Russia, Ukraine resolve their gas dispute: what's next?

Alexei Miller, CEO of "Gasprom" OJSC, stated January 4 at a briefing that in accordance with the reached agreement the holding will be delivering gas to Ukraine through "Rosukrenergo" company.

The high price of the Russian gas from "Rosukrenergo" will be compensated by a lower cost of Central Asian gas.

Sergey Kupriyanov, press secretary of "Gasprom," said that "Rosukrenergo" will be buying Russian gas for 230 USD per 1 thousand cubic metres and consequently that gas will be mixed with the cheaper Central Asian gas so that as a result "Rosukrenergo" will be eventually delivering gas for 95 USD per 1 thousand cubic metres at the first phase to Ukraine.

Thus, Ukraine will get the gas of mixed origin and the higher price of the gas for "Rosurkenergo" will be compensated by the low price the Central Asian gas.

What is this "Rosukrenergo?"

It is a joint venture of "Gasprombank" and "Raiffeisenbank."

50% of the company belong to Gasprombank, 50% to Raiffeisenbank. In this case it should be noted that "Naftogas of Ukraine" also makes part of its shareholders.

But let us return to the Russian oil, or better to its cost, which provokes questions on many parameters.

This situation of "price scissors" between 230 and 95 USD becomes clear only when one considers that the difference in the price of the Russian gas, received by "Rosukrenerg" from "Gasprom" and the price of gas sold by this company to the Ukrainian side will be compensated at the expense of including the Turkmen, Uzbek, and Kazakh gas into the balance sheet of "Rosukrenergo."

The Ukrainian gas balance sheet for 2006 has been approved in the volume of 76.5 bcm, of which 40 bcm come from Turkmenistan, 20 bcm for the locally produced gas, and 16.5 bcm for the Russian gas.

As a result we can see "Gasprom" selling its gas to "Rosukrenergo" for 230 USD per 1,000 cm.

And "Rosukrenergo" in its turn will mix it with the Turkmen and Kazakh gas and sell it to Ukraine for 95 USD per 1,000 cm. It means that Ukraine will buy all gas entering its territory for 95 USD.

Consequences for Ukraine

What's interesting is that only recently all Ukrainian experts were saying that if Ukraine were to buy gas at 95 USD, the Ukrainian chemical production would lose all its profitability and the same situation would occur in the mining and metal industries if the price were 103 USD.

It should be noted that the chemical, mining and metal industries amount to 30% of the Ukrainian GDP, as well as 45% of all currency incomes from export operations.

Therefore the new "rules" of gas consumption will anyway negatively influence the productivity and as a consequence profitability of these industries.

At the same time in the end of 2005 the government of Ukraine planned to raise gas prices for consumers. At the same time the Ukrainian PM asked industrial ventures to reduce, or even cut the consumption of gas.

Moreover, Berdichevskaya, Krasnolimanskaya, and Ternopolskaya gas compressor stations stopped their operations by the beginning of 2006.

There are significant decreases of the gas pressure in the networks of different regions. After the agreement concluded with "Gasprom" Kiev can already guarantee to its ventures and citizens the supplies of gas so much required in wintertime.

Consequences for Russia

Kiev initiated this conflict no matter how paradoxical it may sound. In March 2005 it initiated a switch to market relations with Russia, offering to Moscow to pay money instead of gas for the transit.

As a consequence Moscow announced an increase of the gas price for Ukraine from 50 to 160 USD per 1,000 cm.

Ukraine did not react to the offer and Gasprom on the basis of European prices in late November offered to Kiev to pay 230 USD per 1,000 cm.

When the contract on gas supplies to Ukraine in 2006 was not signed during December, the Russian side offered a 3.6B USD loan to pay for the gas, but the Ukrainian side refused. However, now the conflict is over.

But what was the price of it for Russia and what dividends Moscow actually gained from it is a big question.

So, Moscow demonstrated to Kiev that it is passing from donor aid to market relations.

Of course, a political context is also present. But taking into account the fact that it was Kiev that initiated the switch to the market relations it can be assumed that Moscow would still remain a donor if Kiev did not "wake up the bear sleeping in his lair."

As a result Kiev found itself entangled in its own net.

Therefore it is quite obvious that Moscow did not plan any confrontation with Kiev, that it was the initiator that became victim of its own gas manoeuvres.

Certainly, Russia did use that opportunity to show the remains of its influence to the whole world (to Ukraine, Europe, and the USA,) but also to get some financial dividends.

Who won?

This conflict has shown that Russia today is actually lacking a strategy of developing relations with both the Near and Far abroad.

Of course the tactic used by Moscow is more like reacting to situations influencing the national interests of Russia.

The practice tested by hundreds of years has once more proven its viability, but only under a condition that the second side makes economic and political mistakes.

And if the side initiating a conflict will be better prepared in these aspects, than, for instance, Kiev, which must understand elementary things related with economic mistakes and the political resonance around the Ukrainian political elite, then Moscow will not be able to get dividends from such silly initiatives anymore.

And no matter how sad it sounds, both Moscow and Kiev have shown once more that they are still very far from really developed states and developed economies.