FT: Ukraine must pay Russia market prices for gas

The row between Russia and Ukraine over payments for natural gas looks to be de-escalating.  Gazprom has committed to letting the gas flow freely again after the EU requested this action be taken.  The question now is whether the core issue of payments for natural gas can be solved.  The Financial Times takes a stab at this in their latest Lex column, part of which is excerpted below.

The only way to secure a lasting ceasefire in the gas wars is for Ukraine to commit to paying market prices for Russian gas, through a European-style price formula. Trouble is, Ukraine’s woeful economic state makes that painful indeed. Despite almost constant political crisis since the 2004 Orange Revolution, Ukraine has seen annual economic growth average 7 per cent. Now it has been poleaxed by the global slowdown. Gross domestic product may plunge 6 per cent this year.

So this is a lousy time for a big gas price increase. Falling west European gas prices mean Ukraine should be able to secure a deal at around $250 per thousand cubic metres, as Gazprom was demanding in December. But even that increase, from $179.50 last year, would hammer competitiveness and the current account – especially with prices plummeting for steel, which accounts for 40 per cent of exports. Even if contracting demand reduces its import needs from 55bn cu m last year to 42bn, as Ukrainian officials have suggested, its gas bill would still rise by several percentage points of GDP.

While much of the coverage regarding the gas row has concentrated on Russia’s turning off the supply to Europe, the crux here is that Ukraine, a recipient of IMF funds with a banking system near collapse, cannot afford market prices due to its economic ills. However, the country should pay market prices like everyone else. Moreover, the IMF has conditioned its loan on Ukraine’s passing through the anticipated price increases to the end consumer in order to alleviate the government of debt.

Will Gazprom offer any concessions? The FT believes it should, but notes Gazprom has to worry about its own finances. Let’s hope this dispute is resolved soon as it continues to be a source of speculation in the Western media regarding Russian politics. Instead, it should be regarded as a legitimate commercial dispute between an international company and its customer.

Source
Ukraine – FT, Lex