Gas and Politics

So it seems that I have left Kyiv just as things are getting interesting.

My Fulbright scholarship ended this summer and I have moved to Washington DC to begin working in the energy consulting field. Events in Ukraine’s energy and political fields continue to draw my attention, though, and I hope to keep this blog updated—certainly more frequently than I have for the past month.

Perhaps the key issue in the energy sphere now is how the deepening political crisis will affect the ongoing talks between Naftogaz and Gazprom concerning the price of imported natural gas for Ukraine. Last year’s negotiations happened between the transition of the Party of Regions-led Rada and the tenuous Democratic Coalition (headlined by Tymoshenko at PM). PoR deputy Yuri Boyko negotiated the deal in October 2007, but Tymoshenko immediately voiced objections and began pulling strings to put her own stamp on the agreement. That led to rounds of protracted and contentious negotiations that lasted well into 2008 before a key deal was signed in mid-March. Until then, in an unstable and imperfect arrangement, gas was being supplied to Ukraine without a contract.

Negotiations for next year’s contract began months ago, tied in with Tymoshenko’s goal for a long-term deal with Gazprom. While a multi-year contract is unlikely at this point, progress is continuing on next year’s deal. This big question is the price charged to Ukraine, guaranteed to rise from the current $179.50 per thousand cubic meters (mcm). Predictions run from $250-450, and they tend to be connected to various “concessions” granted to Russia, running from the status of the Russian Black Sea Fleet in Crimea to maneuvers for Ukraine’s 2009/10 presidential elections.

The fracturing political landscape affects the mandates of the various actors involved. As I mentioned, last year’s deal was principally negotiated by Boyko, who was then the Minister of Fuel and Energy. This year’s negotiations have mainly been conducted by Oleg Dubina, the head of Naftogaz, a position beneath the ministerial level. Both positions, though, ultimately report to the Prime Minister, Tymoshenko.

She herself has gotten involved in the negotiations, and one of the issues raised is how she accepts directives passed on to her from the president. Yushchenko has traditionally given the Ukrainian negotiators instructions for their meetings with the Russian side, but as he and Tymoshenko continue their drift apart, it seems more and more unlikely that the two will be able to cooperate. They had already bickered about this issue last winter, with Tymoshenko proudly proclaiming that she had talked with the Russian delegation “without directives,” only to be confronted with the list of instructions passed to her from the President after it was posted on the Presidential Secretariat’s website.

Yushchenko himself is not a good negotiator for natural gas deals. His former nickname within Gazprom upper management was reportedly “The Artist” because of his finicky and aloof manner. During meetings following the Orange Revolution he gave no indication of understanding the complexities of the gas business, and did not appear to be too invested in the outcome.

Since then, Yushchenko has taken the task more seriously for a variety of reasons.

  • He witnessed the effect of unpopular deals after outrage at the 2005 agreement helped contribute to the split of the Orange Coalition.
  • He recognizes the boost in popularity gas deals can bring to the figures involved, and seeks to capitalize it—or at least prevent Tymoshenko from solely benefiting from it.
  • He resists ceding any more authority to the Prime Minister, using his directives to emphasize the political pecking order he is trying to maintain.
  • He respects the economic impact of gas deals and, drawing on his background as a successful economist, positions himself as more in touch with the realities of the financial ramifications. (This economic experience is generally contrasted with Tymoshenko’s aggressive social spending plans.)

The two sides have both asserted that they will be able to present a unified front in the ongoing negotiations, and keeping the talks at company-level (i.e., between Dubina of Naftogaz and Alexei Miller of Gazprom, rather than Tymoshenko and Putin or even Yushchenko and Medvedev) should theoretically help keep the political fallout at arms length.

In reality, there is no way to completely divorce the maneuvering of Ukraine’s politicians with the natural gas negotiations, and every twist and turn will be used as “proof” of Tymoshenko’s alleged deal with Putin or Yushchenko’s rumored affinity to RosUkrEnergo. Politics has been deeply intermingled in Ukraine’s natural gas relations with Russia and Central Asia since the breakup of the Soviet Union, and it is unlikely to cease being so at this point.

As a footnote, I expect the price to be between $300 and $350 per mcm, though this is of course speculation at this point. A lot depends on how the costs are derived, as I explained in an earlier post.

Also worth mentioning is that Ukraine’s main stock market, the PFTS, has declined over 60% since January 1st, 2008, making it the worst performing stock market in the world. The PFTS performed extremely well last year, perhaps leading traders to feel that it was over valued at the start of 2008. Unhealthily high inflation, poor regional financial performance, geopolitical worries exacerbated by the Georgian conflict, and the upswing in domestic political instability have all contributed to the decline.

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