Posted on November 22, 2008 - by Venik

Gas Wars: Episode V

Russia’s natural gas monopoly Gazprom says Ukraine has a $2.4 billion past-due balance. Ukraine acknowledges the debt, but say the amount is $1.3 billion. The $1-billion difference in the two positions is due to Ukraine only counting what it owes for September-October period, while Gazprom also counts November plus various past-due fees and fines. Medvedev told Gazprom’s CEO Alex Miller to get Kiev to pay up by any means necessary. Naturally and as usual, this move by Moscow comes not in the middle of the summer, but in late November, when temperatures plunge in Ukraine.

Not two months ago Ukraine’s Prime Minister Julia Timoshenko met with Putin in Moscow to discuss gas prices and debt repayment, as well as to prepare for the signing of a new gas delivery contract for 2009. During 2008 Ukraine was paying about $180 per thousand cubic meters, while the market price for Russian natural gas paid by the EU in the fourth quarter of 2008 was $500 per thousand cubic meters. Ukraine’s re-payment of its gas debt to Russia was a precondition for the 2009 contract. Otherwise, Ukraine was warned, the cost of a thousand cubic meters of gas in 2009 may be as high as $400.

It was expected that some time in October Ukraine would pay its past-due balance and sign a new contract with Gazprom. Ukraine paid almost nothing and, since Timoshenko’s meeting with Putin, Ukraine’s gas debt nearly doubled. Estimates show that Ukraine’s economy will not be able to afford to pay more than $250 per thousand cubic meters of gas in 2009 without going deeper into debt. Gazprom will not be willing to sign any long-term contracts with Ukraine (or any contracts at all, as it would seem) until the past-due balance is paid in full. And so there is a strong possibility that, once again, Russia will have to cut gas supplies to Ukraine starting January 1 of next year.

Ukraine’s Economy

	2007	2008	2009
GDP Growth (%)	7.6	6	-3
Domestic Demand (%)	16.1	14.4	-14.3
Unemployment (%)	6.4	6	9.5
Monthly wage growth (%)	15	9.1	-8.7
Total foreign debt (bln USD)	57.8	54.3	78.2

This month IMF approved a $16.5 billion loan to Ukraine. However, the first disbursement is scheduled for February 15, 2009 and it will be less than $2 bln. Ukraine is getting deeper into debt: by the end of 2009 its foreign debt will have grown from $54 billion to $78 billion, while its GDP is expected to drop from 6% to negative %3 during the same period of time. The IMF loan comes with many strings attached. One of the most difficult conditions is the requirement to pass the 2009 budget by the end of April with no deficit. Doing so will require drastic cuts to a wide range of federal programs: everything from defense to infrastructure upgrades.

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