Price details unclear in murky Russia-Ukraine deal

MOSCOW (Reuters) – Who pays and who profits from Sunday’s apparent agreement on a new gas relationship between Russia and Ukraine?

In a normal, commercial world, it should be easy enough to work out. But the complex, opaque nature of the two nations’ gas dealings and the lack of full detail about the outline agreement makes it very hard to be certain what is really happening.

Russian Prime Minister Vladimir Putin said Moscow had agreed to sell Kiev gas this year at European prices less a 20 percent discount for 2009, moving to full European prices in 2010.

In return, Kiev would charge Russia the same amount as last year for the transport of export gas across its territory to Europe. This fee would increase to a “market level” next year.

However, neither the “European prices” for gas nor the “market level” for the transit fee have been publicly defined.

Kiev paid $179.50 per 1,000 cubic meters (tcm) for Russian gas last year. Current prices paid by European countries for Russian gas range between $240 and $300 per tcm, according to Ukrainian President Viktor Yushchenko. Russian sources put the range somewhat higher.

Further complicating matters is the role of a little- understood Swiss-domiciled intermediary company, Rosukrenergo, through which all the Russian gas intended for domestic consumption is sold to Ukraine.

Rosukrenergo is owned 50-50 by Russia’s Gazprom and by two Ukrainian businessmen and makes money on commissions from the gas trade, though how that cash is shared out is unknown. Its last published accounts, for 2007, showed net income of $795 million on sales of $9.9 billion.

Russian government sources said on Sunday that the new gas deal would eliminate all intermediaries.


Analysts say that Russia may well have agreed, behind closed doors, to sell Ukraine gas at much less than the average European market price this year — but still more than the $201 per tcm Kiev had said it was willing to pay.

“I doubt that it is realistic to expect Ukraine to pay a price higher than $250 per tcm. We do not want to be back (in a row) in March or April, if Ukraine falls into debt,” said Jonathan Stern of the Oxford Institute for Energy Supplies.

Ukraine’s economy is forecast to contract by up to 5 percent this year, and there could be another disruption in gas supplies if Ukraine is unable to pay its bills.

“Ukraine will pay more this year, but not that much more. I think they settled for something like $210 (per tcm) … Russia made a big price concession,” added analyst Valery Nesterov at Moscow brokerage Troika Dialog.

Under the deal, the transit fees Ukraine charges Russia will be frozen at $1.70 per million cubic meters per 100 km this year, but this will go up to market prices next year. A Russian government source reckoned this would mean a doubling.

Gazprom said it sent around 120 billion cubic meters of gas to Europe via Ukraine last year. Assuming an average distance of 1,000 km, this would mean it paid around $2.04 billion in fees.

“Gazprom got a good deal… Ukraine won’t be getting this higher transit fee until 2010, which for Gazprom will be offset because by then Ukraine is going to be paying a market price,” said Chris Weafer, chief strategist at UralSib.

But with market prices falling — gas follows oil with a time lag of six months — next year’s price for Ukraine and the market-adjusted transit fee could both be low, making it hard to predict a winner.

“What’s going to happen if Ukraine falls into arrears, which is very likely? Without the intervention of a financial guarantor, it does look like this is still a patchwork solution,” Weafer added.

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