Ukrainian Government Prepares Public Opinion for Possible Sales of Naftohaz Assets

Ukrainian Prime Minister Viktor Yanukovych hinted on July 8 at an imminent vote in the Verkhovna Rada to allow the sale of assets from Naftohaz Ukrainy to foreign investors. Yanukovych did not name these, but alluded to Gazprom. Indeed, exploratory discussions have taken place exclusively with the Russian government and Gazprom about corporate investment in Ukraine’s gas transit system (Pravda Ukrainy, July 8; Interfax-Ukraine, July 8, 9).

Until most recently, the Ukrainian government and Yanukovych himself resisted proposals for a “merger” of Naftohaz (in whole or in part) with Gazprom, as Moscow demands in return for a second deep discount in the price of gas for Ukraine (the first discount came in 2010 through the naval-base-for-cheap-gas tradeoff). During the last few days, however, the Ukrainian government’s signals have shifted from resistance toward practical consideration of another tradeoff. In line with this change of tone, Yanukovych announced for the media on July 8 that his government considers dividing up Naftohaz Ukrainy into its components, selling off some of them, and launching joint projects with Gazprom for pipeline upgrades and gas extraction in Ukraine. He mentioned the possibility of an initial public offering (IPO) for a 10 percent stake (“to start with”) in Naftohaz, or selling a spinoff from Naftohaz, to raise investment funds for the gas transit system’s upgrade.

The government-connected daily Segodnya had prefaced Yanukovych’s remarks with two news stories (June 29, July 2) about separating the gas transit system from Naftohaz, selling as much as 30 percent of the shares through an IPO, and rushing the necessary legislative changes through the Verkhovna Rada. All this suggests that the president and government have started preparing Ukrainian public opinion for as yet unspecified agreements affecting the future of the gas transit system, Ukraine’s most valuable national asset. Moscow insists on some form of shared control over this system, in return for a second discount on the price of gas.

Notwithstanding the discount in force since 2010, Ukraine is paying $350 per one thousand cubic meters of Russian gas in the current year’s third quarter; it expects this price to rise to $400 in the fourth quarter; and is worried by Gazprom’s forecasts that the price might approach $500 by the end of 2011. The main driving factor is the Moscow-imposed link between the price of the oil-products basket and the price of gas. The surge in world oil prices has found Ukraine ill-prepared to cope with the resultant hikes in the price of Russian gas.

Politically, the Ukrainian president and government must take the interests of two gas-consuming constituencies into account: the interests of energy-intensive industry at all times, and household consumers’ interests at pre-election time. Parliamentary elections are due in 2012, and the ruling team’s political rating is plummeting. In these circumstances, the government has made clear that it will continue subsidizing household gas consumption. This practice deprives Naftohaz of revenues, consigning it to de facto insolvency, and necessitating either external borrowing or asset sell-offs to Russia to finance the gas transit system’s upgrade. Meanwhile, the gas-dependent steel and chemical industries expect the government to work out a price discount with Gazprom and the Russian government.

The government has drafted a bill to allow selling off assets from the state-owned Naftohaz. The governing Party of Regions is certain to support this initiative in parliament. The bill is meant to change the law on the statute books, which bans any form of “alienation” of state-owned energy infrastructure and other energy assets. The existing law meticulously lists all possible forms of “alienation” (sale of such assets in full or in part, rental, lease, concession, trust management, joint use, and other forms), banning them all. Yulia Tymoshenko had drafted and submitted this law to parliament during her time as opposition leader in 2007. The then-governing Party of Regions voted in favor of this law. It was triggered by maladroit public hints from Russia’s then-President, Vladimir Putin, about discussions with Ukraine’s then-President Viktor Yushchenko about allowing Gazprom into Ukraine’s gas transit system. The Party of Regions, however, is now executing a turn-about.

Ukrainian officials’ and parliamentary deputies’ remarks to the media (UNIAN, Interfax-Ukraine, July 1, 5) already reveal three main arguments that will be used for gaining public consent to these changes. First, demonizing Yulia Tymoshenko for accepting the gas price formula in the long-term agreement she concluded as prime minister in 2009 with Putin (the prosecution of Tymoshenko will therefore continue unabated). Second, emphasizing the need for external financing through asset sales in order to modernize the gas transport system (no mention is made of generating funds for the system’s upgrade by discontinuing subsidies to household consumption). And third, rejecting the idea of a “merger” of Naftohaz with Gazprom, only to resort in practice to piecemeal asset sales, or various possible forms of sharing control of Naftohaz assets with Gazprom.