Gas deal threatens Ukraine’s crisis-hit economy

KIEV (Reuters) – An abrupt rise in Russian gas prices will undermine Ukraine’s economic and energy security and leave some enterprises on the brink of insolvency, officials and analysts said Tuesday.

Its economy already in a tailspin due to the global financial crisis, Ukraine will now pay $360 per 1,000 cubic meters of Russian gas in the first quarter, double the $179.50 it paid last year.

“Inasmuch as the government is fully responsible for the state of the national economy, the signed agreement is liable to negatively affect Ukraine’s economic and energy security,” Ukrainian President Viktor Yushchenko’s chief of staff, Viktor Baloga, said in a statement.

The president’s chief economic aide expressed dissatisfaction at the agreement, saying it was far less favorable than terms previously discussed with Russia.

“We got an agreement that is worse compared to what was being offered to us before New Year,” Oleksander Shlapak told a news conference. “The president has no legislative instruments to stop these decisions. The prime minister has assumed full responsibility for this.”

Both men criticized the notional market price of $450, discounted by 20 percent to $360 in the first quarter.

The gas deal was clinched by Prime Minister Yulia Tymoshenko after weeks of dispute between Kiev and Moscow. The criticism of the deal underscored continuing poor relations between the prime minister and the president.

The two leaders, allies in the 2004 “Orange Revolution” that brought pro-Western politicians to power, have since been at odds on a wide range of issues. Tymoshenko had called on the president to resign in the run-up to the deal.

Although gas prices are likely to fall in the second quarter in line with a drop in European prices, the increase will heap pain on an economy hurtling toward the worst recession in a decade.

Industrial output was down by almost a third at the end of last year compared to late 2007, after the global crisis slashed foreign demand and brought production to a virtual standstill.

“A rise in gas prices … brings Ukrainian enterprises to the brink of insolvency,” the Delo business daily wrote. “First of all, the price jump will hit the chemicals industry for which gas is the main source of energy.”

GAS RESERVES

Some analysts played down the impact of higher prices on industry, saying Ukraine would tap into its considerable gas reserves to avoid having to pay the high first-quarter price.

“There is lots of gas still in storage which was purchased at $179.50 and, in the first quarter, the purchases from Gazprom at $360 will be minimal,” said Katya Malofeeva, an analyst with Renaissance Capital in Moscow.

The economy ministry says gross domestic product could contract by up to 5 percent this year and some analysts have forecast deeper stagnation for a country where steel and chemicals make up about half of all exports.

Metals output linked to steel production shrank 42.7 percent in December 2008 compared with the same month of 2007, when Ukraine was the world’s eighth-largest steel maker.

Additional worries come from a fast widening current account deficit and uncertainty surrounding the hryvnia currency, which tumbled in the last four months of 2008 to a record low.

A jump in Russian-supplied gas prices will now lead to higher prices for chemicals and steel companies and major producers have already cut consumption.

“We have seen that every time gas prices rise by $10 that leads to a $0.5 billion increase in the (current account) deficit,” said Vasyl Yurchyshyn of the Razumkov Institute independent think tank.

Some analysts said uncertainly during weeks of disputes with Moscow inflicted heavy damage on foreign investor confidence.

“There will be higher energy prices for Ukrainian industry. But I don’t think it’s going to be seismic,” said RBS economist Timothy Ash.

“The main thing is that it is resolved. I think industry faces other problems in the global story. The year ahead is going to be very, very difficult whatever happens with gas prices.”

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