December 21, 2013

What Was Signed on behalf of Ukraine in Moscow on the 17th of December 2013?

The fact that the signature under the Appendix of December 17 to the Contract for the Supply of Gas dated 19 January 2009, put a cross on modernization of the Ukrainian economy up to modern standards has been discussed a lot, so there is no need to speak about it all over again.

The fact that having signed the Appendix, they put a cross on our opportunities in the Energy Community, which Ukraine is going to head from s January 1, 2014, has also been mentioned by all who are not lazy.

No one also explains and does not know what to do with the Instruction of the President of Ukraine of August 22, 2011 “On Prevention of the negative impact on Ukraine's economy of a significant increase in the price of imported natural gas”, where in black and white is written about the need to reduce the consumption of natural gas. So what to do now with statements of Ukrainian Ministers about the plans to increase gas imports? Is the Minister not fulfilling the President's Instruction? Or is just saying one thing and doing another?

But now about the Appendix itself:

About the Appendix to the “gas” Contract, or at least what we know from the media about it, — not all, as not all has been said.

Firstly, the Appendix is not being publicized.

The surroundings of the guarantor, in particular the Government of Ukraine, even does not thinks that hiding the Appendix from their own people (even under the guise that it's supposedly “trade secret“) deprives them of their right to criticize “paperedniks“ ( predecessors) for having not shown the Contract in 2009 to the President of Ukraine and people. Then, in 2009, it was someone from Gazprom that did it — sent by fax to the Secretariat of the President the Contract with Appendixes and signatures. Why? Presumably, the Kremlin did it with good intentions, guided by special “friendly feelings to Ukraine. Maybe such is the scheme of pulling a fast one? It is no secret that the Contract is of 19 January 2009. And only later, in 2009, one of those involved in that process did confirm it. The same fate befell the “Kharkiv Agreements “and the Appendix of 17 December 2013 — “the fruit of creativity of the Kremlin”. Our experts on the “gas deals", diplomats, etc. were not even let to them! Everything was done by Russians.

Secondly, the formula has not been changed.

After signing in Moscow on December 17, 2013 of the Appendix to the “gas” Contract of 19 January 2009, it took the Ukrainian President 3 days to eventually let the citizens of Ukraine know (immediately after the talks in Moscow, the president of the other country told about them!) that the formula for calculation of prices has not been changed because the guarantor hopes that at some point of time, before the ending of the Contract in 2019, oil prices will fall to 80 U.S. dollars, or even lower. In this case, the formula that ties the gas price to the “oil basket”, will allow to make a quite low gas price. At this, it did not even occur to the guarantor that the price of the “oil basket“, at least until 2019, is not going to fall to 80 US dollars. A lot has been written about this, including in his native Russian. In particular, in the researches of M. Baykov and R. Hrynkevych from the Institute of World Economy and International Relations of the Russian Academy of Sciences in Moscow. The guarantor's environment even did not suspect that in this way they have accepted the formula, which they so bitterly have been criticizing since January 2009. So the formula turns out great!

Thirdly, the formula provides for replacing the gas with other energy carriers which is not correct for Ukraine.

In particular, among the parameters in this formula of the price there are such energy carriers, which have not been used in Ukraine since long ago (such as gas oil).

Fourthly, the not fair for Ukraine basic price of 450 US dollars has not been changed.

So what for have they been criticizing the four above-mentioned points for nearly five years?

A rhetorical question arises: when were you, the current authorities, sincere? Now, or when you were criticizing, or never?

So it turns out that nothing in the Contract has changed significantly, except for some introduced quarterly index by which the price of gas in the first quarter of 2014 has to be 268.5 US dollars per 1,000 cubic meters. Then it should be reviewed quarterly. It seems that the presence of this factor, in particular, its value depends on the mood in the Kremlin. It does not say what to do if the parties do not agree on it by the end of the quarter — if at some point, for example, in March 2014, one of the parties does not agree with this artificial index for April — June 2014? What to do then? To jump to the formula without the index — that is, should everything remain as it was, — not to Ukraine's favour? Does the price stays as it was in the previous quarter? Or what? What is then the role of the formula? Is it all written in the Appendix? Would it not have been simpler to reduce the base price — then the price would not depend on the mood, or names?

In a word, it is difficult to understand what the Ukrainian side has reached.

However, it is easy to understand what the Kremlin has reached having signed the Appendix to the Contract:

Apart from the “short leash“, by which the current government in Ukraine is tied up to the Kremlin, having introduced the incomprehensible to anyone, quarterly index, the Russian side has gained two important victories:

Firstly, nothing has changed for Gazprom as far as the Contract of January 19, 2009 is concerned. On the contrary, having signed another Appendix, the Ukrainian side has actually again (after the Kharkiv Agreements and payments for the overpriced gas) legitimized the Contract itself. Now it will be more difficult to write off onto “paperednyks“ (predecessors) their own mistakes in the Ukrainian economy.

Secondly, having reduced the gas price to 268,5 US dollars, the Russian side has approached the average price for the piped, in particular, Russian natural gas. Before that, the Russian side had received from Ukraine at least 20 billion dollars in overpayments at inflated prices. This is confirmed not only by comparing the prices for us and other Europeans, but by the words of the current Prime Minister of Ukraine. So the Kremlin has a place for “friendly” gestures for Ukraine, worth 20 billion!

Thirdly, Gazprom retains a monopoly at the largest gas market in Europe — in Ukraine.

Fourthly, the Russian side has received legal guarantees for a monthly fee for supplied gas and has lost nothing. While dictating to “Naftogaz of Ukraine“ obviously inflated prices, Russia has actually began with delays getting paid for gas (in particular, this was confirmed by the scandal about August non-payments and September underconsumption).

Fifthly, Gazprom has received a real judicial perspective everywhere, including in the Stockholm arbitration. In case of unreasonably inflated prices, this just never happened. Possibly this was the reason why Gazprom did not bring Naftogaz to court, but simply put before Ukraine accounts for unexplained debts, for example, of 7 billion US dollars.

So the Russian side has again totally beat us by having signed the Appendix? And we unfortunately are accepting it.