Attempts to Reform Gas Markets and Why They Failed

Despite the reformist inclinations of the first Kuchma presidency in the years 1994-97, the gas supply problem was not seriously addressed until Yushchenko became prime minister in 2000 and included in his cabinet Yulia Tymoshenko as minister of energy. The irony of someone who had made a personal fortune in this shady business becoming the major reformer of the process has not escaped the attention of observers or the population—nor has the logic of the old adage ‘it takes a thief to catch a thief’. Despite the presumption that she had or even continued to benefit personally from gas trading, she still stands out in the public mind as the only person to have attacked the gas traders, both in 2000 and again as prime minister in the Orange Regime of 2005-2009. Both efforts in the end failed primarily owing to the enormous power that the energy lobby had to resist and curry favour with Tymoshenko’s opponents—including, as noted in Chap. 7, President Yushchenko. A brief resume of the principal actions attempted by Tymoshenko and the key barriers she faced is provided next.[1] [2]

Tymoshenko with Pynzenyk tried in 2000 to achieve three main changes: insist on cash payments including for taxes; eliminate barter in the imports of gas from Turkmenistan; and battle corruption in the domestic distribution of gas. She planned to reform coal markets as well, but this never got off the ground. The new laws and regulations for her main aims were in fact put in place, and early results were significant. Cash payments to Naftohaz increased from 15.8 % in 1999 to 87 % in 2001; cash payments to Gazprom also rose. Barter dropped sharply—though some of this was attributable to the natural evolution of greater liquidity in the financial sector rendering barter trade less profitable. Perhaps the most important purchase of gas began to be carried out directly from Gazprom instead of the intermediary ITERA.11 Planned reforms of the oil market—raising prices to world levels—and in coal markets—removing state subsidies—barely began to have effects. Indeed,

pp. 116-117, 122-135.

all Tymoshenko’s reforms lasted only about as long as she retained her portfolio. Yielding to enormous pressure from the gas-trading lobby (Yuriy Boiko, head of Naftohaz; Firtash, Ukrainian partner in ITERA; and other intermediaries), President Kuchma dismissed Tymoshenko in January 2001. Within a few months it was back to business as usual: intermediaries returned and coal subsidies actually increased. But something was achieved: cash payments were henceforth increasingly prevalent and barter much reduced especially in the oil sector. The special tax privileges that allowed some individuals such as Oleksander Volkov to import cheap oil and resell at as much as double the price were removed, and Volkov went out of business.[3]

Five years later, Tymoshenko resumed the battle upon becoming the Orange prime minister. She reinstituted the prohibitions on barter and eliminated intermediaries in gas imports. But again, echoing the year 2000, this lasted for less than a year, as in September her sharpening disagreements with Yushchenko led to her dismissal and a reversal of energy reforms. While her dismissal is commonly attributed to policy differences on reprivatization and price controls, evidence has been shown that it was precipitated by Yushchenko’s opposition to her actions under pressure from the main gas players like Boiko of Naftohaz, and Firtash. With Tymoshenko gone, they felt shielded by the best of ‘kryshas’, the president of Ukraine. Russia demanded debt payments and increased prices from $50/tcm to as much as $230, and, on 1 January 2006, cut off gas. A rushed agreement between Yushchenko and Putin provided a surprising $95/tcm, but a return to intermediation through a new company, RosUkrEnergo, 55 % owned by Gazprom and 45 % by Firtash.[4]

A third attempt in 2008-2009 again tried to eliminate the intermediary which Yushchenko again opposed. In the ill-fated and controversial agreement of January 2009 that she struck in direct negotiations with Putin, RosUkrEnergo was indeed eliminated and a European-based price formula established. While the elimination of RosUkrEnergo was a great achievement, removing the source of $2-3 billion of rents, it had some serious faults: the base price was far above prevailing EU prices;

the contracted volumes were far in excess of Ukrainian needs; and even the too-low transit fees were reduced.[5] The balance of the gains and losses to Ukraine from this agreement are not easy to calculate, but for Tymoshenko personally it was a Pyrrhic victory as the deal eventually led to the criminal case laid against her by the Yanukovich regime a year later.

  • [1] The interested reader is directed to the excellent analysis of Balmaceda (2013) especially
  • [2] Balmaceda (2013), pp. 116-117.
  • [3] Aslund (2009), p. 138.
  • [4] Aslund (2015), p. 76.
  • [5] The pluses and minuses of this deal are recapped from Balmaceda (2013), pp. 132-159.
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