The cabinet agreed with Ukraine’s leading oil traders on stabilizing gasoline costs on June 12. “We had a meeting with the board of experts, analyzed the situation, and now it is safe to assume that the costs will not continue to rise,” Minister of the Economy Oleksandr Shlapak declared. He believes that the fuel cost jump in June is mainly explained by Russia increasing the export tax twofold, also because of oil price increases the world over. The Russian oil drilling companies keep a sensitive finger on the pulse of foreign market price fluctuations and they do not seem inclined to make Ukraine an exception. The cost of oil is roughly 70% of the final cost of gasoline. In addition, the Ukrainian prices were influenced by the agreement between the cabinet and oil traders on full tax payments, the excise tax included. Previously, most oil traders successfully avoided excise payments through court decisions. After reaching a cooperation agreement with the cabinet, practically all the large companies actually volunteered to pay the tax.
All these factors of current gasoline prices are of long duration, meaning that the prices are likely to remain at today’s level, at least for the rest of the summer. Economy Minister Oleksandr Shlapak was his usual optimistic self on Wednesday when he said that world oil prices could decline, in which case the domestic gasoline prices would follow in July. However, the strained Middle East situation gives no indications that world prices could go down significantly.
Cabinet statistics show that Ukraine’s fuel reserves exceed last year’s, so there is no threat of any shortage. Mr. Shlapak nevertheless admitted that the government is under heavy pressure to allow soft importation terms for cheaper gasoline from Belarus. Minsk is member of the Customs Union, so Russia’s higher export tax does not affect it. As it is, Belarusian fuel costs 15-20% less than in Ukraine. Such soft importing of Belarusian gasoline would lower prices in Ukraine. Naturally, the owners of Ukrainian oil refineries were adamantly against it at Wednesday’s meeting of the board of experts, because this would destabilize the market and damage the contacts that have been formed between oil producers and distributors. “The Ukrainian oil refineries can supply all domestic needs, so allowing such imports would be wrong,” said Serhiy Antonov, CEO, Lukoil-Ukraine (Odesa Oil Refinery).
Economy Minister Oleksandr Shlapak, however, did not rule out the possibility of limited oil imports from Belarus, explaining that this decision would be made if fuel prices continued to increase. “We have ascertained that there are no economic preconditions for such further increase, so if it does take place on the spur of the moment, we will have to import less expensive oil products to stabilize the situation,” he announced. This was a sort of blackmail and seems to have been appreciated by large oil companies. “We do not operate a chain of filling stations., but we’ll try to make arrangements with our buyers, so the prices stay at the current level,” promised Rustam Nasyrov, general director of Ukrtatnafta-Center (Kremenchuk Oil Refinery). He believes that both the government and oil traders want to have a stable market, there are no reasons to expect further price increase.
Yet the big market operators do have something up their sleeve in case events take a pessimistic course. “If the government allows such imports we’ll stop paying taxes,” declared Oleksandr Horodetsky, CEO of TNK-Ukraine (Lysychansk Oil Refinery). He said this in the presence of Minister Shlapak (the chief publican Mykola Azarov was not on hand). Mr. Horodetsky must have meant not only cutting budget revenues through lower sales of Ukrainian oil products. It was also a transparent hint at the possibility of lawsuits proving the unlawfulness of excise payments being currently made for purely humane reasons.
This looked like blackmail by both sides in public, but it may well become a guarantee of an actually stable market for the next couple of months. Lobbyists wishing to profit from preferred import terms, unlike oil refinery owners, pull shadow strings. All things considered, this distinction must decide the cabinet in favor of cooperating with the companies Lukoil, TNK, Kazakhoil, and Ukrnafta. They together with the oil refineries of Drohobych and Nadvirnia currently supply 95% gasoline in Ukraine. The remaining 5% is provided by importers, whose biggest trump card is having their people in Verkhovna Rada – and contacts in the cabinet, of course. Whichever scenario is to be played out, the Ukrainian consumers may rest assured that gasoline prices are not likely to rise any higher unless, of course, world oil prices jump. And the Ukrainian prices may go down if Russia nixes the VAT on oil exports to Ukraine. Both governments are to discuss the possibility in Kharkiv, June 21. TNK and Lukoil people promised that they would use all their lobby reserves at the Kremlin to have the value added tax lifted.
