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April 12, 2014

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I don't think the FT article on the justification for the price hike is totally correct. The 2009 agreement negotiated by Tymoshenko and some of those who are ministers now (some even with the same portfolios as in 2009) saw Ukraine agreeing to to a formula which resulted in them having to pay something like the current price that Gazprom is charging within a few years from 2009. And that was even with the lease agreement for Sevastopol which was to run until 2017. The price was reduced after Yanukovych came to power when he negotiated the Kharkiv Accords which extended the lease until some time after 2040 in return for lower prices. The price was then further reduced by a third in 2013 when Yanukovych balked at signing the association agreement and signed a new set of cooperation agreements with Russia.

Since the current government came into power by overthrowing Yanukovych and basically disowning his legacy then the 2013 agreement between Russia and Ukraine was no longer applicable in terms of the pricing formula. And since the parties which now form the Ukrainian government had been opposed to the 2010 Kharkiv Accords and constantly questioned its legitimacy and constitutionality then in essence they are agreeing that Ukraine must be bound by the 2009 agreement anyway and under that agreement, regardless of the 1997 treaty on Sevastopol, Ukraine would have been paying about $15.18 per MMBTU by now.

What is happening though is that the new Ukrainian government wants to have its cake and eat it too. It wants to move towards an association agreement with the EU and still get the heavily discounted gas that was on offer under the 2013 agreement with Russia (an agreement that the parties now forming the government had opposed when it was being negotiated, signed and ratified).

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