Friday, January 06, 2006

Successful?

Here’s some analysis like we get here from time to time. I will take the points one at a time:

Got that deal anytime? Like when Ukraine "overdrew" or borrowed some gaz and never paid it back?

No, the deal I am talking about that they could have gotten at any time was the $95 deal not the $230 deal. That was true at any time prior to them shutting off the flow. They know this and so does everyone else—that is, at least, most everyone else.

I don’t know that anybody knows Ukraine overdrew anything. The way things have been done in the past has been very murky and always worked out in the shadows. Most of it has been by barter and barter always lends itself to misunderstandings, if you’re being generous about what went on, or to manipulation, if you aren’t. You say they overdrew. Ukraine would say that they simply collected for transit fees owed. The Kremlin denies this.

If it’s the reserve you’re talking about, the reserve Ukraine used, there has been a lot of back and forth on that. The Ukrainian government says it was Ukraine’s; the Russians say it was Russia’s. With things happening in the shadows like they have, it’s hard to tell. But Ukraine has had at least a colorable claim to it. The Kremlin of course denies this.

Like when Ukraine said that not only will they raise the rent on the pipes but also on Black Sea fleet bases?


Raising the rent on the pipelines to market rates? Isn’t that the position of the Russian government in all of this? If Russia wanted to move to market rates, then why couldn’t Ukraine? They had a contract? (Pause for laughter.) Of course what Russia means by market rate is the same rate paid by Europe. (With gas though it’s hard to tell what the market rate is; it’s not readily tradable. That’s why it is probably better to refer to it as “the European rate.”) So by the same token, Russia should pay the European rate for gas transport, right? The Kremlin of course denies that Ukraine has the right to do this.

Raising the rates on the Black Sea Fleet is another one of those issues that needs to be aired here fully and hasn’t been. There is evidence that the Russian military is subleasing some of the land in these areas for commercial purposes. In other words, they are working a pretty good deal for themselves on what is supposed to be land leased for the military. So if the Russian military wants to make a go of it commercially on that property, why can’t it be charged the market rate? (Unlike for gas, there is a discernable rate for leased commercial property.) Because they have a signed lease agreement with the government of Ukraine for a certain amount? You mean a contract is a contract?

What did you smoke for breakfast? How in the world would Ukraine pay the gaz market price? Out of Bill & Melinda Gates charitable trust?

Could Ukraine pay the market rate? Of course it could but that would create a lot of economic problems for the country if it had to right now. So what is the argument here? Ukraine is poor and can’t afford it and it depends on the largesse of the Kremlin to keep it set up? Or what?

The problem is that the Kremlin had no real bargaining position. They just can’t take their gas and sell it to the Chinese like they could petroleum. Natural gas is not fungible like other commodities are. It cannot be just loaded up and shipped anywhere to any customer. (At least not unliquified, something Russia can’t do extensively in commercial quantities right now--if it can do it at all.) Natural gas depends on pipelines to get to the customer. There lies the rub and the reason for this whole row: those pipelines run right through Ukraine at this moment. Russia wants to bypass Ukraine going north but they still won’t be able to pump the gas to Europe that needs to be pumped even with the new pipeline. This means that Russia will still be dependent on Ukraine for some time to come to get it gas to Europe. So Russia may want to sell its gas to China, India or anywhere else besides Ukraine. The problem is the pipelines are facing in the wrong direction.

That is where they have miscalculated this time and this is one of the reasons why a number of us think that there had to be a political dimension to this whole thing. Take any year before this one. At years end, Russia has cajoled, blustered, talked loud and even threatened either to get Ukraine to pay or to get some kind of contract. But it has been in a lower key. It was not uncommon to hear about the problem from the Russian side and then to hear about negotiations and a solution reached down to the wire--all under the radar and settled out of sight. This has happened time and time again at the end of the year. This time, however, there were early statements by the Foreign Ministry and then Putin became involved. And the Defense Ministry weighed in on it when Ukraine mentioned the Black Sea Fleet base. In other words, the weight of the whole Russian government was brought to bear on this issue. And in the end, the threat to turn things off turned out not to be the idle threat it had been in the past. They actually did. For the first time, they actually did it.

But they overplayed their hand. One analyst says that because of the way markets are, it is not possible to use natural resources as a stick. Every government that has tried it has found this out. OPEC did at first and it taught the Saudis a lesson they learned from. Russia looks it will find this out to, if it hasn’t already.

So I stick by what I said. They could have gotten the deal they ended up with at anytime but they ended up with much less. And they have all of Europe talking about alternatives including what for some of them had been out of bounds--nuclear power. Sounds like a very successful round of negotiations.

3 comments:

LEvko said...

Hi Scott - I've been doing some back-of-envelope calculations on the gas deal signed between Gazprom and Naftogaz. According to Anders Aslund [who, incidentally reckons Ukraine got a cracking deal] Ukraine's bill for imported gas in 2005 was $2.9M. He assumes this year's total import requirement will be about 60Bcm, about the same as last year.

Had both parties agreed to the price Gazprom wanted in the fall of last year of $160/Thousand c.m. the bill for imported gas would have been as follows: [I assume the total import requirements would have been split 17Bcm from Gazprom, 43Bcm from Turkmenistan, as quoted in the new contract]:
17X160 = $2.7Bn + 43X50 = $2.15Bn i.e. Total $4.85Bn. But to this has to be added cost of transporting Turkmen gas to Ukraine, $800M, according to Aslund, so total cost would have been $5.65Bn

With this week's agreement in place the bill for 2006 will now be 60X$95 = $5.7Bn

[1] I assume that Ukrainian earnings from transit of gas through Ukraine and destined for Europe would have been the same, had agreement been made last fall, as the earnings from transit in the deal reached a few days ago].
[2] According to Aslund, the $95 price includes delivery to Ukraine's borders.

Sure, I've made some assumptions on the numbers, and now Gazprom's proxy RosUkrEnergo will be now doing the business at the Turkmen end. But all that Kremlin/Gazprom got is what they wanted in the first place, and in order to get it, they have paid a huge price on the international stage. Ukraine now faces a hefty doubling of its bill for imported gas.

I've read the new contract between Gazprom and Naftogaz. It's at http://www.pravda.com.ua/news/2006/1/5/37345.htm I wonder what your opinion of it is, Scott. I would have imagined that after the last few weeks’ shenanigans, an army of Ukrainian lawyers would have scrutinized every detail before signing. To me, a mere layman in these matters, it seems to be a laughable document. E.g. it clearly states that the $95 price is for the first half of 2006 only, so where does the 5 years that everyone talks about come from? And the price for 17Bcm of Russian gas will be determined by a formula where Po = $230, but where's the formula? There are no delivery schedules, and no penalty clauses. Why use middlemen? As Ukrainians say, 'There's a dead dog buried there, somewhere'.

As many others have stated including Yulia Tymoshenko, the new middleman has no pipelines, no gas fields, nothing. If they go 'belly up', what then? It seems that this contract was cobbled together overnight as a face-saving fig-leaf for Putin. Placing responsibility for all of Ukraine's gas imports into the hands of a dubious middleman surely casts major doubts on the integrity of Yushchenko and his administration.

Incidentally, the above-mentioned 'Ukrainska Pravda' web page also carries a copy of the contract between Gazprom and Naftogaz Ukrainy dated 9th August 2004, agreeing to fix the price of gas delivered to Ukraine at $50/thousand c.m., and a transit rate of $1.09 until 2009. If Gazprom did not adhere to that contract, why should they be trusted on the new one?

LEvko said...

Hi Scott - I've been doing some back-of-envelope calculations on the gas deal signed between Gazprom and Naftogaz. According to Anders Aslund [who, incidentally reckons Ukraine got a cracking deal] Ukraine's bill for imported gas in 2005 was $2.9M. He assumes this year's total import requirement will be about 60Bcm, about the same as last year.

Had both parties agreed at the price Gazprom wanted in the fall of last year of $160/Thousand c.m. the bill for imported gas would have been as follows: [I assume the total import requirements would have been split 17Bcm from Gazprom, 43Bcm from Turkmenistan, as quoted in the new contract]:
17X160 = $2.7Bn + 43X50 = $2.15Bn i.e. Total $4.85Bn. But to this has to be added cost of transporting Turkmen gas to Ukraine, $800M, according to Aslund, so total cost would have been $5.65Bn

With this week's agreement in place the bill for 2006 will now be 60X$95 = $5.7Bn

[1] I assume that Ukrainian earnings from transit of gas through Ukraine and destined for Europe would have been the same, had agreement been made last fall, as the earnings from transit in the deal reached a few days ago].
[2] According to Aslund, the $95 price includes delivery to Ukraine's borders.

Sure, I've made some assumptions on the numbers, and now Gazprom's proxy RosUkrEnergo will be now doing the business at the Turkmen end. But all that Kremlin/Gazprom got is what they wanted in the first place, and in order to get it, they have paid a huge price on the international stage. Ukraine now faces a hefty doubling of its bill for imported gas.

I've read the new contract between Gazprom and Naftogaz. It's at http://www.pravda.com.ua/news/2006/1/5/37345.htm I wonder what your opinion of it is, Scott. I would have imagined that after the last few weeks’ shenanigans, an army of Ukrainian lawyers would have scrutinized every detail before signing. To me, a mere layman in these matters, it seems a laughable document. E.g. it clearly states that the $95 price is for the first half of 2006 only, so where does the 5 years that everyone talks about come from? And the price for 17Bcm of Russian gas will be determined by a formula where Po = $230, but where's the formula? There are no delivery schedules, and no penalty clauses. Why use middlemen? As Ukrainians say, 'There's a dead dog buried there, somewhere'.

As many others have stated including Yulia Tymoshenko, the new middleman has no pipelines, no gas fields, nothing. If they go 'belly up', what then? It seems that this contract was cobbled together overnight as a face-saving fig-leaf for Putin. Placing responsibility for all of Ukraine's gas imports into the hands of a dubious middleman surely casts serious doubts on the integrity of Yushchenko and his administration.

Incidentally, the above-mentioned 'Ukrainska Pravda' web page also carries a copy of the contract between Gazprom and Naftogaz Ukrainy dated 9th August 2004, agreeing to fix the price of gas delivered to Ukraine at $50/thousand c.m. and a transit rate of $1.09 until 2009. If Gazprom did not adhere to that contract, why should they be trusted on the new one?

Kira Zalan said...

Many are labeling Russia’s pressure on Ukraine to pay market prices for natural gas as “Cold War” tactics. Of course, the Ukrainian government is paying the full price for their anti-Russian rhetoric and pro-Western orientation. Russia is flexing the only muscles she has: natural resources. But, it’s not so much a message to the Ukraine as to the West. And it’s not so much “Cold War” as Realist geo-politics.

Putin quickly realized that Russia only has one card to play in today’s world of growing demand for natural resources. Domestically, this realization became clear with the takeover of the Yukos oil company. Disguised as retribution for legal transgressions, Putin removed the threat of a western-oriented Yukos
by imprisoning its managers, and paved the way for a predictable government takeover of Russia’s oil industry. Today, it is not so clear what the rules of oil investment are (i.e. no foreigner shall hold majority stock in a Russian oil company), but it is very clear who makes the rules.