Moscow, Russia: Protracted talks between Moscow and Kiev on Russian gas prices for Ukraine have produced some unexpected results. Ukraine has received a substantial 30% discount on the gas prices stipulated by the January 19, 2009 contract.
In exchange, the Russian Black Sea Fleet will remain in the Crimea for another 25 years. Top officials do not conceal the fact that the two agreements are linked, as highlighted by the April 22 summit involving Russian and Ukrainian Presidents Dmitry Medvedev and Viktor Yanukovych in Kharkiv, eastern Ukraine.
President Medvedev said Black Sea Fleet and gas issues were only technically linked. “The discount will be applied against Russia’s rent for the deployment of its Black Sea Fleet and the naval base in Sevastopol. This is a technical, rather than political link, and involves a financial transaction only,” Medvedev explained.
Trading gas for a naval base explains a highly important point. It was the Russian government, rather than energy giant Gazprom, which gave a gas price discount to Ukraine. The 30% discount will be financed out of the federal budget as no 30% export duties will be levied on the exports of Russian gas to Ukraine.
Gazprom, which did not profit from the amended contract, will be unable to manage underground gas reservoirs and will not receive liberalized access to end consumers. At the same time, the company did not lose anything. Although it is quite logical that the state, which has solved the Black Sea Fleet problem, pays the bill, the equitability of this exchange remains in doubt.
Moscow has made a major concession to Kiev, applying domestic market pricing principles to Ukraine. The price is calculated on the basis of the European market minus transportation costs. Gazprom proposes similar pricing policies for the Russian market, albeit with two reservations.
Russia will opt for a pure netback principle, calculated by taking all of the revenues from the gas, less all costs associated with getting the gas to a market. There will no link to the petroleum basket. The difference is not very substantial because gas prices in the European Union are linked to petroleum costs, all the more so as Ukraine is paid for the transit of Russian gas. Moreover, reduction factors 0.6%, 0.7% and 0.9% of equal-profit prices will be applied on the domestic market in 2011, 2012 and 2013, respectively.
Consequently, Ukraine will pay the same gas prices as any Russian region. This is a serious favor. As a result, part of the Russian elite and the public will think that such agreements are an attempt to bind Ukraine closer to Russia. Analysts will disagree on the alleged profitability of such agreements.
The Russian public is divided into two main groups in terms of their attitude toward Ukraine. Pragmatic Russians think relations between two fraternal nations do not merit economic concessions, while the romantics are confident that relatives should never discuss financial matters.
The latter should be happy about the agreement but should not forget that they will have to pay for it out of their own pockets because the Russian budget will lose a considerable sum, which is easily calculated.
Ukraine pledged to buy 36.5 billion cubic meters of gas in 2010. Of this amount, 6.5 billion cu. m. were paid for in the first quarter and are not taken into account. In April-December 2010, Ukraine is to buy 30 billion cu. m. worth $340 per 1,000 cu. m. This makes up for $3.09 billion.
This is a modest amount, and it can be compensated for on the domestic market. While the two presidents signed the new agreements, the Gazprom board of directors discussed proposals on the terms and procedure for introducing the equal-profitability principle as regards gas exports and sales on the domestic market. Gazprom plans to increase its proceeds and tax contributions, which may compensate for losses incurred by the Russian-Ukrainian agreements.
The additional agreement will not expire in 12 months, but in 2020 together with the contract. Ukraine will have to annually consume 40 billion cu. m. of gas. This implies a $4 billion annual discount. Russia has assumed some rather curious long-term obligations making it possible to reinterpret the “gas-for-naval base” agreements. In reality, such agreements are not very romantic.
On April 9, Moscow launched construction of the submarine section of the Nord Stream gas pipeline, due to link Vyborg in Russia with Greifswald in Germany. Nor does Moscow given on the South Stream gas pipeline to transport Russian natural gas via the Black Sea to Bulgaria and further to Italy and Austria.
The two pipelines will annually pump 118 billion cu. m. of gas. This is more than the 110 billion cu. m. gas-transit volumes via Ukraine stipulated by the contract. Ukraine will soon realize that it will lose its transit country status after both pipelines are completed.
But it is impossible to transport gas to Europe in circumvention of Ukraine while the two pipelines are still under construction. The new contract, which may not imply payments for the Black Sea Fleet, is probably a bonus indicating that Ukraine should behave in a civilized manner until Russia completes both Nord Stream and South Stream pipelines.
After Ukrainian pipelines become redundant, we shall see whether family ties are more important than pipelines.
The opinions expressed in this article are the author’s (Konstantin Simonov) and do not necessarily represent those of DefenceTalk or RIA Novosti.