Ukraine has secured a double reduction of natural gas prices and a purchase of a larger portion of the Ukrainian debts.

On December 17, the Gasprom and Naftogas signed relevant supplements to the gas contract: the price of gas for Ukraine is reduced to $268.5 per 1,000 cubic meters fr om the current one of $406. Also, an agreement was reached on a purchase by Russia of $15bn worth of the Ukrainian Eurobonds. According to Ukrainian Premier Nikolai Azarov, without the above arrangements with Russia Ukraine faced both a bankruptcy and social collapse.

For better understanding of the situation, here is some data on Ukraine. Ukraine is quite a poor country (according to the IMF methods, per capita GDP amounts to $7,300 against $17,700 in the Russian Federation); GDP growth in the 2005-2012 period amounted to about 14% against 32% in Russia with the world economic crisis hitting Ukraine more harder than Russia (in 2009 a drop in GDP amounted to nearly 15% against 8% in Russia, while that in industrial output, to 25%). Growth in 2010 and 2011 (4.1% and 5.2%, respectively) gave way to stagnation in 2012 (0.2%); on the basis of the results of 2013 a drop in GDP is expected. The Ukrainian public debt amounts to about 30% of GDP. In 2012, a negative balance of payments amounted to over 8% of GDP, while the budget deficit, to nearly 4% of GDP. In the Doing Business Rating, Ukraine is rated the 137th (Russia - the 112th). Among negative factors, it is worth mentioning the high cost of loans (about 25%) and general unreliability of contractors.

Let's take a look at the Ukrainian foreign trade. In 2012, Russia accounted for 29.3% of the Ukrainian export, while Ukraine, for 5.4% of the Russian export. The export of Ukrainian metals to Russia and import of Russian energy carriers to Ukraine were always balanced to some extent. However, at present that balance has been upset: the export of Ukrainian metals to Russia started to decrease at a higher rate than the import of Russian energy carriers to Ukraine. The above situation is related, among other things, to numerous nontariff limitations introduced by Russia. As regards trade with Europe, the share of the export to the EU countries after Ukraine joined the WTO rose and amounted to the same 28-30%.


Ukraine's main problem is a shortage of energy carriers, but at the same time its main competitive advantage is a transit of those energy carriers. Russia cannot manage without it: in Europe demand on Russian natural gas amounts to 138bn cubic meters. In 2008, at the height of sales Russia transported via Ukraine 113bn cubic meters of natural gas, while in 2012, just over 81bn cubic meters. It is to be noted that Ukraine still remains the largest transiter of Russian gas to Europe - Belarus transfers 44bn cubic meters and that is the lim it of capacity of the Yamal-Europe gas pipeline, while the transit via the North Flow amounted to the mere 12bn cubic meters with the capacity of the first line amounting to 25bn cubic meters (the aggregate capacity does not exceed 55bn cubic meters, but there is no EU political consent on commissioning of it, however, the results of 2012 paradoxically show that there is no demand on the capacity of the first line either due to a delay in commissioning of the NEL gas pipeline, or a high price or both). So, at present Russia cannot stop using services of Ukraine even if the North Flow starts to work at full capacity. In addition to the above, if demand on natural gas in Europe increases it is only Ukraine that can facilitate Russia in meeting it by launching a portion of its idle capacities of the gas transportation system.


It is to be noted that despite those advantages the problem of Ukraine is related to corrupt practices of its politicians. In 2006, V. Yuschenko revised the agreement of 2004 which guaranteed Ukraine an unprecedented low gas price of $50 per 1,000 cubic meters (though there was nothing from the legal point of view that forced him to do so) and got involved into a bargaining as regards making gas prices for Ukrainian consumers equal to those for European ones. In 2009, Yu. Timoshenko went even further: the price on gas for Ukraine became a floating one and at a rather high base ($450 per 1,000 cubic meters) was linked to "average" exchange quotations on gasoil and residual oil on the European market and calculated on a quarterly basis. As a result, for example, in 2013 the annual average price on gas for Ukraine amounted to $421, while in the previous year it was even higher ($440) and exceeded prices for the UK, France and Germany.


V. Yanukovich took serious efforts to resolve that problem. Firstly, from 2012 Ukraine transferred a portion of its gas transportation system into a reverse regime and bought natural gas from Germany at a price of $360-$370 per 1,000 cubic meters. Secondly, Ukraine dramatically cut domestic consumption of gas (at present Ukraine consumes maximum 50bn cubic meters of gas) by switching over to coal. As a result, in a fuel balance the shares of natural gas and coal are almost equal (35%), while a few years ago the share of gas was at the level of 40% against that of coal being equal to 30%. Incidentally, such a situation is politically advantageous to the Ukrainian leaders as Ukrainian coal is in the right hands. Thirdly, Ukraine is increasing production of its own natural gas at the shelf plate in the Black Sea. In two-three years, in case of an optimistic scenario it may start producing shale gas (relevant licenses have already been granted to the major transnational energy corporations).


Politically, V. Yanukovich is in a difficult situation. At the latest parliamentary elections his Party of Regions won the mere 30%. In the second round of presidential elections, he faces a defeat from virtually any candidate, except for a communist or ultranationalist O. Tyagnibok. His policy to hand out money after having received it somewhere is logical in its own way. The EU did not offer a big sum (only up to $1bn).


As a result, V. Yanukovich secured a double reduction of gas prices and a purchase of a large portion of the Ukrainian debt (which means serious risks to Russia because Ukraine's ratings are at the pre-default level). It is to be expected that later V. Yanukovich will seek from Russia clearance of export duties on oil and oil products towards Ukraine. For Russia, it means huge budget losses (Russia's losses in Belarus amount to about $5bn, while the extent of such losses in Ukraine taking into account the capacity of both its domestic market and transit flows will be much higher).


S.V. Zhavoronkov, Senior Researcher of the Institutional Policy Department