Gas deal: still many things are unclear

President of Ukraine Viktor Yanukovych and President of Russia Dmitriy Medvedev agreed to apply a 30% discount to the price formula for gas imported to Ukraine from Russia. However, according to Astrum investment management experts, the absolute amount of this discount is capped by USD 100 per 1,000 cubic meters. The discount comes into effect as of 2Q10. The parties agreed that Ukraine will import 30 bln cubic meters of natural gas in 2Q10-4Q10 and 40 bln cubic meters in 2011. According to our estimates, the discount for the price formula essentially means that Ukraine will obtain imported gas for USD 233 per 1,000 cubic meters in 2Q10, for USD 245-255 in 3Q10, and for USD 255-265 per 1,000 cubic meters in 4Q10. As Ukraine has already imported as much as 6.5 bln cubic meters of natural gas in 1Q10 at a price of USD 305 per 1,000 cubic meters, the average price for imported natural gas in 2010 should be close to USD 260 per 1,000 cubic meters, up 24% compared to the average 2009 price of USD 210 per 1,000 cubic meters.

What remains less clear is the physical volumes of gas to be imported in 2010. The parties agreed that Ukraine will import 36.5 bln cubic meters in 2010, including the 6.5 bln cubic meters already imported in 1Q10. However, our estimates show that 33 bln cubic meters of imports will be enough for the economy. If the 33 bln cubic meters option materializes, then Naftogaz will have to pay USD 2.3bln less for the imported gas. However, if Ukraine indeed does import 36.5 bln cubic meters of gas in 2010, the total 2010 imported gas bill should amount to USD 9.3-9.4 bln, which is only USD 1.4-1.5bln less than the scenario envisaged according to the previous agreement although Ukraine will import an additional 3.5 bln cubic meters. We think that the latter scenario is more probable and downgrade our external trade deficit forecast for 2010 from USD 2.3bln to just USD 0.9bln. We also adjust our current account forecast for 2010 from a deficit of USD 0.5bln to a surplus of USD 1bln.

The impact of the new gas accords on internal gas prices remains unclear. As the average 2010 imported gas price should still be 24% higher than the 2009 price, we expect that there will not be any significant gas price cuts for industrial consumers. We see the most likely scenario is the freeze of these prices throughout 2010. At the same time, the issue of gas price increases for households and municipal utilities is still high on the agenda. We maintain our view that the government will still have to increase these prices in 2010. However, the government is likely to negotiate with the IMF about a residential tariff increase in 2010 which should be much less than the 95% cumulative growth we previously envisaged. Thus, we put our inflation forecast for 2010 under review.

Portnov becomes Yanukovich's lawyer

Interfax

Ukrainian President Viktor Yanukovych has signed a decree on the appointment of Andriy Portnov deputy head of the presidential administration in charge of legal reform and judicial system.

The decree was posted on the presidential Web site on Friday.

Portnov is a member of the parliamentary faction of the Bloc of Yulia Tymoshenko. He was Tymoshenko's representative at the Supreme Administrative Court in a suit challenging the Central Election Commission's decision to declare Yanukovych the winner of the presidential race.

Couple of words on Ukrainian mobile operators' future

New political order in Ukraine will influence telecom market. In detail, major operators of cellular networks may face changes. In this post, we will cite some thoughts on this matter from Roman Khimich, one of the leading experts in Ukrainian telecommunications.

First, reorganization of system of state regulation of the market is possible. Russian model may serve as an example, where all the regulatory functions are concentrated in one administration for communications. Now local telecom market is regulated by several government institutions, from which national commission for regulating communications (NCRC) and Antimonopoly committee are the most important ones.

Astelit (Life trademark) operator possibly can gain a lot from recent political changes. However, the experience of previous years show that System Capital Management (SCM), who is a stakeholder of Astelit, hasn’t show propensity to influence systematically the government policy in telecom sector. SCM has enough lobbysts but the level of ideas that they offer, to experts’ opinion, doesn’t correspond the role of the corporation that it plays on Ukrainian telecom arena. At least, at present time.

For Antimonopoly committee, hard times has come. It is easy to take some decision that is not favorable for ruling political group. Therefore, we will repeat it again, NCRC will play the prominent role in sector’s regulation.

Yanukovych has started to act

New president of Ukraine Mr Yanukovych has started to act and first he ordered a research or better say an audit of state budget expenditures as well as disbursements from the IMF loan facility. The audit order was given to a consortium of State Prosecutor and the Accounting chamber. President also complained that exporters get their VAT on an ad hoc basis and that the prosecutor should also look into that as well as into all the state officials who do not complain to the law of Ukraine.

All this is to create pressure on Julia Tymoshenko who is still a Prime Minister and refuses to quit. Verkhovna Rada will hold a vote of no-confidence on the governmnet on March 2, which is likely to be successful. So far Tymoshenko has reacted only through convening an extraordinary meeting of the Cabinet scheduled for March 1.

New president was also outraged by the tax administration's idea that the taxes could be paid by firms "voluntarily" 3 months in advance of the due date. Such a method is used by tax authority to manipulate with the cash flow to the budget in order to avoid state coffers getting sort of empty. Indeed, this method shold be avoided if Ukraine is to speak of restoring any kind of fiscal discipline.

Looks like until Tymoshenko is still in CabMin the State Prosecutor Medved'ko will be new president's de-facto both Minister of Economy and of Finance.

Yanukovych - Uncovered

Today I have presented the analytical piece authored by me and my colleague, which analyzes in detail Viktor Yanukovych's possible future steps in Ukriane.

Have a look!

Ukraine's 2010 policies: do you guesswork carefully

Ukraine's elections bring a need for those interested in things Ukrainian to find out "Who is Mr. Yanukovich?" as he is the likely winner of the presidential campaign. Provided Ukrainian parties are build around personalities rather than around policies and ideologies it is very hard to understand as of now what specific stance will be taken by the new president on this or that issue. We are going to devote more attention to specific aspect of future economic, foreign and domestic policies to be expected in 2010. As of now - a a factbox from Reuters on what to expect from Ukraine's election front-runners. Read on under the cut.

Slippery ground of forecasts: 10%, 12% or 15% gap?

We're going to share some rumors. It is hard to come by honest sociology in Ukraine in the wake of presidential elections, so we'll present you the assortment of evaluations, if only to check our sources later on for accuracy. According to pro-Tymoshenko's internal sociology the gap between the candidates will be about 10% in favour of Yanukovich, pro-Yanukovich internal data tells of 12% gap, other "trustable surveys" say that the gap may reach 13-15%. 

We assume that there’s significant probability that Tymoshenko will try to delegitimize second election round. The gap of at least 10% makes it difficult for Tymoshenko to fight for the third round, but even if it is scheduled a miracle is needed for Tymoshenko to win.

Short-term risks for Ukrainian economy still remain high due to increased propensity to resort to radical moves by the two major political groups. Examples are the assault on Ukraina printing house (where voting ballots are printed), Party of Region’s attempts to dismiss the head of police loyal to Tymoshenko, and PoR's pressure on Central administrative court.
 

In case of prolonged political standoff there are risks for the National bank of Ukraine and the whole banking system. Deposits outflow is probable, as well as grivna devaluation pressure and sharp rise of prices for certain food products.

At the same time, we do not forecast the situation to get as radical as it was during the 2004 Orange Revolution.

Gas consortium - a topic for the presidential candidates

Julia Tymoshenko has declared that her idea for the development of the Ukrainian gas transit system is radically different from that of Mr. Yanukovich and Mr. Tigipko. Both Yanukovich and Tigipko said that they support the idea of a gas consortium to manage Ukrainian gas transit system. While Yanukovich was less clear about the membership in the consortium Tigipko was more clear: 50% in Ukrainian ownership, 25% in Russian and 25% in European. That kind of consortium according to Tigipko would guarantee that the consortium is stable and guarantees Ukrainian interest.

In the recent Focus on Ukraine note from German Marshall Fund its Senior Fellow Jorg Himmelreich seems to support Mr Tigipko (or vice versa):

But more than this: the EU should think about buying into or leasing stakes in Naftogaz by the European Bank for Reconstruction and Development (EBRD) or other international financial institutions. Such an EU investment touches Ukrainian sensibilities about its sovereignty, because gas pipelines and storage capacities are perceived as assets of Ukraine’s sovereignty. But the EU stakeholdership should also be seen as strengthening Ukraine’s negotiating position with Gazprom. The European Union as a stakeholder could then enforce the transparency of Naftogaz and Ukraine’s energy sector—and that would unblock Ukraine’s political and economic transformation.

 Recipy from GMF is enticing. Indeed the time has shown that Ukraine is unable by itself to untangle the gas knot named Naftogaz. European and Russian participation in the gas consortium would seem to guarantee the bright future of the enterprise. However, Russia is interested in making its gas more competitive and EU also wouldn't mind cheaper gas. These interests make Russia and EU perfect collaborators in taming Ukrainian side.

Presidential elections: interim reflections

Elections were fair and free. There were not many mechanisms for fraud in the electoral law this time, because both camps of the front runners were not sure that they can exert enough influence to control these mechanisms to their own benefit.

Big surprise was the amount of votes that a relatively "new" face of Sergei Tigipko won - 13%. Former NBU Head and ex-Vice-Prime Minister refuses to ask his voters to support one of the candidates, making a bet on their support during local elections in May 2010 (perhaps coinciding with early parliamentary elections). However, his refusal to support other candidates may be due to his electoral base being relatively new. That is it may not be likely to follow Tigipko's call to support one of the front-runners, but will only deem Mr. Tigipko to be a technical candidate thus reducing trust in him. That in turn can diminish his future May success on local elections.

Certainly, Ms Tymoshenko, one of the front-runners, who loses about 10% to Mr Yanukovich, is in a difficult position. Her chances of victory are slim. One of the interesting scenarios for her would be to step down from electoral battle and to ask her supporters to vote for Mr. Tigipko, thus making him a winner. That would make Tigipko a president, remove Mr Yanukovich from the playing field as well as preserve Yulia Tymoshenko as a Prime Minister of the country - a post that might be prefereable to weak presidential office.  That scenario is just one of the many and is not very likely, but... a really interesting one.

Second round of elections is expected on February 7 with a new president stepping into the office by March 29 should everything go on schedule. It is interesting to note lack of published polls predicting who the victor of the second round may be under different scenarios and what turnout to expect.

Dead gas consortium to rise?

Victor Yanukovich, possibly next president of Ukraine, made a statement regarding so-called gas consortium. According to Interfax news agency he said that he will make a proposal to create a consortium to manage existing gas transit system in Ukraine, and to conduct system’s reconstruction in order to raise the volumes of gas transit.



These goals for the consortium seem to have little to do with reality. First, raising volumes of gas transit doesn’t depend on Ukrainians’ efforts now. Due to economic downturn, the demand for Russian gas in Europe is falling. In 2009, only 95 billions of cubic meters of gas was transported from Russia through Ukraine towards EU, which is 24.4 bns lower than in previous year. Total capacity of Ukrainian gas transit system is at least 140 bns per year. Obviously, it is not necessary to expand these capacities, especially if we consider that Gazprom’s gas production is falling down.

Second. The funniest thing here is that the consortium had already been created long time ago, during late Kuchma’s era. Literally the goal for it was the same. However, the child was born dead – the consortium didn’t manage to fulfill the role of operating center for Ukrainian gas pipeline system.

Post-election redistribution of property: is it coming?

Presidential elections in Ukraine will stop the times of duality in Ukrainian power. The conflict between Orange revolution leaders Yulia Tymoshenko and Viktor Yushchenko are over whatever the result of the election. It is likely that early parliamentary and local elections will cement the victory of a presidential winner, whoever it will be. Once the power gets consolidated in the hands of one political camp the question is - will the other camp suffer or rather how exactly will it suffer.

Certainly, many bureaucrats will lose their positions due to elections (more in case of Yanukovich victory, provided YuliaTymoshenko already controls Cabinet of Ministers and is rather influential with many courts). But it is likely that some property is also destined to change hands. Many oligarchic businesses were built on shaky ground of discretionary bureaucratic decisions with respect to licenses, permits, access to monopolistic markets etc. Those kinds of businesses are likely to suffer after the president gets settled in his or her seat.

One of the likely targets in case of the Tymoshenko win will be Mr. Firtash, who has already lost his intermediary business in gas trade between Russia and Ukraine and is now trying to defend remnants of his business empire. Today OstChem Ukraine publishes a press-release that its stake in Crimean Titan enterprise is under threat due to government's decisions, which may lead to raider attack. Other likely targets of the second round of re-privatization may be in Mr. Pinchuk's business empire.

After Orange revolution Yuliya Tymoshenko has initiated reprivatization process, which came to a halt after a loud sale of Kryvorizhstal' plant to Arcelor Mittal. Kryvorizhstal' was privatized by a consortium of Viktor Pinchuk and Rinat Akhmetov for fraction of the market price.

In case Viktor Yanukovich wins property redistribution may also be likely, but it is less probable, provided his camp has suffered from it in 2005 and ardently protested any kinds of privatization revision. However, being the victim of the process in opposition is one thing - it is much harder to stay away from it once the opportunity is there.

Gas distribution networks - civil gas war

Instead of having a usual winter gas war in Russia Ukrainian authorities decided to move the gas war to domestic terrain this year. The idea is that the state wishes to take control over the gas distribution networks previously rented out by private gas distribution companies - oblgases. January 1, 2010 rent agreements become void and the state decided that it does not want to prolong these agreements that easy. Temporary contracts may be signed, but there is no talk about long term contracts so far. Needless to say that the private owners of the distribution companies are getting the value of their companies diminishing to zero dollars. The big fight between the state and owners is ready to begin.

The management of the gas distribution networks is to be accumulated under the roof of Naftogaz - state monopolist in the gas sector. After that the state will have a second wave of privatization in the gas distribution sector giving long-term management contracts to new firms, or may be will condescend to giving these contracts to good old owners of oblgas enterprises, but on entirely new conditions. Naftogazmerezhi, an enterprise that will now manage all state gas distribution networks, is ready to start a long fight or getting all the networks under its control, with litigation if necessary.

Businessmen like Mr. Firtash, oligarch mainly known for owning intermediaries in Ukraine-Russia trade, may be pushed out of the distribution market. Instead Gazprom is likely to enter, perhaps through new chain of intermediaries. Certainly, the result of the civil gas war in Ukraine will be fully determined by who is going to be in power in Ukraine after presidential elections. Should Yulia Tymoshenko win it is most likley that the state will win the control over the distribution networks and Gazprom is likely to enter the market. In case of Viktor Yanukovich unlikely victory status quo in the industry is likely to be preserved.