Earlier yesterday, Ukrainian Prime Minister Yuriy Yekhanurov once again rejected Moscow's demand to sign an agreement on buying Russian gas in 2006 for $230 per 1,000 cubic meters, up from the current level of $50 per 1,000 cubic meters.
"The Ukrainian side considers this to be an unacceptable price...and direct economic pressure on the country," Yekhanurov said, adding that Kyiv has sent its own proposal to Moscow to settle the gas-price row. "Should the Russian side refuse [to accept our proposal], we have grounds to appeal to the Stockholm court [Arbitration Institute of the Stockholm Chamber of Commerce]."
Yekhanurov did not provide any further details, but the proposal he mentioned is apparently close to what Plachkov made public on 27 December. Plachkov told journalists in Kyiv that Ukraine wants Russia to charge $80 per 1,000 cubic meters of gas in the first three to six months of 2006, with a gradual switch to a "market price" in 2009. Plachkov did not say what price Kyiv could accept in 2009.
The spiraling war of words between Moscow and Kyiv over the lack of an agreement on Russian gas supplies culminated on 27 December. Russian Defense Minister Sergei Ivanov responded to Kyiv's suggestion that it might change the terms for Russia's lease of a naval base in Sevastopol to compensate for the expected gas price hike.
"The agreement on the division of the Soviet Union's Black Sea Fleet is an inseparable part of a larger Russian-Ukrainian treaty, the second part of which contains recognition of each other's borders. Therefore, in my opinion, attempts to revise that treaty would be fatal," Ivanov said.
Ivanov's pronouncements should not be taken at face value, and one should not expect that Moscow could venture to revise its borders with Ukraine, let alone launch a military intervention in that country. But Ivanov's comments well illustrate the intensity of the Russian-Ukrainian gas dispute and indicate that Moscow is firmly set on having its own way.
How Much Is Too Much?
What could constitute a reasonable compromise for Moscow and Kyiv? Some economic experts have suggested a compromise price could be agreed at $150-$160 per 1,000 cubic meters of gas, adding that Ukraine could simultaneously increase its gas-transit tariff from the current $1.09 to some $2-$2.50 per 1,000 cubic meters of gas per 100 kilometers.
But even such a compromise would increase Ukraine's present gas bill -- some $2.2 billion in 2005 -- at least threefold, depending on the terms of Turkmen gas supplies to Ukraine in 2006. As a result, the impact of such a rise could be painful for the Ukrainian economy and Ukrainians in the upcoming year.
According to experts from the Economist Intelligence Unit, if the Ukrainian government decided to cushion this impact, it would have to raise household gas tariffs by 50-100 percent and double gas tariffs for industrial consumers. Such moves would be fraught with grave political and economic consequences.
First, the Ukrainian electorate could offset such a gas price shock by voting overwhelmingly for forces opposing the government of President Yushchenko, primarily the Party of Regions led by his unsuccessful presidential rival, Viktor Yanukovych. Current polls indicate that the Party of Regions is supported by some 25 percent of voters, while the pro-Yushchenko Our Ukraine bloc is backed by 15 percent of Ukrainians.
Second, the industrial base of the Ukrainian economy -- particularly its energy-intensive metallurgical and chemical branches -- would certainly shrink, spawning unemployment and possibly consumer price hikes.
The economy is already decelerating, from a growth rate of 12 percent in 2004 to 3 percent in 2005. The Economist Intelligence Unit has said the economy could be close to stagnation in 2006.
Offsetting The Threat
Kyiv seems to be well aware of such unpleasant consequences of the gas row with Moscow and has already taken or declared that it will take some precautions and countermeasures.
Prime Minister Yekhanurov announced on 28 December that household gas tariffs would rise by 25 percent on 1 January, or by some $1.20 monthly for the average Ukrainian family.
Earlier this week, Fuel and Energy Minister Plachkov returned from Ashgabat, saying that he signed a contract for Turkmen gas supplies for 2006. However, he has not disclosed either the contracted volume of gas or its price. It is also not known how much the operators of Russian gas pipelines will charge Ukraine for Turkmen gas transit next year.
In addition, Yekhanurov publicly warned Moscow that if Gazprom reduces its gas flow across Ukraine in 2006 only to transit volumes, Ukraine will take 150 cubic meters of gas from every 1,000 cubic meters as payment for transit. Gazprom responded that such a practice would be treated as theft. However, Gazprom did not go as far as to say that it will stop sending gas via Ukrainian pipelines to Europe in 2006 altogether.
In theory, government measures could help the Ukrainian economy survive at a relatively stable level until the 26 March vote even without a gas-supply contract for 2006. But it is anybody's guess as to whether President Yushchenko and his allies can maintain their current political weight for that long.