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European grip: They are driving Kiev to bondage with cheap gas from Russia

Meter showing how long Ukraine has not been receiving the Russian gas. Source: utg.ua

Ukraine stopped importing gas from Russia 350 days ago, according to a special meter available on the website of Ukrtransgaz, Ukraine’s gas and transport operator. Ukraine’s authorities say ordinary citizens gain from the energy dependence on Russia. Meantime, according to experts and EADaily’s data, European suppliers “skim the cream off.”

“Ukraine buys Russian gas not directly from Gazprom, but from European companies that earn on resale,” says Alexey Grivach, deputy director of the National Energy Security Fund. “Therefore, the statements that Ukraine has lived 350 days without Russian gas is nothing but a PR-campaign, like the slogans on energy performance that allowed the country reduce gas consumption for several-fold. In fact, it was 10%, the remaining was economic crisis.”

According to data received by EADaily, big companies from EU not just resell gas, but are due to become monopoly suppliers of gas to Ukraine. Besides, they received a large access to Ukraine’s domestic market – something Gazprom did not even dream of.

With refusal from the Russian gas, Ukraine launched gas reform. On the one hand, it deprived Naftogaz of Ukraine of its monopoly right to buy gas abroad. As a result, 70% of the 11billion cubic meters of gas imported to the country within 8 months was the share of the government-run company. Private traders procured the remaining. On the other hand, import of gas from Russia is a taboo and suppliers have to deal with the European market only. The situation is in favor of big European suppliers that have long-term contracts with Gazprom. The price of the Russian gas is low enough for the companies to resell it to Ukraine with good profits and at the same time for quite attractive price, which has almost made them gas monopolists in Ukraine. In the period from January to August, French Engie supplied about 3 billion cubic meters of gas to the country, which accounted for one-fourth of total import. The company is Gazprom’s partner on the Nord Stream-2 and increased the Russian gas procurement by 34% in the current year alone. Engie procured gas for $130-$140 per 1,000 cubic meters in summer. In July and August, Ukrainian traders and Naftogaz of Ukraine bought gas for $187 in average. The difference is about $30-$40 per 1,000 cubic meters inclusive of transportation costs. In July and August, Engie supplied about 1 billion cubic meters of gas to Ukraine earning on re-trading nearly $30-$40 million for 2 months alone. In the meantime, Kiev lost at least $20 million, as it could buy gas directly from Gazprom for $167.5.

Another result of the gas reform in Ukraine is free access to the domestic market for any foreign company. Engie proved the first foreign company to enter it. Ukrtransgaz reported in late October that the agreement with the French company will enable it to supply gas to Ukraine independently to resell it to Ukrainian traders and consumers.

“Entry of such powerful European actor in the Ukrainian market is a good signal for other European companies. We are happy to see that the reforms of Naftogaz and the market are bringing the first results,” said Andrey Kobolev, the head of Naftogaz of Ukraine.

Yet, experts are not that optimistic about the situation. They say Engie will earn from the European market, while incomes of Ukrainian companies will decrease. Neither have ordinary citizens gained anything from that.

“In Ukraine the gas market works for industry where price making is linked to the real import prices. It was liberalized. However, Engie’s entry into the market may shatter it, as the French have no limitations for purchase of the Russian gas. This means that they may have cheaper resource and get a solid place in the market,” says Valentin Zemlyansky, director for energy programs at the Center of World Economy and International Relations at the Ukrainian National Academy of Science. Another advantage of the French company is its financial capacity. Gas suppliers to Ukraine are to provide the operator, Ukrtransgaz, a financial guarantee in the amount of 20% of the planned monthly supply volume.

“In general, additional expenses of Ukrainian suppliers of natural gas can be estimated at 2.7 billion hryvnias in summer and up to 5 billion hryvnias in winter. Ukraine’s model of financial responsibility is high for Ukrainian traders and they have to take loans and add the loan interests to the gas price. Big European companies with dozens of millions of euros will have no such problems,” says Dmitry Marunich, Co-Chair of the Energy Strategies Foundation.

In his words, additional income of the French company and consequently the losses of Ukrainian ones after Engie enters the Ukrainian market will be significant. For instance, in July and August, gas supply by the French company cost Ukrainian traders $187 per 1,000 cubic meters in average, while industrial enterprises bought has for $221 in that period.

“Post-taxation profit totaled about 20 dollars per 1,000 cubic meters,” says Marunich. “In addition, the French company will be making little expenses in Ukraine. Essentially, it will keep an office that will sign dozens of contracts and relay papers.”

Actually, entering the domestic market yet in July and August, Engie could earn another $20 million increasing its profits from re-trading of just 1 billion cubic meters of the Russian gas to $50-$70 million. Ukrainian companies, in turn, would suffer $40 million losses from refusing to buy gas directly from Russia.

In Kiev, they say the free gas market will stiffen competition and lead to fair prices, while experts doubt that European suppliers pursue such goals.

“In 2000s, foreign banks entered Ukraine and many hoped for lower interests on loans. Is there a financier that would refuse from extra profits? Therefore, entry of foreign capital into the country has changed nothing for consumers. A similar situation may be observed in the gas market,” Marunich said.

As to ordinary citizens, the only change they may see is the workstyle of the French company in the Ukrainian market, says Valentin Zemlyansky. To recall, Naftogaz of Ukraine sells gas to the population at a regulated price. Gas price has increased 8-fold during the last 2.5 years and there is more to come.

“Ordinary citizens have to pay gas price linked to the import parity. They have no alternative suppliers, and a growth of quotas at European hubs may trigger a new price hike,” Zemlyansky says.

Ukraine may soon turn into a “cash cow” for European companies due to Kiev’s anti-Russian policy and decision to open the domestic market for the EU. Facts show that they are deliberately driving the country to bondage. For instance, this year, Naftogaz of Ukraine received $800 million loans for purchase of gas from the EBRD. One of the loan terms was purchase of gas mainly from European suppliers.

Experts see nothing special in the West’s attitude to Ukraine. They say the EU has always considered Ukraine as a new market for European companies. Therefore, it is not surprising that Europe cares for its business interests first. “This is a story of Luis Carrol about the oyster that was invited to have dinner with seahorse and cook,” Alexey Grivach says for conclusion.

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