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Ukraine: Would Hike In Russian Gas Prices Prove A Blessing In Disguise?

7/14/05 By Valentinas Mite

Russia's State Duma is urging the government to consider exporting natural gas to Ukraine at world prices. The Duma's recommendation comes amidst Russian accusations that Ukraine is stealing Russian gas transiting its territory, a claim Kyiv strongly denies. Ukraine is highly dependent on Russian energy resources, and higher prices could seriously strain its economy. Others believe such a price hike might serve as a blessing in disguise by pushing the Ukrainian government to implement economic reforms that it wouldn't have adopted otherwise.

Prague, 13 July 2005 (RFE/RL) -- The price hike, if it happens, would be huge. Currently, Ukraine pays $50 per 1,000 cubic meters of gas. The world price is around $160. Ukraine consumes 24 billion cubic meters of Russian gas annually.

RFE/RL analyst Roman Kupchinsky says the proposed hike should be seen as a blessing by Ukrainian reformers. "Ukraine, which wants to join the European Union, has to learn that it has to pay European prices for energy," he said. "The good part of that is it might finally force Ukraine to begin a program of energy conservation. Ukraine is the sixth-largest user of natural gas in the world, with a GDP [gross domestic product] which is No. 45 or 46 or even worse."

Some are afraid any price hike could have a devastating impact on the country's economy. Kupchinsky disagrees. He says market reforms could be quickly introduced and that Kyiv would be forced to use the resources it has more effectively. He believes the economic consequences of such a hike would be mild, noting that much of Ukraine's economy is run on coal.

On the other hand, Ukraine also has the means to retaliate against the Russian move by implementing its own market measures. Currently, Kyiv is selling steel and electricity to Russia at well below world prices. Russia also pays low prices for the transit of gas through Ukraine.

Impetus For Reform Or Threat?

Oleksiy Kolomiyets, the head of the Kyiv-based Center for European and Trans-Atlantic Studies, says a sudden rise in the price of gas, with no time to adjust, might indeed push Ukraine's economy to the brink of collapse. But he agrees that a price hike could also act as an impetus for reforms.

"What I have in mind is at least trying to create a good climate for investment, radical tax cuts, a clear policy of defending private property. These three main points should be implemented and, of course, further liberalization of Ukrainian economic policy," Kolomiyets said. He believes the government that came to power after the Orange Revolution lacks the commitment for such reforms.

Shift To The South?

The Orange Revolution has reoriented the direction of Ukrainian policy toward the West. Observers say the Russian gas problem might trigger another shift.

During a recent this week to Iran, Petro Poroshenko, the head of Ukraine's National State Security and Defense Council, suggested that Tehran could use Ukrainian pipelines to export its gas to Europe. Iranian officials reportedly embraced the idea.

Kupchinsky says there is nothing new in the plan, as Ukraine has always sought closer economic ties with Iran. "The main question there is the question of constructing a gas pipeline from Iran to Ukraine and on to Western Europe," he said. "This, of course, would probably be a suitable alternative to Russia. Iran would, of course, also charge world prices for its natural gas, as it does for its current customers." He notes such a plan would likely be opposed by the United States, which fears Iran could use any additional cash for its suspected nuclear-weapons program.

Regardless of the price, both analysts point out that the Duma's appeal to the Russian government doesn't mean the price of gas will actually be raised. Kolomiyets says the Russian government makes decisions, not the Duma, and that the Duma's recommendation may be nothing more than a political declaration. "In a sense, the Duma -- if you have in mind the Duma's composition -- is a kind of trumpet for those ideas that the official Kremlin cannot allow itself to say," he said. "If these declarations were to be followed by concrete decisions by the Russian government, then it would indicate a very serious policy."

Kolomiyets points out that Moscow might use the gas issue as a means for influencing the political situation in Ukraine ahead of next spring's parliamentary elections.

Copyright (c) 2005 RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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