Russian First Deputy Premier Mikhail Kasianov, de facto head of the Russian government, held talks in Kyiv with Premier Yushchenko and President Kuchma On February 22. There is little doubt that energy debts topped the agenda.
The Russian side clearly aimed to harden its stand. While Ukraine’s officially acknowledged liability was admitted at $2.8 billion worth of energy supplies from Big Brother, prior to the talks Russia’s government sources referred to $3.5 billion (courtesy of Interfax). In addition, Russia plans to enforce additional oil and petrochemical export duties already this month.
Unfortunately, Ukraine is in no position to reciprocate. It has no alternative but harden its domestic policy to enhance payment discipline. Last Friday, Deputy Premier Yuliya Tymoshenko (responsible for the fuel-energy sector and heading the state committee to enforce its reform) announced the beginning of the Clean Energy program, which she had been promoting since the start of the year. It is too early to say whether or not this new approach will work. Also, the recent cadre reshuffle is by no means sufficient reason to draw any specific conclusions. All measures notwithstanding, thermal energy arrears, according to Mr. Yushchenko, have increased by another 4%, February 1-10, currently totaling UAH 200 million, with outstanding payments for Russian gas supplies going up another UAH 767 million (courtesy of the Ukrainian Financial Server at http: www.ufs.kiev.ua). Viktor Yushchenko, as a market reformer, threatens severe administrative retributions against officials running the regions guilty of piling up energy debts.
Unsatisfactory payments were the reason for Russia’s stopping oil supplies to Ukraine. The subject continues to be inflated by the Russian print media. The Friday before last, the newspaper Segodnia (Moscow) carried an interview with Igor Makarov, president of the Itera group, quoting him as saying, “The gas being stolen from Gazprom is then supplied to the market as Ukrainian gas and our fuel is thus denied full market demand.” This and other such statements resulted in practically no oil being supplied to Ukraine, despite the official lifting of the Russian embargo.
Valery Melnyk, head manager of the Odesa Oil Refinery, told The Day that there is no oil to refine. “This problem must be solved at the presidential level. Kasianov will bring nothing. Russian and Belarusian refineries are working oil supplied at $108-113 per ton. We are offered it at the world market cost: $200. In view of this, gasoline will cost an average of UAH 2,800 a ton; diesel oil UAH 2,300-2,400. No one is saying no to us. They say go right ahead, order it and pay for it. We must make certain concessions to lower the prices. Everybody is waiting for Kasianov’s visit, but I doubt that it will yield any results. I also doubt the practicability of oil supplies from Azerbaijan and Greece; no one is going to sell oil below the world market price. Moreover, our petrochemicals will sell 60% higher than elsewhere in the world, because we must pay VAT, excise, and customs duties. In other words, a loaf of bread will sell at two hryvnias in Ukraine.”
A gasoline crisis prior to the spring sowing could call into question the Yushchenko Cabinet’s existence. To settle the oil supply and all other attendant or related problems, this government is trying to follow the trail blazed by joint ventures like all those ill-famous bisons: budget concessions. No one can guarantee that the Clean Energy project will emerge untarnished.
Another option is getting part of the debt converted in terms of property, something the Russian side is pressing for heavily, bringing forth various energy sector projects, aided by third parties. Thus, the Kherson Oil Refinery was supplied oil by Kazakhoil after the Ukrainian and Kazakh Presidents reached agreement. Addressing the supervisory board of the Khersonnaftopererobka (Kherson Oil Refining) Company on February 18, Zija Bazhayev, head of the Alliance Group, elected Chairman of the Board, announced that the Kherson facility would be supplied not only Kazakh but also Russian oil, and that appropriate contracts for February had already been signed.
And what will Ukraine pay these oil suppliers with? Mr. Bazhayev said he was planning to take part in the Kherson enterprise’s privatization. Naturally, every buyer will try to by this property cheap, he added.
Regrettably, Ukraine, whose debts are staggering and whose enterprises are in a condition best described as down the tubes, will have to consider the possibility of parting with enterprises on its lists, ones currently most favored by the Russians, and probably others as well. Another possibility is that Kyiv will attempt to convert Russia’s economic claims into Ukraine’s geopolitical concessions, considering Moscow’s grave concern about Kyiv’s Western orientation and cooperation with NATO.
