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Ukraine: Former U.S. Ambassador Says Kyiv Can Cope With Gas Price Rise

Former Ambassador Steven Pifer at RFE/RL's Prague broadcast center (RFE/RL) PRAGUE, October 24, 2006 (RFE/RL) -- Steven Pifer served from January 1998 to October 2000 as the U.S. Ambassador to Ukraine. On the sidelines of the Prague Energy Forum, organized by Radio Free Europe/Radio Liberty in partnership with the Warsaw-based Institute for Eastern Studies, Pifer spoke to RFE/RL's Jan Maksymiuk about the aftermath of the Orange Revolution, Ukraine's gas price rise, and the state of the proposed Russia-Belarus union.

RFE/RL: How do you assess the Orange Revolution in Ukraine in 2004 from the perspective of the nearly two years that have since passed? Are there any practical results of the revolution for ordinary Ukrainians today? Are you disappointed with the turn of political events in the country following this year's parliamentary elections?

Steven Pifer: Well, I think the turn in political events in Ukraine has probably surprised many -- the fact that [Prime Minister Viktor] Yanukovych has returned. But he returned basically as a result of a free and fair democratic process. So, that's hard to argue with. In the longer term, though, if you look at the Orange Revolution, the impact is going to be seen in things such as a media that I think today is stronger, feels more independent, and is prepared to challenge the government, and a stronger nongovernmental-organization sector.

Listen to the complete interview (about 11 minutes):
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You will have, I believe, a strong and vocal opposition in [former Prime Minister and opposition leader Yuliya] Tymoshenko as an opposition leader, unlike the kind that Ukraine has had in the past. So I think there are different manifestations now that are good for Ukrainian democracy.

And, again, with regards to Mr. Yanukovych's return, his party won in March in a free and fair election; hopefully now it doesn't bring some of the baggage back from the [former Ukrainian President Leonid] Kuchma years. But I think there will be a lot of people watching very carefully on this.

RFE/RL: The coming of President Viktor Yushchenko to power in 2004 became possible through the introduction of a constitutional reform that limited presidential powers in favor of the prime minister and parliament. Ukraine has moved from a presidential republic, which is characteristic of most post-Soviet states, to a parliamentary-presidential system, which is more typical of European democracies. But this shift has triggered a bitter confrontation between Yushchenko and Yanukovych over who should be the real ruler of the country. Don't you think that Ukrainians are not yet ready to break with their political thinking in terms of the authoritarian power system established by Kuchma?

Pifer: I'd say, first of all, that this change, the fact that Ukraine has moved from a supra-presidency model to a parliamentary-presidential model, is probably a good thing. Certainly one of the problems of the Kuchma era was that you had too much authority in the president, with no real checks and balances. So now you have more serious checks and balances, first of all between the Ukrainian executive branch and the legislative branch, and also between the president and the prime minister.

Ukrainian large industry already understands that the price of energy is going up, probably eventually to world market prices. And therefore, large businesses are making decisions now in investing in energy-efficient technologies, decisions that they didn't make four or five years ago because gas was so cheap and there was no economic reason.

Second, I would point out, if you look at the countries in Central Europe and the Baltic states that have successfully made the transition after the collapse of the Soviet Union, after the collapse of the Warsaw Pact, those countries that joined NATO and the European Union in 1999 and 2004, they all had the parliamentary-presidential model. This has been a successful model in Central Europe.

Now, the problem that we've seen, and we saw it for example in the debate in September, over whether Ukraine would seek a NATO membership action plan, was that although there are new constitutional arrangements now in effect, there's some ambiguity, there's not total clarity on issues such as the NATO membership action plan. Or on other questions, there may no precise guide as to what happens when the president and the prime minister are in disagreement.

I'm not sure that this is something that can be fixed easily or quickly by looking at the Ukrainian Constitution. In the end, it may be very important that the two Viktors -- President Yushchenko and Prime Minister Yanukovych -- are going to have to come to terms together if they want to produce coherent policy that moves Ukraine forward. And that's going to be a challenge for both of them. But it'll be important for Ukraine that they meet that challenge.

Can Ukraine Handle Higher Gas Prices?

RFE/RL: Today Kyiv and Moscow are expected to sign a deal on gas supplies for 2007. What is your prediction regarding the price Ukraine will have to pay for imported gas next year? And what impact may this new price have on Ukraine's economy?

Pifer: Based on what I've seen, the expectation is that in 2007, Ukraine will have to pay something on the order of $100-$135 per 1,000 cubic meters of gas, which is an increase from the $95 per 1,000 cubic meters that Ukraine has paid for imported gas in 2006. What struck me when I was in Kyiv in September was when I talked to various people, both in the government and also in industry, nobody seemed to see that this would be a huge problem. They seemed to understand that the price was going up, and they seemed to believe that this would not be a huge blow to the Ukrainian economy.

And what I heard from multiple sources was that in fact, Ukrainian large industry already understands that the price of energy is going up, probably eventually to world market prices. And therefore, large businesses are making decisions now in investing in energy-efficient technologies, decisions that they didn't make four or five years ago because gas was so cheap and there was no economic reason. So they're making decisions now.

And several people said that if Ukraine has two or three years to make this transition, they should be able to accommodate this, introducing new energy-efficient technologies, and be able to absorb the price increases. Now certainly it won't be without some pain, but I was surprised in September that most people talked about it as if Ukraine could manage it in a way that people weren't talking about managing energy price increases say eight or 10 months ago.

RFE/RL: Yanukovych has said that Ukraine should be prepared for an even more painful gas price hike beyond 2007. And Yushchenko has recently signaled that Ukraine should return to talks on forming an international consortium, with the participation of Russia, to run his country's gas transit pipelines. Do you think Ukraine can ensure its energy security without giving control over its gas transit infrastructure to Russia?

Pifer: There are two different questions here. The first question is, Ukraine ultimately needs to be prepared that it's going to have pay world market prices for energy. I think it's also fair for Ukraine to expect that there'll be a certain transition period, just as for example Russia, when it negotiated its WTO bilateral agreement with the European Union, negotiated with the EU a five-year transition in terms of raising domestic prices for energy within Russia.

Russian Prime Minister Mikhail Fradkov arriving in Kyiv today for energy talks (Ukrinform)

But it makes sense both from an economic point of view, but also from the point of view of energy security, that Ukraine plan that it's going to ultimately have to pay world market prices, and therefore begin adapting toward that. Because once Ukraine is paying global prices, it reduces the amount of political leverage that Russia may have over Ukraine. If Ukraine's getting a special deal, there will be that temptation for the Russians to exploit that question.

The second question on the international consortium -- this is something that five or six years ago, when I was still in the American government, we were very interested in, because we saw an international consortium to manage the pipeline as a way to promote win-win solutions, both for Ukraine and for the producers and shippers in Russia, but also for the consumers. I think the consortium idea still has some merit.

But it's going to be very important that Ukraine look at the exact terms of what the consortium looks like. The concern here is that when designing the consortium with Russia involved, and they usually also talk about a consumer, maybe [German gas company] Ruhrgas or somebody on the consumer side being involved. Ukraine has to bear in mind that there always may be a convergence of interests between the producer and the shipper in Russia, and the consumer in Western Europe. And that convergence of interests is, of course, that the shipper and the consumer want to minimize the transit costs. So there is that alliance of interests which could work against Ukraine. So Ukraine has to make sure that the consortium is designed in such a way that its interests do not get short-changed.

The Russia-Belarus Union

RFE/RL: Belarus is a country that pays for Russian gas deliveries not so much with money as with political loyalty. In your opinion, for how long may Belarus expect to receive gas from Russia at such a discount as now, when it pays just $47 per 1,000 cubic meters of gas? Will Russia increase its gas price to Belarus next year? If so, by how much?

Pifer: I'm a little bit less familiar with the gas and energy scene in Belarus than in Ukraine, but I think it would be awfully optimistic for Belarusians to continue to expect to enjoy that kind of deal. If you look around, Ukraine will be paying $130, and in the Baltics it's already $120 and it's likely to go up.

Forty-seven dollars seems to be fairly much of a gift. And indeed, Gazprom has already been making noises that they would like to raise the prices of energy, because Gazprom also is a partially commercial entity, at least. There's a mixture there because it's state owned, but Gazprom is also looking to maximize its revenues, and it's hard to see how Gazprom can afford to continue to provide energy at that low price to Belarus. So I think Belarus would be wise to begin thinking about what happens when the prices of energy go up there.

RFE/RL: Some Russian and Belarusian analysts believe that Moscow has no clear vision of what to do with Belarus. Russian President Vladimir Putin proposed to Belarusian President Alyaksandr Lukashenka three integration scenarios in 2002: (a) political absorption of Belarus by Russia; (b) integration similar to that between the EU countries; (c) putting into operation the 1999 union state treaty that has so far remained mostly on paper. Lukashenka rejected the first two options, stressing the equality of both sides in a common state. What is your opinion about the future shape of the Belarus-Russia Union? Could it be a viable political formation?

Pifer: That ultimately is going to depend upon Russia and Belarus. What has struck me is that although the two countries have talked about a political union since the mid-1990s, you really haven't seen much in the way of real progress. Part of my assumption has always been that while the Russians talk about a political union with Belarus, they didn't want to make the practical steps, because actually bringing Belarus into a union with Russia would probably impose some significant economic costs, not only in terms of the energy subsidies that Russia is already providing, but also other types of subsidies to make that work. It seems to me that up until now, Russia has been unwilling to make that economic investment to make a political union.

I also found it interesting that when President Putin posed those two alternatives, either absorption or an EU-type arrangement, it was almost designed as if he was trying to give Mr. Lukashenka two alternatives that were very unpalatable. It seems to me that while there may be talk about this political union, I haven't really seen much evidence that either side is moving to make that a reality, which suggests that both sides may be comfortable with talking about a union, but neither is really prepared to make the investment in the costs, or the sorts of real changes that would be necessary to make that happen. Both may be in fact comfortable with the current situation.

Prague Energy Forum, October 23-24

Prague Energy Forum, October 23-24

An oil refinery in Western Siberia (TASS)

STABILITY AND SECURITY: On October 23-24, RFE/RL and the Warsaw-based Economic forum cosponsored the Prague Energy Forum at RFE/RL's Prague broadcasting center. The Energy Forum brought together nearly 100 experts and policymakers from Europe, Central Asia, and the Middle East to discuss key issues of energy supply and security in the years to come.

HIGHLIGHTS: RFE/RL presents some of the key presentations from the Energy Forum and interviews with some participants:

Czech Premier Urges Reduced Energy Dependence On Russia

Interview: Nature A Bigger Threat To Security Than Terrorism

Russia Can Boost Security Through Transparency

Interview: Russian Expert Addresses Europe's Security Concerns

U.S. Official Outlines Concerns About Iran's Nuclear Program

Iranian, Western Experts Spar Over Tehran's Nuclear Ambitions

Experts Ponder Future 'Gas Wars'

Former U.S. Ambassador Says Kyiv Can Cope With Gas Price Rise

Interview: Tbilisi Bent On Energy Independence

MORE: Click on the image to see the conference program, participant list, and other materials.

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