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Monday, February 13, 2006

Cabinet Caps Natural Gas Prices at $110, Concerns Persist

Economics Minister Arseny Yatseniuk recently stated that natural gas prices for manufacturers and consumers would not exceed $110 for a period of five years. A special commission would work out specific rates shortly, he added. This rather upbeat statement may somewhat cushion concerns over price uncertainty that have reverberated in Ukraine since New Year's Day. The last wave of concerns to hit the government involved a confidential protocol to the deal between Naftogaz and RosUkrEnergo. Allegedly, Naftogaz had agreed to have RosUkrEnergo rent its underground gas storage facilities at a heavily reduced rate.

The 95/230 quid pro quo deal may have put quite a few skeletons in the closet. The opposition will be there to do the counting. Any smack of a "sweet surrender" on the part of Ukraine becomes campaign fodder. A Rada investigative panel has already subpoenaed Naftogaz records.

Many analysts doubt that the $110 rate, which does not include VAT and transportation fees, will hold for five years. As energy prices climb worldwide by leaps and bounds, pinning hopes on a price break makes little sense. Naftogaz and RosUkrEnergo already offer different interpretations of the deal. At some point in the future, the genie will be out of the bottle. Russia will insist on a price increase, and Ukraine should be ready.

Even hypothetically speaking, a price lock-in would be a bane rather than a boon to Ukraine. It would kill the incentive to modernize and thus would bury the prospect's of Ukraine's economic development. With far too low a price for far too long, why invest in energy efficient technology, renewables, and cutting edge management techniques? The oligarchs would not move a finger.

Somehow, despite the government's best intentions, a low longterm price appears divorced from reality. And the oligrachs counting on "business as usual" are in the business of fooling themselves. A price hike is just a matter of time — and preparation.

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