to call a foul... -- From / AP

On Friday, two private security firms (and a handful of Party of Regions deputies) tussled in front of the Zaporizhye offices of Dniproenergo in an apparent attempt by Privat and the state-owned Energy Company of Ukraine (EKU) to take control of the regional electricity firm. The attempted seizure was rebuffed, but a secretive shareholders’ meeting of disputed legality was held “in close proximity” later in the day in another effort to appoint Privat-affiliated figures to the company’s board.

The government’s shareholder regulation commission refused to support the legality of this meeting and the management appointed by the currently-accepted ownership–50%+1 owned by EKU, 44% by Rinat Akhmetov’s Donbass Fuel and Energy Company (DTEK)–will remain in place. However, another shareholders’ meeting scheduled for March 27th promises to deliver more intrigue.

  • Dniproenergo is one of Ukraine’s largest electricity generating companies, with its three thermal power plants combining for a capacity of about 8 gigawatts. In 2007 the company reported a profit of about $24 million on over $765 million in revenue. Controversy over ownership of the firm has arisen since an August 2007 supplementary stock issue. The sale, which was approved by the outgoing Viktor Yanukovich government, dropped EKU’s share from 76% to 50%+1 and raised DTEK’s stake by 26% to about 44%–above the 40% threshold needed to block company decisions. DTEK allegedly paid about $10 million for the shares and also agreed to assume around $190 million in Dniproenergo’s debt as well as to make future infrastructure investments.DTEK, an energy holding company composed of coal and electricity assets, reported profits of over $190 million last year. It is owned by Rinat Akhmetov (via his massive holding company System Capital Management), who is a deputy in Yanukovich’s political party as well as Ukraine’s richest citizen.
Dniproenergo was the location of another attempted corporate raid by Privat last week.

Both EKU and Privat–which, via its subsidiary Business Invest, owns 0.0065% in Dniproenergo–have contested the controversial sale. A court case spearheaded by Privat that challenges the stock issue is currently being considered by Ukraine’s Supreme Court after a lower court ruled in favor of DTEK.

While EKU is government-owned, it is seen to be an ally of Privat, particularly in this fight. EKU’s current president is the former financial director of Ukrnafta, an oil company essentially controlled by Privat. Also, neither EKU nor Privat is interested in Akhmetov being in control of Dniproenergo. Ukraine’s current Prime Minister, Yulia Tymoshenko, sharply criticized the stock sale during her campaigning last fall, alleging that Akhmetov used his political connections to increase his share of Dniproenergo to a bargain price. Privat is apparently interested in obtaining the potentially lucrative asset itself. A privatization of Dniproenergo–along with three other regional power generators–has been announced, but the terms and viability of such a sale remain vague. (Update: Comments from Tymoshenko on privatization plans in English.)

Government, return Dniproenergo to your side!

Tensions had been growing in advance of a shareholders meeting that was scheduled for last Friday, March 21st. Competing propaganda posters began appearing in the streets of Kyiv last week. On Thursday, Ukraine’s Fuel and Energy Minister announced the government’s intent to change Dniproenergo’s leadership at the next day’s meeting.

Also on Thursday, Vladislav Lukyanov, a fellow deputy of Akhmetov and Yanukovich in the Party of Regions (PoR), warned there could be an attempted forceful seizure of Dniproenrgo’s office. In expectation of trouble, Dniproenergo invited members of the press to its office on Friday. Also present were five PoR representatives, including Lukyanov and Elbrus Tedeyev, an Olympic gold medal winner in freestyle wrestling.

An audience was therefore on hand to document the resulting physical confrontation.

As retold by Kommersant, early Friday morning about thirty camouflaged men from the Dnipropetrovsk private security firm “Security. Protection. Guaranteed.” (whose Russian initials, БОГ, spell out “God”) stormed Dniproenergo’s offices and clashed with the company’s own security team as well as the PoR deputies. (The PoR’s experience in obstructing the work of Ukraine’s Verkhovna Rada by blockading the rostrum and dais must have come in handy.)

Privat is based in Dnipropetrovsk, and the same security firm was earlier used in seizures of a Kremenchug steal mill and Ukrtatnafta’s oil refinery.

However, the raiders could not gain access to the building and retreated in their minibuses after Dniproenergo called in guards from the prestigious security firm Berkut (Golden Eagle). Things then quieted down giving the defenders time to lick their wounds–one deputy had his coat torn and others came away with bruises.

By 11 AM, the State Commission on Securities and the Stock Market (GKTsBFR) acknowledged that no legally valid shareholders’ meeting could have taken place, as regulations called for any meeting to occur on the company premises between 8 and 10 AM.

The fued between Privat and SCM is likely to continue over the fate of Dniproenergo

However, this didn’t stop EKU and Privat from attempting to convene a shareholders meeting “in close proximity to [Dniproenergo’s] office,” according to the head of EKU’s corporate law department, Alexander Maliy. Justification for the meeting centered on the refusal to recognize the result of the supplementary stock issue, meaning that EKU still owns over 75% of the company giving it the right to make unilateral management decisions.

This interpretation is allegedly supported by the figures in Dniproenergo’s shareholder register, which is controlled by the controversial financial firm Ukrneftegaz. Ukrneftegaz, in charge of keeping the registers for energy companies with significant government ownership, is owned by Privat. The same firm is implicated in the ownership dispute still raging over Ukrtatnafta (expect an update from me soon).

At the secretive shareholders meeting, the EKU “elected” a new board of observers for Dniproenergo that is full of Privat-affiliated figures. Lukyanov dismissed the results of the meeting, saying that “after the storming was unsuccessful, Privat decided to place its leadership into the firm by a different manner.”

Dniproenergo also refuses to accept the result of this meeting, pointing to a court ruling annulling the meeting as well as various procedural violations. “We have nothing to disprove,” says Dniproenergo board member, Dimitry Tevelev. “An illegitimate decision cannot be implemented.”

Another shareholders meeting is scheduled for March 27th. The other major state-controlled power generating companies also have shareholders meetings scheduled in the near future–Kievenergo on March 28th, Zapadenergo on April 2nd, Tsenterenergo on April 3rd, Donbassenergo on April 15th, and Krimenergo on April 22rd. Management changes are on the agenda for all of them.

Some analysts are predicting that the physical confrontation with Dniproenergo is the first step of a coordinated effort between Privat (which controls the books) and EKU (which has the votes) at remaking the leadership structure of Ukraine’s power generators. We’ll see if the next steps are as action-packed as the first one was.

Update (3/25/08): Protesters gathered outside the Fuel and Energy Ministry in Kyiv holding anti-Privat signs. They are the usual subjects: bored-looking students and cranky pensioners willing to hold a sign for a little money. I asked them what they thought of the conflict, but didn’t get much in the way of a response besides a general belief that Akhmetov “is right.” Here’s a couple pictures from the “rally.”

Anti-Privat signs in front of Ukraine's Fuel and Energy Ministry
“Dniproenergo for the people, not for Privat!”

Anti-Privat signs in front of Ukraine's Fuel and Energy Ministry
“Take care of state–not Privat–interests!”

Anti-Privat signs in front of Ukraine's Fuel and Energy Ministry
“Dniproenergo in the hands of Privat = energy crisis in Ukraine!”

Gazprom and Naftogaz sign gas supply deal excluding Ukrgazenergo and keeping prices at $179.50

Gazprom and Ukraine sign a gas supply dealUpdate (3/15/08): As noted by IIU in the comments below, the Zerkalo Nedely weekly has an article by Alla Yeremenko on the agreement and includes a low-quality scan of the document. While the gas storage fees charged Naftogaz are likely going to be reexamined (they are scandalously low), Tymoshenko said that the transit fees charged to Gazprom will remain the same for this year. (However, you can expect a large increase for next year’s contract, coinciding with Gazprom’s increase in gas price in turn stemming from Central Asian producers asking for a higher price.) Yeremenko also notes that this agreement still requires both commercial and technical contracts to be drawn up and signed — indeed, this document lacks many specifics.

The ambiguity in the supplier of gas at the Ukrainian border that I mention below is somewhat explained in the document: the 49.8 bcm of Central Asian gas will be supplied either by Gazprom or by RosUkrEnergo. Hence, proclamations hailing the removal of RosUkrEnergo are premature.

Other points from the document:

  • Naftogaz has until today (Saturday, three days from the signing) to figure out a framework on the “repayment” (through barter) of expensive “Russian” gas from the first two months of this year. (This may actually be three days following the “acceptance” of the agreement — see below.)
  • Transit fees for “Central Asian” gas to Ukraine are to be figured based on a few different distance options, all significantly less than the actual distance between the two regions. This reaffirms that Gazprom is merely using gas substitution rather than supplying Ukraine with the actual gas from Central Asia.
  • The agreement has to be accepted by Ukraine’s Cabinet of Ministers, Naftogaz didn’t have the authority to fully authorize it itself. Tymoshenko says this will happen on Wednesday, after a series of consultations. Hopefully the extra time will prevent any surprises from popping up later on into the deal…


Gazprom and Ukraine sign a gas supply dealAll it took was assuring Gazprom access to Ukraine’s industrial gas market…

From (my translation and emphasis):

Gazpom and Naftogaz Ukrainy signed an Agreement on the development of relations within the gas sphere

Chairman of the [management] board of Gazprom Alexei Miller and chairman of the board of Naftogaz Ukrainy Oleg Dubina signed an Agreement on the development of relations within the gas sphere.

In accordance with the agreement, from March to December of 2008 Ukraine will be supplied gas from Central Asian sources in volumes not less than 49.8 billion cubic meters for the price of $179.50 per thousand cubic meters. The purchaser of this gas on the border of Ukraine will be Naftogaz [NOT Ukrgazenergo]. In doing so, the supplies of Central Asian gas in January-February in the volume of 5.2 bcm [out of 9.1 total] will be fully documented and paid for based on the contracts of RosUkrEnergo and UkrGazEnergo.

In addition to the volumes of Central Asian gas, Naftogaz will formulate a contract with RosUkrEnergo on the sale of Russian gas delivered to Ukraine in January and February of 2008 on the base price of $315 per thousand cubic meters, the calculations of which can be realized by the return of corresponding volumes of gas.

From April 1st, 2008, a subsidiary or affiliated company of Gazprom will yearly provide direct deliveries of gas to industrial consumers of Ukraine in volumes not less than 7.5 billion cubic meters.

Negotiations on the terms of gas delivery to Ukraine in 2009 and following years will continue, taking into consideration the evolving nature of the purchase price of Central Asian gas.

Based on this:

  • RosUkrEnergo is still in the picture. Notice the statement says the remaining volumes of gas this year “will be supplied from Central Asian sources,” but without clarifying by whom. This suggests that this part of the structure will likely remain the same.
  • Ukrgazenergo is out of the picture. Their main role–buying gas at the border of Ukraine and Russia from RUE–is explicitly handed over to Naftogaz.
  • The debt scare that was used to push for this latest round of negotiations will be settled as it normally is, with discrepancies caused by seasonal variations accounted for over time through corresponding volumes of gas. This means $315 may be used as a calibrating price, with no expectation of actual money changing hands. It is unclear where this leaves the contract signed by Naftogaz and RosUkrEnergo.
  • Gazprom will make up from losing its 25% stake in Ukrgazenergo (since it looks like the company is on its way out) by being granted a license to sell about 25% of the volumes of gas Ukrgazenergo was selling (around 35 bcm). However, (ominously) the maximum size of the license isn’t mentioned. Previously, the regulatory commission has stated that no singular company (perhaps excluding Naftogaz?) can hold a license covering more than 35% of Ukraine’s market. Based on 70 bcm of consumption, this would be 24.5 bcm. However, if it is based on the unregulated market only (i.e. excluding communal services and residential consumers), the maximum would be about half that number.

Update: Tymoshenko’s congratulatory announcement praised the removal of Ukrgazenergo and the $179.50 price, but any talk of the fate of RosUkrEnergo was conspicuously absent…

Ukraine capitulates on $321 for Russian gas but negotiations continue

Update (3/13/08): Scans of the “contract” can be found accompanying this article at Ekonomika.  Some critics are saying that since there is no Naftogaz stamp over Didenko’s signature, it is not valid and only represents a proposal by RosUkrEnergo.  It will be interesting to see how it fits into the new deal just signed in Moscow.  (Also, interestingly, the bank account numbers are not whited-out in the pictures accompanying the Kommersant paper edition.)


Naftogaz signed a contract with RosUkrEnergo on the repayment of gas supplies Russia’s natural gas supply cuts to Ukraine last week were lifted after only two days following a vague agreement between Naftogaz and Gazprom that “solv[ed] the crisis situation in the gas area.” However, no solid terms were announced and negotiations are scheduled to continue this week to reach a more official agreement.

An article from today’s edition of Kommersant (shorter English version) has the details of a previously-unknown contract signed between Naftogaz and middleman RosUkrEnergo on March 6th, the day after supplies returned to normal. According to the article, Naftogaz has agreed to repay Gazprom for gas delivered to Ukraine since January 1st on two pay scales: for gas alleged to be of Russian origin, the company will pay $321 per thousand cubic meters (mcm); the remaining volumes, ostensibly from Central Asia, will be calculated from the $179.50 price agreed upon late last year.

While the exact volumes of Russian versus Central Asian gas are still being negotiated, Russian gas could account for roughly 4 billion cubic meters (bcm) out of the 9.1 so far delivered to Ukraine this year. This would put Naftogaz’s average price for gas at $240 per mcm for January and February of this year. Terms for the rest of the year are set to be negotiated starting tomorrow.

The print edition of the paper has partial scans of the faxed contract signed by vice chairman Igor Didenko of Naftogaz (interestingly, not the company’s head, Oleg Dubina) and RosUkrEnergo’s executive directors Dmitry Glebko and Konstantin Chuichenko (who is also on Gazprom’s board). I haven’t been able to find pictures of the contract online, however.

Gazprom is allegedly taking this as evidence of Naftogaz’s financial ability to pay for gas at European prices, and may press this issue during upcoming negotiations. (Ukraine may very well respond by demanding “European” prices for gas transit.)

Didenko apparently agreed to this price–which was higher even than the $315.50 price Gazprom was trying to charge–in order to pave the way for the removal of Ukrgazenergo (a 50/50 joint venture between RUE and Naftogaz) from Ukraine’s internal market. Paying for Russian gas at European prices has been an unofficial demand by Gazprom for acquiescence on the removal of middlemen within the gas supply scheme.

However, an analyst quoted in the Kommersant article suggested that this situation may create a two-tiered system, where Ukrgazenergo sells the gas it receives from RUE for $178.50 and Naftogaz sells “Russian” gas bought for $321. Given the price difference, it is hard to believe that Naftogaz would be able to compete commercially with Ukrgazenergo on the internal market.

Prime Minister Yuila Tymoshenko’s government has been actively working to “liquidate” Ukrgazenergo, to the benefit of Naftogaz. Ukraine’s National Energy Regulating Commission attempted to severely limit Ukrgazenergo’s allotted market share within Ukraine (from about 35 bcm per year to 5 bcm), and a suit on the issue between the commission and the gas trader is currently awaiting a hearing in Kyiv’s overworked administrative court. Tymoshenko’s vice premier asserted today that Ukrgazenergo’s license for the sale of gas at non-regulated prices had been revoked, but the company responded by calling him a liar.

Naftogaz responded to the article with a press release stating that Naftogaz isn’t going to be buying any “Russian” gas anyway, so the price isn’t a big deal (my translation):

Naftogaz notes that the publicized information relating to the purchase of Russian gas for Ukrainian consumers at the price of $321 per mcm is counter to the agreement reached between the Presidents of Ukraine and Russia and does not respond to reality. In the balance of the company [Naftogaz] for this year, there are no plans for selling volumes of Russian gas to Ukrainian consumers. According to the energy customs service, this year gas of Russian origin is not being cleared [растаможивался] into the Ukrainian customs territory

If indeed gas of Russian origin is not being sold within Ukraine, this would suggest it is instead either re-exported into Europe or being kept in storage. Though if Russian volumes of gas did make up 4 bcm out of the 9 bcm bought by Ukraine this year, it is hard to believe that domestic demand could have been satisfied by only the remaining 5 bcm of imports. (This underscores the difficulties in determining the origin of gas pumped through pipelines, particularly in the absence of clearly-delineated contracts and volumes.)

Assuming the price structure is expanded into the future, Naftogaz may be planning on simply re-exporting any gas it is forced to buy at “Russian” prices. It would then rely on the cheaper Central Asian blend (and domestic production) to supply internal consumers. In past years, the price of the gas “cocktail” supplied by RosUkrEnergo to Ukraine had included the cost of significantly higher-priced volumes of Russian gas. It is unclear why this year’s scheme has Russian gas being charged outside the system.

The negotiating delegation–which includes Didenko–plans to ensure that the price remains $179.50 during talks that resume in Moscow tomorrow. Bowing to the $315 Russian price for gas already delivered had been fodder in a public argument between Tymoshenko and President Yushchenko over the handling of gas issues.

Tymoshenko had claimed success at having escaped from the gas shut-off situation without agreeing to paying higher-than-contracted prices. She also intimated that Yushchenko was willing to accept the price Russia suggested. Yushchenko’s secretariat responded by posting the directives he had given her prior to her recent trip to Moscow, which included doing everything possible to secure the $179.50 price–steps that Yushchenko himself had taken during his own meeting with Putin earlier this year.

While Tymoshenko also wants a low price, she has stressed that any future deal should remove both RosUkrEnergo and Ukrgazenergo. She has been hesitant to endorse a plan to replace them with joint ventures between Naftogaz and Gazprom. It will be interesting to see what aspects of the President’s and Prime Minister’s visions for the gas scheme are stressed by the negotiating team–and eventually accepted by Gazprom.

Ukraine and Gazprom agree to end conflict after gas supplies drop further, allegedly affecting European deliveries

Update: Following direct phone talks between Naftogaz’s Oleg Dubina and Gazprom’s Alexei Miller, a resolution to this gas supply conflict is apparently on its way “soon.” Here’s more details on the vague “agreement” reached:

In particular, the sides have agreed that the gas supplies during January 1- March 1, 2008, will be paid for by Naftohaz Ukrayiny by the scheme [that] exist[ed] a[t] of beginning of the year. The problems with Russian natural gas supplies will be solved. The talks on other issues of collaboration in the gas sphere will continue.

Assuming supplies are back to normal by tomorrow, much of the post below won’t be too applicable. But feel free to read it anyway.


Gas supplies remain at below-normal levels in Ukraine dueGazprom’s 25% cut in gas supplies (or 35%, depending on whom you believe) to Ukraine on Monday was followed by a further reduction in deliveries yesterday. Ukraine’s Naftogaz responded that it may retaliate by dipping into deliveries destined for Europe, which (according to Gazprom) apparently has already begun to happen today.

The level of gas from Russia has dropped by about 70 million cubic meters (Mcm) per day, which represents around half of Ukraine’s typical daily gas imports. Gazprom says it received a telegram (what century is this?) from Naftogaz saying that the Ukrainian state-owned company has diverted 60 Mcm per day from transit to Europe. Of this, 30 Mcm is designated as coming from Gazprom’s shipments west and 30 Mcm from RosUkrEnergo’s. These volumes represent about 8% of Gazprom’s average exports to Europe (358 Mcm / day) and the entire amount of exports for RosUkrEnergo. Gazprom is complaining that it is not being given access to data from gas transit monitoring stations in Ukraine to independently verify the discrepancies in volume.

Naftogaz asserts that the additional reduction of supplies is uncalled for, as it now cuts into the “Central Asian” portion of gas Ukraine is supposed to be receiving. For this time of year, the percentages are apparently supposed to be 25%-75%, Russian-Central Asian, but it’s doubtful there’s a contract anywhere that says that proportion is set in stone. Naftogaz also blames Ukrgazenergo and RosUkrEnergo–the two intermediaries coordinating the supply of gas imports to Ukraine–with stonewalling and hampering negotiation efforts.

It is believed that Ukraine has enough gas in storage (plus its domestic production) to satisfy demand for a few weeks before Ukrainian consumers will be affected. That would suggest that the reduction of transit supplies by Naftogaz is being done on principal–the belief that this act by Gazprom is illegal and hampers the Russian side’s negotiating stance–rather than out of need. Tymoshenko has assured Ukrainians that their heat and hot water will remain on, barring a conspiracy between Ukrgazenergo and RosUkrEnergo. Problems in Kirovgorod–heat allegedly shut down to “maternity wards, schools and kindergartens”–appear to be only political agitation.

The shortfalls of gas leaving Ukraine are unlikely to cause Gazprom to break the terms of its contracts with European consumers, as the volumes being sold up until a few days ago were in all likely hood above well the minimum stipulated amounts (which are determined over given lengths of time, rather than by daily flow). Also, Naftogaz announced that transit volumes through Ukraine had been up significantly for the past two months, suggesting the average deliveries could still fall within contractual amounts even with a period of lessoned supplies. Regardless, the structure of the contracts has Gazprom responsible for the delivery of its gas to European consumers. That won’t stop the Russian company from charging Naftogaz with illegal activities and seeking recompense, but the downstream customers are obliged to complain first to Gazprom.

This isn’t to say Ukraine isn’t at fault, nor that it won’t generate ill-will from European consumers. Both sides are investing heavily in PR efforts to publicize their arguments and reassure observers, but it is unclear at this point how they will play out. A spokesman for the US government characterized the situation as a “commercial conflict” that should be resolved via “commercial means.” While decrying the use of supply cuts, this nevertheless strays from the overtly political undertones accompanying most coverage of the January 2006 shut off.

Most international press has connected the current cut in supplies to debt accusations made by Gazprom. My last post attempted to show that this emphasis on the money portion of the conflict is being overblown. Instead, the main point of contention is the future composition of the gas supply scheme. (Naftogaz’s spokesman reaffirmed this.) A few hundred million dollars is not a big issue when companies with revenues of tens of billions of dollars are at stake.

The deal that Gazprom is pressuring Tymoshenko to sign off on–and that the president’s have agreed to–would have Gazprom increasing its share in the domestic market from 25% to 50% and include access to Ukraine’s domestically-produced gas. Whether or not those concessions are included in the agreement reached to end this conflict will show which side emerged the winner.

Making sense of a gaseous situation

Note: A version of this article is posted at

Tymoshenko explaining her position on Ukraine's gas supply issue - From unian.netFollowing through on its threat, Gazprom today reduced supplies of natural gas to Ukraine by 25% due to unpaid debts and the failure of both sides to reach an agreement on the future of the gas scheme. The news stories covering the situation are rife with inconsistent numbers, timelines and explanations. Here is my own labored attempt at explaining how Ukraine and Gazprom have arrived at this point.

The main problem is that the agreement reached between Yuri Boyko and Alexei Miller in early December 2007 was never fully agreed upon and implemented by all parties involved. (The agreement was also incomplete, failing to address and formalize terms that relied on mutual cooperation in the past.) The key reason for this was the transition in Ukraine’s government following the September 30th parliamentary elections and the ensuing coalition deal that (eventually) propelled Yulia Tymoshenko to Prime Minister and replaced the Yanukovich-led government under which Boyko served.

Flowchart outlining Ukraine's gas supply scheme - From The transition period–which resulted in Yuri Prodan being appointed as new Fuel and Energy Minister and Oleg Dubina to the head of Naftogaz–also apparently disrupted the in-place structures for payment between the government, Naftogaz, and Ukrgazenergo (UGE). Disruptions to the money flow at this level traveled up the line to RosUkrEnergo (RUE) and on to Gazprom (see the excellent structural flowchart by Vedomosti for more information on the connections between these firms). Tymoshenko’s long-running pledge to clean up the gas scheme fed the instability and contributed to uncertainty by the involved parties towards the recently-struck gas deal.

As a result, Gazprom was unwilling to put up with debts and promises of repayment that had been typical in the scheme up to this point. It was also in the process of signing deals for a new bypass pipeline, South Stream, and was interested in painting Ukraine as an unreliable partner.

Ukraine’s President Viktor Yushchenko, uncomfortable with changing the status-quo and not eager to pave the way for a Tymoshenko “victory” in the flashpoint gas issue, reached a hand-shake agreement with his Russian counterpart Vladimir Putin aimed at defusing the situation by creating a compromise. Except for expelling private Ukrainian business interests, the structure of the scheme would essentially remain the same–as would the price charged to Ukraine. Tymoshenko originally embraced the new deal, but then realized–along with many other critics–that it resembled a redux of the January 4th, 2006 agreement that inserted RosUkrEnergo in the first place. Indeed, the scheme proposed by the presidents would increase Gazprom’s presence within Ukraine’s domestic market and not significantly improve Naftogaz’s own financial footing.

Tymoshenko dragged her feet on agreeing to the presidential deal while looking for ammunition to rework the terms in Ukraine’s favor. Gazprom sensed this delaying, and clamored for immediate debt-repayment. It further increased the sense of urgency by emphasizing that current gas supplies to Ukraine are being delivered without the presence of a contract. This is only partly true, as Central Asian gas is being supplied according to the terms of the deal reached in December of 2007; there apparently is no structure in place, however, to regulate excess purchases of Russian gas. (After Boyko and Miller reached their agreement, I noted that it only clarified the terms for Central Asian supplies and gave no figures for Russian gas. This appears to be an issue now.)

That is the surface overview. Here are some underlying issues feeding the situation:

  • An earlier conflict between Ukraine and Gazprom over unpaid debts was settled in October 2007 by returning 12 billion cubic meters (bcm) of gas in Ukraine’s storage facilities to Gazprom’s control after RUE and UGE were slow in coming up with funds (partly due to delays in repayment by Naftogaz) to pay for it. Gazprom earmarked 4 bcm for re-export to Europe while saving 8 bcm for sale within Ukraine. Gazprom considers that gas to be “Russian” now and has been charging Ukraine the $314 per thousand cubic meters (mcm) price (as opposed to $179.50 for Central Asian gas) to dip into those reserves this winter.
  • The inflexibility of production capabilities within Central Asian countries means that shortfalls of supply to Ukraine during the winter months are normal and are compensated by Russian gas. Ukraine received about 3 bcm of extra Russian supplies over the first 3 months of 2007, but this didn’t create the stir that it is now. As noted by LEvko, Yuri Boyko explains that this excess was typically repaid “in-kind” later in the year, with Ukraine exchanging control over corresponding volumes of Central Asian gas to Gazprom from regular deliveries when Ukrainian demand is lower. Because this provision was not included into the official contracts (which aren’t signed / being followed anyway), that isn’t the case this year. Assuming this issue gets settled, this would presumably mean that Ukraine will have excess volumes of gas later in the year which it could export west for profit to compensate for the current financial crunch.

These two factors have been artificially inflated to contribute to the antagonistic situation between Gazprom and Ukraine which has led to this current dispute. Adding in the political factors–Tymoshenko looking to make an impression during her second PM stint with both her and Yushchenko eying the presidency, and the election of Gazprom chairman Dimitry Medvedev as Putin’s replacement in Russia–further complicates the economic rationale. Geopolitical factors–pipelines, NATO, and spheres of influence–add yet another layer to the overall issue.