Ukrainiana

Pricing and Pacing: What Does It Take To Modernize Ukraine's Industry Without Crippling It?

Immediately after UkrGazEnergo, the joint venture between RosUkrEnrgo and Naftogaz, came into being, both parties issued contradictory statements. Naftogaz prided itself on having clinched a deal that had fixed the $95/230 rate for five years. RosUkrEnergo countered that the rate would fluctuate starting with July 1, based on market conditions. So, the question still remains: What does the future hold for Ukraine? How long and how much?

The government struggles to keep the gas issue in good shape. A number of issues such as the deal's monopoly effect, price uncertainty, and corruption associated with RosUkrEnergo have become hot campaign issues. Critics argue that the government is trying to put a good face on what looks like a can of worms.

They say the government has been overgenerous in giving RosUkrEnergo the benefit of the doubt. A company pursuing profit maximization would be loath to burden itself with a 5-year price commitment in a market of rising prices. Those who aim to ride the crest of public opinion by promising a price rollback if "rapport" with Russia is reistablished go even further in misleading the public. As Russia's partners in Ukraine fish for votes, gas makes a good bait. But let's face it: Once the bait is swallowed, there will be no rollback. There need not be. Whoever swallows the bait will be toast, game over. Nor would a cheap price do Ukraine any good, except for the oligarchs.
In the "one company, two stories" puzzle, the question boils down to this: Will the price be high enough to hasten modernization and low enough not to drive the industry bankrupt? Several scenarios merit discussion.

"Too low, too long." An unlikely scenario, will have the oligarchs stick to their guns. Modernization will end up on the backburner. Little investment in energy efficient technology will be forthcoming. The good old boys will keep their old ways, and the whole country will suffer as a result, mired in economic retardation. The more inert the environment, the less innovative the enterprise. And the less innovative the enterprise the more vulnerable it becomes. Should the rug be pulled out from under it, this might be a ticket to the boneyard.

"Too high, too fast." Not an unlikely scenario, may drive the industry bankrupt. Friends come and go, but interests remain. Stabbed in the back, Russia's erstwhile friends, the oligarchs, will have to throw up a white flag. A blowout sale will follow, and Russia will stock up on Ukrainian industrials. Consider it a "scorched earth" policy to make up for Ukraine's impending NATO membership. The best hedge against this scenario is being ahead of the game. To stay in business tomorrow, the oligarchs should start modernizing today. Better safe than sorry.

Somewhere in between these two scary tales falls a relatively high but measured price. Neither amnesia nor paralysis will catalyze Ukraine's modernization. Without having its industry crippled, Ukraine needs core, not cosmetic, changes.

That's why a "sit-back-and-relax" price should not be toyed with, nor should a "swallow-and-die" price be waited for. Get up and go. Don't count on the dice to tell you the price. Set your pace before the price comes blowing in your face.