…AND WRECK ATTEMPT AT DECENTRALIZING UKRAINE’S GAS INDUSTRY.

The crisis over arrears to Gazprom also seems to have led the Ukrainian government to abandon its post-1995 attempt at decentralizing the import, distribution and financing of natural gas imports. Gas imports and distribution prior to 1995 had been the sole responsibility of Ukrhazprom, the state enterprise that owns Ukraine’s gas pipeline network. This centralized system did not prevent Ukraine from accumulating $1.4 billion in arrears to Gazprom. The government responded by securitizing these arrears and revoking Ukrhazprom’s monopoly on the import, domestic distribution and re-export of Russian gas.

It was anticipated that tighter financial discipline and competition among gas distribution firms would keep these arrears from reappearing. Were they to reappear, it was hoped that they would be a commercial matter between Gazprom and the Ukrainian importers, rather than a political source of friction with the Russian government. This view was apparent in Ukrainian Prime Minister Valeriy Pustovoytenko’s statement last month that, if Gazprom were not paid by its Ukrainian importers, the Russian firm should take these matters up "with those to whom they sold gas." (See the Monitor, February 25)

As the developments of recent weeks have shown, these hopes have been in vain. Indeed, Gazprom’s inability to settle with Ukrainian wholesale importers has been mirrored by the arrears the wholesalers have accumulated with their retail clients. As of February 20, "purchasers" owed Ukrainian gas suppliers a whopping $3.3 billion: Only 10 percent of the gas consumed by retail users during January and February was actually paid for. (Itar-Tass, Eastern Economist, March 3) The government is therefore reintroducing controls over gas imports, distribution and consumption. According to a document issued by the Oil and Gas Ministry in Kyiv, gas consumption by households, local government agencies and institutions funded by the state budget is to be administratively reduced by 15 percent. The reduction is to be implemented immediately by the regional authorities. Payments are to be settled through special accounts maintained by Ukrhazprom and supervised by the government and the NBU. Regions that do not implement these guidelines will lose access to central subsidies.

Although the parliamentary election campaign and the perennial tensions between Kyiv and the regions are likely to prevent these initiatives from being fully implemented, their promulgation could well mark the end of yet another unsuccessful attempt to marketize Ukraine’s energy sector.

Lukashenka in Iran.