Ukraine Enters Final Russia Gas Push as Yanukovych Seeks to Duck ...

Ukraine is entering a final push in
talks with Russia over cheaper natural-gas imports as it seeks
to shore up state coffers without making the increases in
household fuel costs needed to revive a $15.6 billion bailout.

Ukraine must agree on a lower gas price with Russia within
a month or bow to International Monetary Fund demands for a 30
percent jump in household tariffs for the fuel, Deputy Prime
Minister Serhiy Tigipko said Jan. 11 amid signs tensions were
rising in discussions between the two nations. Energy and Coal
Minister Yuriy Boyko meets officials in Moscow today for talks.

Ukraine’s government, which faces $8.2 billion in debt
payments this year, wants to bolster public finances after the
current-account deficit widened and reserves dwindled. While
raising household gas tariffs would reduce losses at state
energy company NAK Naftogaz Ukrainy, higher heating costs may
prove unpopular as President Viktor Yanukovych’s ruling party
braces for elections in October.

“To get through the year, the government must agree on a
lower gas price, sell assets or do a deal with the IMF,”
Barbara Nestor, emerging-market strategist at Commerzbank AG in
London, said Jan. 13. “We expect market pressure to increase on
Ukraine.”

Credit-default swaps to insure the country’s debt against
non-payment for five years have jumped 63.27 basis points this
year to 918.500 points on Jan. 13, the world’s biggest increase,
according to data provider CMA.

Cheaper Gas

Ukraine was granted its second IMF bailout in two years in
July 2010. Having disbursed $3.4 billion, the program was frozen
last March after the government refused to raise household gas
tariffs to trim a budget deficit the Washington-based lender
estimates reached 3.5 percent of gross domestic product in 2011.

Instead, Ukraine wants to reduce the price it pays Russia
for gas by a third to $250 per 1,000 cubic meters, President
Viktor Yanukovych said Dec. 21. Under the current contract, the
price will rise to $416 per 1,000 cubic meters this quarter from
$400 in the previous three months, Boyko said Jan. 13.

OAO Gazprom (GAZP) has sought to acquire Ukraine’s pipelines,
which carry Russian gas to the European Union, in exchange for
cheaper energy supplies, according to Boyko. Belarus reduced its
payments to Russia under a similar deal in November.

“Ukraine won’t consider selling its pipelines,” Boyko
said. “If we find a model that satisfies both sides, we’ll make
a deal. Otherwise, we’ll work under the current contract.”

Public Finances

Ukraine’s economy grew about 5 percent in 2011, the fastest
pace since 2007, helped by a good harvest and exports, Prime
Minister Mykola Azarov said Jan. 11. Growth may slow to 3.9
percent this year, the government forecasts.

The current-account deficit widened to $8.75 billion in the
first 11 months of last year compared with $2.13 billion in the
same period of 2011 because of increased gas imports and strong
demand for foreign equipment, the central bank said Jan. 4.

Gold and foreign-exchange reserves shrank to $30.4 billion
at the end of 2011 from $38.2 billion in August as the central
bank supported the hryvnia. The currency slid to 8.0435 per
dollar yesterday, its lowest level in almost two years.

Without an IMF deal, “the government will have to continue
depleting its limited foreign-currency reserves to meet its
external debt obligations,” Liza Ermolenko, an emerging-markets
economist at Capital Economics Ltd. in London, said Jan. 13 by
e-mail. “With over $50 billion in short-term external debt to
be repaid this year by both the government and private sector
and a hefty gas bill, this is hardly a sustainable strategy.”

Reduced Imports

Ukraine relies on Russia for more than 70 percent of its
gas needs. Should talks fail, it plans to cut 2012 imports to 27
billion cubic meters from 40 billion last year, Boyko said.

That would violate a contract signed after Russia cut gas
supplies to Ukraine for almost three weeks in January 2009,
disrupting deliveries to the EU amid freezing temperatures,
Gazprom said Jan. 12.

Yanukovych says that deal is detrimental to its financial
health. A court in Kiev in October sentenced former Prime
Minister Yulia Tymoshenko, who signed the contract with her
Russian counterpart Vladimir Putin, to seven years in prison for
abuse of office. She denies wrongdoing.

Ukraine may also be able to increase domestic gas and coal
production and shift utilities to coal, saving 6 billion cubic
meters of gas a year, according to Boyko.

Parliamentary Elections

The government has sufficient resources to sustain itself
until the parliamentary elections without turning to the IMF or
raising gas prices, according to Ivan Tchakarov, chief economist
for Russia and the Commonwealth of Independent States at
investment bank Renaissance Capital in Moscow.

“Irrespective of how the negotiations with Russia evolve,
the Party of Regions is not yet in a sufficiently dire position
to surrender to the IMF’s requirements,” he wrote yesterday in
an e-mailed note. “The government macroeconomic and budget
framework is already based on the new high import gas price.”

Support for Yanukovych’s Party of Regions fell to 13.9
percent support in December from 16.6 percent three months
earlier and 39.1 percent in April 2010, the Razumkov Center for
Economic and Political Studies in Kiev said Dec. 27. Backing for
Tymoshenko’s party rose to 15.8 percent from 13.8 percent. The
survey of 2,008 voting-age Ukrainians was conducted Dec. 9-16
and had a margin of error of 2.3 percentage points.

Yanukovych last week ruled out higher household gas prices.
While steps must be taken to address Ukraine’s financial
position, selling the pipeline infrastructure may be preferable
for the president as voters focus on their own fortunes.

“Economic growth won’t catch up with the gas-price
increase,” Alexander Pecherytsyn, head of research at ING Groep
NV in Kiev, said Jan. 13 by phone. “Voters look at their
pockets first of all. They don’t care about gas pipelines.”