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Ukraine flirts with disastrous return to gas price caps

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With a record harvest and high international prices for agricultural products, iron ore and steel, this year is expected to be a year of strong economic growth for Ukraine, but it is not. The International Monetary Fund has just forecast that the global economy will grow by 5.9% in 2021, but Ukraine’s economy is only expected to grow by 3.5%, despite falling 4% last year. For a lagging country like Ukraine with an open European market, a reasonable policy should generate seven to eight percent growth.

Unfortunately, the current Ukrainian government prefers to shoot itself in the foot. Last year it scared off foreign investors by disrupting the energy market. She had promised too many investors high green tariffs, but suddenly concluded that she couldn’t pay. He first enacted lower tariff laws. Then he accumulated large arrears. As a result, Ukraine had negative foreign direct investment, as Ukrainian and foreign investors realized that this government does not offer stable and predictable market conditions.

After wreaking havoc on the electricity market, President Zelensky’s Servant of the People party now appears determined to do the same with the gas market. Faction leader David Arakhamia has offers a law “temporarily” banning private companies from selling gas at commercial market prices.

Indeed, it would mean re-establishing the disastrous post-Soviet subsidy policies that reforms ultimately ended in 2015-16. In this vein, Arakhamia claims that this gas can be used for the benefit of budget organizations, just like in Soviet times. He justifies this policy in a populist way by positioning it as a blow to the main oligarchs who produce gas in Ukraine.

But who would be the real beneficiary? In all likelihood, the biggest winner would be the main Ukrainian gas trader Dmytro Firtash, who knows how to make money in distorted gas markets. Moreover, Ukrainska Pravda recently reported that Arakhamia had made trips to Vienna on Firtash’s private jet in January and February.

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The main victims of this policy are said to be the Ukrainian public. Over the past two decades, many observers have argued that Ukraine, with its vast gas reserves, should be able to become gas self-sufficient within five years. Consumption has fallen dramatically from 130 billion cubic meters in 1989 to the current figure of just over 30 billion cubic meters per year thanks to the closure of inefficient factories, to energy-saving measures. energy and at higher prices. Production, however, has stuck at 20 bcm per year for the past thirty years.

The main reasons for this stagnation are the complex state regulatory processes which hamper the development of national gas production and the inefficiency of the state company Naftogaz. The situation became particularly dire this year, as Naftogaz’s gas production fell sharply due to political chaos among the company’s top management. Fortunately, private producers were able to make up for Naftogaz’s shortfall by increasing their production to almost a third of Ukraine’s total domestic gas production.

The current Ukrainian government has responded by granting almost all of the country’s new gas production licenses to Naftogaz, as it has proven to be the least effective, while offering price caps to private producers to deter them from producing and to invest.

The world is currently experiencing an extreme shortage of gas. At its lowest in March 2020, European gas prices were as low as $ 130 per 1,000 cubic meters. Recently, volatile prices hit $ 2,000 and continue to hover around $ 1,200. Fortunately, Ukraine is well placed with more than 18 Gm3 of storage, which should be enough for the whole winter.

Vladimir Poutine clearly during Russian Energy Week on October 13, that Ukraine should not expect any favors from Russia. “The increase in supply this year through the Ukrainian gas transmission system, beyond our contractual obligations for transit, will be around 10%. We can no longer increase it, ”commented Putin. “It’s dangerous because Ukraine’s transit system has not been fixed for decades. It can explode if you increase the pressure, and Europe will lose this route altogether.

Putin’s claims lack credibility. In 2019, Russia passed 84 billion m3 through Ukraine. The figure was 65 bcm in 2020, but for this year the Russian contract is only for 40 bcm. Russia could undoubtedly transport 90 billion m3 through Ukraine as it did before, but Putin wants to monopolize the transport of Russian gas via Russian-owned pipelines and wants Nord Stream 2 to be certified by the Union. European as soon as possible.

In 2020, Russia exported 130 billion m3 to the European Union. All the current gas shortage in Europe can be explained by the reduction of 44 billion cubic meters by Russia of its transit through Ukraine from 2019 to 2021. This is a major threat to European energy security. and Ukrainian.

In this situation, the Ukrainian government is trying to limit private production and therefore investment in gas by introducing arbitrary price caps. This risks damaging the entire Ukrainian economy and undermining national security.

Anders Åslund is a senior fellow at the Stockholm Free World Forum.

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The opinions expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff or its supporters.

The Eurasia Center mission is to strengthen transatlantic cooperation by promoting stability, democratic values ​​and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East .

Image: An aerial view shows a gas compressor station near Volovets, Ukraine. October 7, 2021. (REUTERS / Gleb Garanich)


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