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Economy: Ukraine Fails To Resolve Energy Debt

While Ukraine declares that it has solved its problems with energy shortages, it has failed to reach an agreement with Russia on its energy debts. As another winter approaches, the conflict suggests that few, if any, of Ukraine's problems have been solved, and there is no sign of a new formula to prevent a repeat of past mistakes. Correspondent Michael Lelyveld reports.

Boston, 24 July 2000 (RFE/RL) -- Ukraine declared an early victory over its energy problems last week, but within days it was forced to concede that its problems with energy debt remain unresolved.

In Moscow on Thursday, Ukrainian Prime Minister Viktor Yushchenko met for four hours with Russian Prime Minister Mikhail Kasyanov, trying to find a formula for settling Kyiv's $1,4 billion dollars in gas debts. The Reuters news agency reported that the only result was an agreement to establish a new inter-governmental commission, which is scheduled to meet in the coming week.

The panel's task is to form a new basis for cooperation on the debt problem. But even that modest goal is not expected to be addressed until the fourth quarter of this year.

The effect may only be to postpone the problem past the harvest and into the winter heating season, when Ukraine's pattern of high energy consumption and gas theft become most apparent. Without a radical change in relations, Russia is likely to repeat its practice of depending on Ukraine for gas transit to European customers, while Ukraine relies on being able to take gas from the pipelines whether it pays for it or not.

The disappointing end of the Yushchenko meeting with Kasyanov stood in sharp contrast to a glowing statement by Ukrainian Deputy Prime Minister Yulia Tymoshenko on 12 July.

Tymoshenko told reporters: "Today I want all of you and the whole of society to know that the crisis in the fuel and energy sector is ended." Tymoshenko added, "The government has no reason to think the crisis may start again."

On the surface, there seemed to be reason for optimism. Ukraine recently enacted a new energy reform law, which was a condition for further lending by the International Monetary Fund (IMF).

The law, which is designed to accumulate payments for power producers rather than relying on distributors, has had some immediate effect. Cash collections for electricity rose sharply in June, although they are still less than half the amount owed. Consumer payments for gas also increased dramatically, thanks to collection of arrears.

In the past week, President Leonid Kuchma has named a new energy minister and a deputy minister to head Naftogas Ukrainy, the state-owned state oil and gas company. Their predecessors were seen as resistant to reform. In a further sign of progress, the government announced plans to privatize seven electricity distributors by the end of the year, following another recommendation by the IMF.

Tymoshenko also predicted a doubling of coal stocks before the winter, saying, "Today I want to convince the country and people in power that the government and the country do not have any problems with preparations for the autumn and winter period."

But by the end of the Yushchenko visit to Moscow, those assurances seemed less than convincing. Russia's Gazprom is still considering a plan to bypass Ukraine by building a new gas connection between Poland and Slovakia for deliveries to Western Europe. In a signal of its fear rather than its resolve to reform, Ukraine has sought assurances from Poland that it will resist any plan that might leave Kyiv in the cold.

The claim that Ukraine should have no worries about winter fuel may be hard to accept, considering that the country still depends on Russia for 55 billion cubic meters of gas per year, or about 70% of annual consumption, while its debt remains unpaid.

Ukraine, the sixth-largest consumer of gas in the world, also seems to have a shortage of new ideas for dealing with its chronic problems. Last week, Tymoshenko proposed that Ukraine should swap its transit fees as a settlement for its debt. But Ukraine is already relying on 30 billion cubic meters of gas in payment for transit, suggesting that it wants to count its fees twice.

The only other idea is to reschedule the debts for as long as possible. While such a deal may be inevitable, Ukraine has already run through a variety of rescheduling and debt bonding schemes. Reform of the gas market itself still seems the toughest task, as long as wages are low and industry remains inefficient. The government also appears unable to stop private gas traders from stealing fuel, even in the summer, despite its repeated pledges to crack down.

Russia has also had little new to offer. Since 1994, it has tried to gain control of Ukrainian assets to secure its pipeline routes. The suggestion of forming a joint energy company may be little more than a variation on the same theme. Its only other solution is to bypass the problem by building a detour around Ukraine, relying not only on Poland but Belarus, another perennial debtor for gas.

The problem of energy debts to Russia comes as Moscow tries to persuade Western nations to write off its old Soviet debt. Their response is that Russia, as an energy exporter, can afford to pay. Ukraine's hope for IMF loans may only help to complete a vicious circle.

Despite optimistic statements, Russia and Ukraine are approaching another winter with no solutions in sight. Until both countries reform their energy sectors, talks seem likely to go on and on.