A look back and a look forward – The Yanukovych presidency so far

Today I am not going to write much.

I will bring to your attention this Carnegie article published on 2 April 2012, highlighting the highs and lows of reforms to the Ukrainian economy under the current president.  Suffice to say, its author, Nazar Kholod, it not so very wide of the mark and as a general recap so far, it is well worth a read and a reasonably accurate summary.

Next up, a You Tube video of Ukraine’s Foreign Minister, Mr Gryshchenko, during a presentation and Q&A session as the IISS in London on 3 April 2012.

Enjoy!

LNG Terminal – Yushni creeps closer to becoming a reality

Every now and again I mention LNG and Yushni in the same post and have been doing so since 2010 when I first put my money on Yushni being the eventual location of any LNG terminal for Ukraine.

It seems my prediction was right and that a feasibility study has just been completed for locating it there.  Good news for Odessa as it brings it a step closer to commencement.

The cost for constructing a LNG terminal there has been cited at approximately Euro 800 million.  A further Euro 121 million to create a supply channel for the LNG tankers and Euro 113 million to link the new terminal to the gas transport system.  In total  about Euro 1.3 billion.

That sounds a lot of money, and it is, especially for cash strapped Ukraine.  It is not far off the normative figure for such a terminal however.  The recently completed LNG terminal on the Isle of Grain in the UK came in at slightly over Sterling 800 million.  Scope of works considered, the costs seem about right through a feasibility lens.  The study also states a construction to commission time of 49 months – again about right baring any very nasty surprises.

The major question for now, is how this needed infrastructural terminal will be financed and over what period of time.  The plan, it seems, is to raise 30% from internal investors in Ukraine.  In fact I believe the usual suspects have already agreed to do so, leaving 70% to be funded either by bond sales or other credit arrangements.

It has to be said that Euro 1.3 billion is not a lot of money for the usual suspects should they have wanted to finance it completely and I suspect that a government/State of Ukraine stake in the terminal is therefore non-negotiable and the powers that be have decided  Ukraine will hold the majority stake.

The plan is that the terminal will supply LNG into the Ukrainian system at about $40 per 1000 m3 of gas for its services.  Not a bad service mark-up on the LNG bought from nations like Turkey and even with that service charge added to the price of Turkish LNG it still remains considerably less than the terrible cost to Ukraine of the current gas deal with Russia which still has another 7 years to run.

In fact it may be useful to put the cost of the proposed LNG terminal of Euro 1.3 billion in context with the monthly gas payments to Russian of approximately $1 billion.  Long term and from a diversified energy supply chain viewpoint, quite obviously the proposed LNG terminal makes economic sense.

That being the case, let’s hope that a decision is made promptly and the LNG terminal is given the go-ahead at Yushni.

Assassination attempts, Chechnya, Odessa the EU and oil prices

Well it seems that attempted assassinations of Russians and Chechens in London are making the news over in Blighty.

Not so long ago I wrote about the attempted assassination of German Gorbuntsov at Canary Wharf and now it seems MI5 are struggling to remove a Chechen of extremely dubious and nefarious background from London, who they believe is likely to be involved in a plot to assassinate Ahkmed Zakayev, (the self-appointed Prime Minister of the Chechen Republic of Ichkeria) who has claimed asylum in London.

The MI5 court documents show the bizarre situation where two Chechen (Russian Federation) citizens have claimed asylum in London and one is believed to be involved in a plot to assassinate another.  It is extremely rare that MI5 court documents reach the public domain, so click on the link and have a read.  You will see once again Article 8 of the ECfHR is going head to head with national security concerns.  This time however, it is not a radical Islamic cleric who stands to benefit but a would-be conspirator in an assassination plot on UK soil.

Less we forget, not so very long ago two Chechens and a Russian either died or were detained in Odessa when they managed to blow up an apartment they were renting in the city.  Speculation about a would-be plot to assassinate Mr Putin emanates from Russia, Odessa authorities believe they were here to assassinate a high-flier from Odessa.

What is not in dispute is their nationalities, the explosion at their rented apartment in Odessa, the death of one in that explosion and the capture of two others, regardless of their intended target.

All of these things draws our attention to a more active Chechen insurgency with a growing inclination to act outside both Chechnya and the Russian Federation.  A cause for concern indeed but not one to get overly carried away with unless you happen to be a likely target.

However, I do wonder how long it will be before there is a change of tactics once again and these people decide that economic targeting will produce far more publicity and far more devastating results, that will incur far less loss of life (if any) but equally prove to have far less chance of detection and being caught at the time of any act or thereafter.

I am talking about huge sections of pipelines carrying oil and gas from Russia, across Ukraine and serving the EU.

Not only would ad hoc sabotage of these pipelines cause Russia and the EU major headaches if they were carried out often enough as far as energy supply is concerned (not to mention environmental damage), but it would also apply a huge amount of market pressure on Russian economics when market confidence becomes rattled.

Market confidence is a global issue when it comes to oil and thus nobody would escape the aftereffects should this ever happen.  The markets would expect strong and decisive action from Russia in Chechnya, humanitarian groups would be desperately waving the red warning flags over human rights when an undoubted crackdown came from Russia, but where the EU and US leaderships would sit is far harder to determine.  For certain national interests would far outweigh and human rights concerns when it comes to energy and oil.  Interests verses values once again (or realpolitik if you prefer).

Now we may all have our own thoughts about the effectiveness of Russian policy towards Chechen and other separatists regions in the Caucasus,  but this year alone there have now been at least 3 high profile nefarious incidents not only outside Chechnya but also outside the Russian Federation, so the policy of those who carry out such acts, either as a result of Russian policy or as a result of a change of policy by their own processes, would seem to have resulted in an expansion of high profile activity outside the traditionally reported theatre.

If policy is indeed changing, one wonders how long before acts against Russian economics and energy take precedents over current targeting methodology and what effects that will have on the EU and Ukraine in the process.  One hopes that the policy makers, spooks and international policing organisations whilst having a watchful eye on assassinations are also looking at the possibilities that can effect the larger picture.

A difficult situation for Russia and the Caucasus already.  A difficult situation for a much larger geographical area if both modus operandi, targeting and geographical theatres begin to change.

Turning the tide – Ukraine and gas

Well there has been much written, including by myself, over the Ukrainian situation with Russian gas, the pressure the 2009 gas deal puts on the Ukrainian budget and the amount of time before Ukraine can take upstream projects and turn them into downstream production to alleviate this problem.

It is not often I write about rumour, however what I write next comes from a usually very good source and thus I will tell you anyway as it is likely to be more than a rumour coming from him.

Many have questioned what use the Ukrainian Gas Transport System will be to Ukraine if or when Russia builds Southstream and no longer needs to use the Ukrainian GTS.  With no gas and transit fees for Russian gas making its way to Europe and insufficient Ukrainian produced gas for quite a few years to come, what use will it be.

The answer it appears is to turn the tide.  More precisely the answer is to turn the direction in which gas is pumped in one particular part of the system.

The rumour is that Naftogaz Ukraine is going to sign a short term deal with RWE (I used to work for them – RWE Nukem to be exact) and buy gas at spot market prices from the EU and push it back from the EU system via the Slovakian system into Ukraine.

Spot market prices for gas are certainly far lower than the current rate Ukraine pays to Russia under the 2009 gas agreement.

Very good – but the rumour does not end there.

As we all know Odessa is to have a LNG terminal in the near future to help reduce the reliance on Russian gas.  That LNG most likely coming from Turkey which would make sense as it is less than a day sailing away.

In the meantime, it would appear that the Ukrainian government has been talking with Turkey and Bulgaria, Bulgaria having a newly refurbished LNG terminal and gas transportation system.  The plan is to buy LNG from Turkey, ship it to Bulgaria and then pump it into Ukraine.  Both Turkey and Bulgaria are currently happy to do so and assist a fellow BSEC nation.

So there you have it.  Parts of the Ukrainian GTS normally associated with gas flowing from Russia across the country out into Europe will now have the tide turned and gas from Europe (at vastly cheaper spot prices to the 2009 gas contractual prices) will be coming into Ukraine from Europe via the Ukrainian GTS.

Quite how Russia will respond to Germany (via RWE) Slovakia, Bulgaria and Turkey all having a part to play in pumping cheaper gas into Ukraine than Russia does remains to be seen, but credit where credit is due to the current government for managing to pull this off if the rumour turns out to be true.

Oh the tides of fortune in the nefarious energy markets!

As long as Ukraine abides by the minimum contractual amount imported from Russia as per the 2009 agreement, the rest can be bought far cheaper through this arrangement given the current price of gas on the spot markets.

Russian pressure is building on Kyiv

Quite unsurprisingly, with the EU, IMF and “the West” in general suffering from a bout of Ukraine fatigue not seen since the Yushenko/Tymoshenko years,  and with Ukraine tied to a ruinous gas deal signed during those years, Russia with a Presidential election next month, is piling on the pressure and rhetoric at Kyiv.

Back in July 2011 I wrote about trade disputes between Russia and Ukraine building up and amongst the many disputes currently on-going is a cheese war.  Russia has currently banned all Ukrainian cheese and to be honest it is getting the same headline press in Ukraine as the current gas negotiations for which Russia is attempting to drive a very hard political bargain.

Tymoshenko may well have signed Ukraine up to economic suicide when authorising the gas contract between Russia and Ukraine in 2009, but to get out of it, Yanukovych must now commit political suicide.  The price for Ukraine to have gas prices the same as Russian users does not depend upon it surrendering the Ukrainian gas transport system to Gazprom any longer.

The price is now signing up and being a full member of the Customs Union.  To do that would put the long negotiated and soon to be initialed DCFTA with the EU in an exceptionally precarious position if not a completely unworkable position.  Tied to the DCFTA is of course the political Association Agreement which regular readers will know I thought was not a particularly bright idea from the EU side, envisioning the exact scenario we now see unfolding over the geopolitical battle for Ukraine.

Thus far Ukraine has refused to buckle to such pressure, however this week saw the upping of the Russian anti considerably.

I predicted back in January 2010, that the Ukrainian GTS would become an empty and useless system (other than for domestic supply).  Not that it was difficult to predict, anybody who takes an alternative view to Ms Tymoshenko over policy will usually turn out to be right.

Two days ago, to turn up pressure on Ukraine further, Russia announced that the construction of the South Stream gas line will begin in December 2012 and that with it, plus the new working Nordstream plus the recently Gazprom acquired and fully owned Belorussian GTS, will mean that no EU gas will then be transited via Ukraine.

The pressure on Kyiv will now be enormous, as that is likely to be the Russian position going forward for some time.  It would be easy to say, just release Tymoshenko and the EU and IMF will come riding over the horizon to the rescue, however, the latest opinion polls not controlled by the government showed only 30% of Ukrainians believed her jailing was political.  The vast majority according to that poll therefore think justice has indeed been done.  The fact her jailing managed only 2000 protesters would seem to back that poll.

Whilst the international audience may well be happy with her release, the domestic audience, and they are the people who vote, may not be as happy, to say nothing of a large number of MPs.

The important question for the EU, Russia and Ukraine is now whether Kyiv will stay strong or if it will crumble.  It is said in every crisis there is opportunity and this maybe an opportunity for Ukraine to show both Russia and the EU it will not be bullied by either, however the pressure is tangible!

Thus far though, since that Russian announcement, Ukraine seems to be standing strong – thankfully – just the kind of crisis to force Ukraine look to opportunities to move on and become less reliant on Russian gas.

Gas disputes and reduced supply again – Russia v Ukraine 2012 (and the EU)

For once Ukraine maybe well served by having the current hard-nosed power vertical of the Party of Regions in power.

Why? In the past week, Italy, Poland, Austria, Czech Republic, Bulgaria, Greece, Hungary, Romania and Slovakia have all noticed large drops in the supply of gas from Russia.

Needless to say these drops have occurred when nations like Ukraine, Poland and Bulgaria etc have been on the receiving end of -15C temperatures and more during the last week.

Gazprom’s Alexander Medvedev (yes he is related to the current Russian President) has immediately accused Ukraine of using far more gas than it has been contracted to buy, despite Ukraine only a few weeks ago being lambasted by Gazprom for reducing annual usage to 27 billion cubic meters per year, a figure below the 33 billion cubic meters it was contractually obliged to buy under the awful 10 year deal negotiated by Ms Tymoshenko in 2009.

Now which is it?  The breaking of the contract by using less than contractually obliged to do as claimed only 2 or 3 weeks ago by Gazprom, or an incredible 60 billion cubic meters as claimed a few days ago by Gazprom, putting the blame of EU shortfalls on Ukraine over-using gas from the Ukrainian gas transport system?

For once we have a government that has thus far not crumbled to Russian pressure for the past 12 months over all matters gas related to Russia.  Ukraine has a government that has not crumbled under immense EU pressure over Ms Tymoshenko either (rightly or wrongly).  When the Ukrainian government now claims it is not using any more gas that it is contracted to use, I tend to believe them.

Why do I believe them?  Well Poland, who have reported a significant drop in deliveries over the past week via their distributer PGNIG, are not supplied by the Ukrainian gas transport system.  PGNIG is supplied by the gas transport system that passes through Belarus over which Ukraine has absolutely no control.  In fact the Belorussian gas transport system is now completely owned by Gazprom after the Belorussian government crumbled under Russian pressure only a few months ago.

This seems to be a case where Russia would like to increase the pressure on Ukraine via blaming it in a media war for EU gas delivery shortfalls, despite the obvious fact some nations suffering shortfalls are not supplied via the Ukrainian gas transport system at all.

Quite simply, given the cold snap currently being suffered across Eastern Europe and Eastern European EU members, one can simply expect that demand is far greater than the Russian ability to put sufficient gas into the existing pipelines.  It serves Russian purposes to blame the old unreliable transit nation of Ukraine rather than take responsibility itself or declare the system is working at a maximum until new pipelines are built.

Fortunately, the Ukrainian government is not likely to take any responsibility for this and will, one suspects, take a strong position (which they have done already with Russia and the EU over other issues) and stick to their guns very publicly if necessary, denying any wrong-doing.  Avoiding populism and being bullied is one thing the current authorities seem to do rather well (much to the annoyance of both Russia and the EU for different reasons).

Whether there will be any need to robustly and publicly deny taking off more gas through the GTS than is contracted for remains to be seen, as it is unlikely the EU will believe such ridiculous Russian claims when some members do not get their gas via the Ukrainian GTS but are still suffering from lack of demanded gas.

Nevertheless, Ukraine must win the media war if there is going to be one and that is going to be very difficult whilst Naftogaz Ukraine remains one of the most notoriously opaque and political of all State owned enterprises.  When Ukraine will have a government with the balls to split this behemoth up into separate operating divisions and privatise some or all of them remains anyone’s guess, but it is something that needs to happen just for the sake of transparency that shareholders would demand from any IPO.

One thing is for certain, no Ukrainian official will be rushing to Moscow to sign yet another truly awful gas deal because some EU countries are feeling a little chilly and complaining to Ukrainian authorities about it!

Back to the subject of gas – again

Remember this post I wrote from a few days ago?

This reads rather well now and something of a prophesy:

“If Russia was to turn off the taps, the EU, which has done all it can to stay outside this contractual squabble would then be sucked in. The options for the EU would be to either back Ukraine and state the contract is flawed somehow, which would not do the perception of Ms Tymoshenko’s innocence much good, to side with Russia which does nothing for the EU’s geopolitical battle with Russia over Ukraine, or to get involved with a Ukrainian/Russian/EU troika over the GTS which is something the current Ukrainian authorities have been muting for since they came to power with little concrete response from the EU by way of encouraging momentum.”

The options I mentioned above are probably all to the dislike of the EU, however they seem to have taken a public decision on what they are prepared to do.  As usual with the EU, things have to get to the point there the issue is almost critical for it to do anything, but that is the nature of the EU beast.

Only 24 hours after I spelled out the only realistic options for the EU, Gunther Oettinger, the EU Commissioner for  Energy stated the European Commission was willing to participate in the Ukrainian gas transport system upgrade (as well as supporting other Ukrainian energy reforms).

Quite probably the least of all evils given the geopolitical consequences of the only other two realistic options.

It remains to be seen whether this will actually happen, but it certainly now allows Ukraine the possibility of keeping control (if not sole ownership) of its gas transport system with a troika of producer, transporter and end user all involved in the joint venture.

That seems far too sensible a solution both from the viewpoint of politics and cost.  One has to assume therefore that there will be some reason why it doesn’t happen, however we can only hope that by some fluke it gets off the ground and becomes a reality.

Hopefully it will give the current authorities a brace for a backbone that must be close to breaking due to Russian pressure over the issue of the GTS.  Particularly so as this was always the proclaimed hope by the current Ukrainian government who realise that Naftogaz Ukraine cannot continue as it is and must be broken down into component parts and privatised where ever possible.

A golden share or small majority stake in any troika for the Ukrainian State with regards to the GTS is all that is really required as far as Naftogaz is concerned.  There seems to be no other part of the Naftogaz behemoth that should have any State input at all when it comes to energy related national security.

Given that Naftogaaz was further downgraded by S&P yesterday to CCC status, you have to expect that its break-up and sell off will soon follow after agreements over the GTS have been reached between interested governmental authorities.  It is the only asset of the company worth keeping control over as a State for national strategic reasons.

Let’s see how this situation develops now the EU have eventually publicly engaged.

Ukrainian 2012 Budget already unrealistic?

There is a possibility that the Ukrainian budget will not be met already.

The reason as always is gas and Russia.

It is already acknowledged by the government themselves that the budget is ambitious when it comes to the budget cutting.

Now the authorities state that they will cope in 2012 and cite the budget deficit of 1.7% GDP in 2011 as proof of fiscal determination.  Undoubtedly, if 1.7% is true then it is far better than in recent years.

It is also true that the Ukrainian budget was passed allowing for the current, very high tariff it pays to Russia since the 2009 agreement made by the previous government.  Ukrainian/Russian negotiations continue with Ukraine attempting to reduce the tariff without giving much to Russia in return (or at least nothing Russia wants in return).

The Russian pressure on Ukraine to cede partial or complete control of the Ukrainian Gas Transport System is immense with an immediate $8-9 billion price reduction should the Ukrainian government roll over and crumble.

Thus far, I have to give credit to the Ukrainian government for standing its ground and even muting taking the current contract to an independent tribunal for resolution whilst still adhering to such a crippling agreement.  Needless to say, Russia is not overly keen to have the route of an independent tribunal getting involved in a bilateral agreement.

How long Ukraine can withstand such huge economic stresses caused by the gas agreement remains to be seen, but it can’t go on forever.  To be honest I am surprised Ukraine has stood its ground for so long.

The options for Ukraine seem limited.  It has announced it will reduce its importation of Russian gas to 27 billion cubic meters in 2012 which is almost half the usual annual quantity.  This done of course to reduce costs and provide some wriggle room in a very tight budget.

Simple eh?

Well no.  The 2009 agreement obliges Ukraine to buy a minimum of 33 billions cubic meters of gas whether it uses it or not.  This contract runs until 2019.  That additional 6 billion cubic meters of gas is more than small change when Ukraine is paying $416 per cubic meter, a price well above its EU neighbours.

So why has Ukraine stated it will only buy 27 billion cubic meters of gas, clearly in contravention of the 2009 agreement?

Well, despite Ukraine’s seemingly weak negotiating position, should Russia insist on Ukraine paying for the other contractually obliged 6 billion cubic meters it would have to take Ukraine to arbitration.  If Russia will not move on the negotiated price or to a pay as you use amendment, as Ukraine has already muted the idea of arbitration, Ukraine would get what it wants and Russia would be doing something it doesn’t want to do.

If Russia was to turn off the taps, the EU, which has done all it can to stay outside this contractual squabble would then be sucked in.  The options for the EU would be to either back Ukraine and state the contract is flawed somehow, which would not do the perception of Ms Tymoshenko’s innocence much good, to side with Russia which does nothing for the EU’s geopolitical battle with Russia over Ukraine, or to get involved with a Ukrainian/Russian/EU troika over the GTS which is something the current Ukrainian authorities have been muting  for since they came to power with little concrete response from the EU by way of encouraging momentum.

In the meantime, the $800 million gas exploration joint venture between Ukraine and RD Shell breaks ground in Ukraine in the immediate future.  How fast that will come on-line remains to be seen.  What benefits it has to Ukraine given the contractually guaranteed purchase of 33 billion cubic meters from Russia, use or not use, in the immediate future is also subject to conjecture.  Long term it can only be a good thing.

One suspects that there will be a relative push from the Ukrainian government to get as many gas exploration JV’s started immediately to get them on-line long before the 2019 agreement expires if renegotiations fails, the EU sides with Russia over the contract leaving Ukraine with no options other than to honour the contract or simply break it.  If it is to be the latter then Ukraine needs to be in a position to be far more self-sufficient as soon as possible.

In the meantime, Ostchem, a company controlled by Dmitry Firtash, arch enemy of Ms Tymoshenko who duly removed him from the gas-loop as an officially sanctioned intermediary with her 2009 agreement with Russia, has increased gas import into Ukraine by 35% (7 billion cubic meters) at a considerably lower price than that negotiated by Ms Tymoshenko.   I’ll say no more and leave you to think about why Russia would sell to him (and the EU countries) far  cheaper than to Ukraine.

The question for the 2012 budget remains however.  Was it drawn up on the current very high price but with the purchasing of only 27 billion cubic meters of gas from Russia, ignoring the contractual guaranteed minimum purchase agreement, or was it drawn up to meet the minimum contractual necessities by way of price and volume?

As the year progresses and if negotiations don’t progress, I expect we will find out.