Financial Times

January 5, 2006

Ukrainian industry is “very happy” with the gas deal agreed with Russia this week, analysts said on Thursday. Opposition leaders however called it a “betrayal” and prepared to make criticism of the deal a central part of their campaigns for parliamentary elections in March.

The details of the deal announced on Wednesday, in which Russia agreed to supply gas to Ukraine for $95 per thousand cubic meters (tcm) through the Swiss-registered intermediary RosUkrEnergo, were still being worked out on Thursday. Rosukrenergo said it expected to have a signed contract early next week.

But Yulia Tymoshenko, a former prime minister who supports Viktor Yushchenko, Ukraine's president, on most issues, told a press conference she would challenge the “illegal” agreement in court. Other more radical opposition leaders said they would press for a no-confidence vote against Mr Yushchenko's government.

Yuri Yekhanurov, Ukraine's prime minister, hit back at Ms Tymoshenko, pointing out that she had been head of a highly profitable gas-trading company with close links to the government before she entered politics in the mid-1990s. “Her huge experience could be very interesting,” he said wryly.

Analysts, meanwhile, said industry was relieved by the deal, which they said would probably result in a moderate increase of prices to industry from the current $83.5/tcm to no more than $110/tcm.

“This is the price that [industry] budgeted for,” said Dmytro Tarabakin of Dragon Capital, a local brokerage.

Analysts said it was very difficult to estimate the extra cost of the new contract because Ukraine had traditionally acquired gas through complex barter deals that were very hard to value.

Last year Ukraine paid a notional sum of $50/tcm to Russia for gas, but the “payments” were actually part of a barter deal in which Russia paid gas to Ukraine in lieu of fees for transit of Russian gas to Europe. Ukraine paid $44/tcm to Turkmenistan for gas last year but gave more than a third of it to RosUkrEnergo in lieu of fees for transit of gas from Turkmenistan to Ukraine.

This year Ukraine will pay $95/tcm for gas at its border with Russia, regardless of the origin of the gas, and will receive cash fees for transit of gas to Europe of $1.6/tcm/100km. Estimates of the extra cost range from $500m/yr to $2bn.

Andry Gostik, an analyst at Concorde Capital, another local brokerage, said the increase could at worst shave up to 2 points off Ukraine's gross domestic product growth, which grew by only 2 per cent last year, but he still expected a recovery.

Mr Gostik said Ukraine's chemicals industry is most sensitive to gas prices, but it is also enjoying very high world prices for its products because of the much higher gas prices that their competitors in other countries are paying, typically above $250/tcm.

The second-most sensitive industry is steel, but gas accounts for only 5-7 per cent of mills' total production costs.

“This might eat a bit into [steel plants'] profits, but it won't make their products uncompetitive,” Mr Tarabakin said.