Reforming the Ukrainian Gas Sector

by Roman Kupchinsky

Can the Ukrainian natural gas sector be reformed? For the last two decades the Ukrainian gas business has been one of the least transparent and reportedly most corrupt and mismanaged sectors of the economy. Will this begin changing in 2009-2010?

Ukrainian policy makers and politician’s have resisted reforms tooth and nail because if they were implemented they would not only abolish a system which was so profitable for the political and economic elites, but would further impoverish an already poor population.

However, once the price charged for Russian gas reached European market levels in 2009; hastened by a debilitating shutdown of gas supplies to Europe in January 2009, the European Commission had had enough and began demanding immediate demonstrable reforms.

By June/July 2009 the European Commission finally had the leverage it needed to force Kyiv into taking action. Ukraine lacked the $4 billion needed to pay Russia’s Gazprom for gas to insure uninterrupted supplies to the EU during the fall/winter heating season. Prime Minister Yulia Tymoshenko had asked Russia for a loan - which was rejected - so she turned to the Commission with her request.

At the heart of the problem is the domestic pricing structure for Ukrainian produced gas which is sold to regional communal heating companies which supply heat and hot water to domestic consumers. The price currently charged communal heating companies is $154 per 1,000 cubic meters while the price of Russian gas is $228/1,000 cubic meters – a difference of $74 which is subsidized by the state budget.

On July 17, European banks demanded that these state subsidies end. According to the Commission spokesman Mark Grey, a decision on extending credits to Ukraine will be announced only after the Ukrainian government provides a definitive date when the subsidies will end.

Meanwhile the head of the Ukrainian National Regulating Commission for Power, Valeriy Kalchenko, stated the price of gas for consumers “does not make any economical sense”.

Yet Prime Minister Yulia Tymoshenko, immersed in an upcoming bitter presidential campaign, expressed doubts that the price of gas for Ukrainian consumers will rise in 2009. “Do not believe in rumors. I ask you to wait for the signing of a memorandum and then it will become clear if there will be a price increase or not”.

Earlier, Tymoshenko had promised to increase consumer prices in 2009 by 20 percent, a bare minimal which will not solve the problem according to experts. What is needed is a far greater increase, a proposition few in the Ukrainian government are willing to endorse at this time.

Are reforms likely? Many observers believe they will be postponed until 2010 or later. If so, Europe could well expect another gas delivery crisis this fall.