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>THEREFORMOFUKRAINE'SENERGYCOMPLEX

>AS APRECONDITIONOFELIMINATING

>UKRAINE'SENERGYDEPENDENCE

Only 16percent ofUkraine'sgas and 13percent ofitsoilisproduceddomestically andmorethanhalf ofUkraine'simportsconsist ofenergy.[i]Most ofenergyimportsoriginate in Russia.Thisenergydependenceupon Russia andproblems topayforenergydeliveriesisperceivedas abigthreat toUkraine'ssovereignty.Unauthorisedsiphoning ofgasdestinedfor Western EuropeurgedRussianGazprom tostartnegotiationsabout agaspipelinebypassing Ukraine.Thiswouldbereave Ukraine of amajorsource ofincome,i.e.betweenonequarter andonethird ofits domesticgasconsumption.

Ukraine'senergydependenceupon Russia andsecuritythreatsinvolvedareinvestigated inthiscontribution.

Itisargued thatwith areform of theenergyeconomy,energydependencewouldbevery limited. Thelevel ofenergydependenceis,amongothers,dependentupon thelevels of domesticenergyconsumption andproduction. Energyconsumptionisvery highdue tolack ofincentives toeconomize onenergyconsumption.Domesticenergyproductioncouldbemoreefficient andmuchmorecheaperifproperincentiveswouldbe inplace. Thepayments crisis and theparasiticrole ofenergytradersconstitute theroot of thecurrentenergy crisis. Theobstacles thatprevent areform of theenergyeconomyare thesame thatprevent Ukrainereducingitsenergydependence.

 

Firstproblems ofenergyconsumption,trade inenergy and theenergypayments crisisareanalysed.Subsequently domesticenergyproductionislookedat.Then theresults of thereform of theenergysector of theYushchenkogovernmentaredealtwith.Finally,energyimports andenergydependenceupon Russiaareanalysed.

1.Wastage ofenergy

>InSoviettimes,enterprises andhouseholdsdidnothaveanyincentive toeconomise onenergyconsumption.Allhouseshadcentralheating andcosts ofheatingwereincluded in theverylowfixedrent. Enterprisesconsumedhugeamounts ofenergy thatwasdeliveredfor averylowpricebecause theSoviet Unionhadenormousamounts ofenergyreserves.Moreover, allenterpriseswerefacedwithsoftbudgetconstraints: the statewouldautomaticallycoverlosses.Itmade theSoviet Unionone of themostenergyintensiveeconomies in the world.

After theindependence of Ukraine thesituationchanged. Ukraineimportedmorethanhalf of theenergy itconsumed andsoon Ukrainehad topay the worldmarketpricefor theoil andgas thatwasmainlydeliveredby Russia.Inthreeyearstime thepricewent upfromapproximately 15percent of the worldmarketprice to the worldmarketlevel.Althoughnot alldeliveredenergywaspaidfor (Russiacontinued tosubsidise Ukrainealthoughregularlycutting ofsupplies) and Ukrainestarted toindebtitself, thechange-overhadanenormousimpactupon theeconomicsituation in Ukraine.Itcontributed to theeconomiccollapse (a 65percentproductiondeclinefrom 1991-1996) andpartlyexplainswhy Ukrainewasperformingsomuchworsecompared to Russia.

Although Ukrainehad topaymuchmorefor theenergy itconsumed, thewastefulattitude ofhouseholds andenterprisestowardsenergyusehardlychanged.Householdsstillgenerallydonothavethermo-regulators anddonothaveindividualgasmeters.

Althoughhouseholdshad topaymorefor theenergytheyconsumedtheywerenotgiven themeans todiminishenergyconsumption.[ii] Thelocalenergyprovidersreacteduponlack ofenergyresourcesbyswitching on theheatinglater inwinter andswitch it offearlier inspringtime.Asfarascut-offsoccurred,theywereusuallyarbitrary andoftennotdirectlyrelated tonon-payment.

Enterpriseshad topaymoreforenergybut thebudgetconstraints ofbig stateownedenterprises andmanyprivatisedenterprisesremainedrathersoft andnon-payment of theenergybilloftendidnotresult incutting off ofenergy.In 2000, 13 000debtorcompaniescontinued toreceiveenergy.On theotherhand, new privateenterpriseshadincentives totakeenergysavingmeasures.

Theindustrialstructure of Ukrainechanged. Theshare ofenergyintensiveindustrieslike heavymetallurgy andchemicalindustryincreased.Heavymetallurgyas ashare oftotalindustrialproductionincreasedfrom 14.4percent in 1990 to 26percent in 1999,mainlyas aresult ofincreasedexports.Thirteenpercent oftotalgasconsumptionisby heavymetallurgy and 11.3percentbychemicalindustry.[iii] Theenergyintensity of heavymetallurgyissuch thatifcosts ofenergywouldbereflected in theexportproduct, itwouldnotbecompetitive.Moststeelenterprisesproducesteel inopen-hearthfurnaces (Martinovens) thatarealreadyseveraldecadesagoabandoned in the Western world.Therefore Ukrainiansteelenterprisesuse up to 60percentmoreenergyastheirforeigncompetitors.However,steelenterprisesdonotpayfor all theenergytheyuse.Thisis thereason that Ukrainiansteelexportedabroadisoftenfacedwithanti-dumpingprocedures.

Although Ukrainiansteelenterprisesoftenmanaged tomakesomeprofit,revenuesarehardlyusedfor newinvestments,amongothers inenergysavingmeasures.

During the1990s Ukrainebecame themostenergyinefficientcountry in theworld.[iv] Internationalcomparison of perkgoilequivalent (USdollars)shows that Ukraineproduced in 1996only 0.5dollarsperkg/oilequivalent,while itwas 3.0dollarsforSouth Korea, 5.4for theNetherlands and 7.0forGermany.[v]

Littlehasbeendonehitherto toreduce theenergyintensity ofproduction.PresidentKuchmacomplained thatthereisnogovernmentalactivity in thesphere ofenergyconservation.[vi]With amoreefficientuse ofelectricity, 20-25percentcouldbesaved on theelectricitybill,according to the EnergyCenter of the European Union, 40percentaccording to the Energy Research Institute of the UkrainianAcademy ofSciences.[vii]Yet,energyintensity ofindustrialproductionhasincreasedduring the1990s,becausegenerally,decline of powerconsumptionhasbeenlessthan thegeneraldecline ofindustrialproduction.In 1994,electric poweruseperunit GDPwas 4-4.5timeshigher in Ukrainethan in Western Europe.This ratiowas 2.5-3times in the1980s.

Nowadays, Ukrainesurpassesvirtually all Western Europeancountries inpercapitaelectric powerconsumption.[viii] Ukraine,with 49millioninhabitants,burns thesameamount ofgasasaffluentGermanywith 80millioninhabitants.

According toO.Khraban, of the Danishenergy-technologyfirmDanfoss, thepotentialmarketforenergysavingtechnologyishuge,but the realmarketismuchsmaller,mostlybecausethereislittleawareness of the problem.[>ix]Thereisalso themisconception thatenergysavingtechnologyisexpensive.

Someenergyconservationprojectsclearlyshow the problem.With thehelp of a USAagency aschool inLvivinsulatedwindows andaccomplishedherewith 43percentenergysavings.Also a newheating controlsystemwasinstalled.Before theupgradehasbeenmade, theschoolpaid 900 000hryvnasmonthlyforenergy,while twoyearsafter theworkhasbeencompleted theschoolpays 544 000hryvnasmonthly. Thecosts of theworkswere 29 000dollars.TwoyearsaftercompletionLvivgot 10 000dollarsback andissaving 5000dollars ayear.[x]

Unfortunately,veryfewinstitutionsfollowedthisexample.Forexample,hospitalsstillspend onaverage 20 to 30percent oftheirbudgetforheating,whileeconomizing onenergycould free moneyforsalaries andequipment.[xi]

2. Energypayments crisis

Energytradeisone of themostprofitable business in Ukraine,despite thefact thatthereis apayments crisis in theenergysector.Officialstatisticsabout thefinancialsituation in theenergysectorarenotreliablebecausemostactorsinvolvedareopposed totransparency.Inmanywaystax-authoritiesarecheated. Thefact thatlargepart ofenergyistraded inbarterdealsmakesenergytradeveryopaque.Bartergivesampleopportunities tosiphon ofprofits andhiderevenuesfortaxauthorities.Thissituationisfurthercomplicatedby thefact thatenergytradersoftenget theexclusiveright toprovideenergy todesignatedenterprises.Thisgivesthem theopportunity tosqueezetheseenterprises,usuallywith thecollaboration ofthesemanufacturingenterprises.

Forexample, asteelenterprisebuysgasfrom atrader thatisimposedupon theenterpriseby politicalauthorities. Thetraderdelivers thegasfor a highprice andreceives inexchange,apartfrom asmallamount ofcash, thelargerpart in theform ofundervaluedsteel.Onpaper, thesteelenterprisepaysonlyforpart of thedeliveredenergy. Theenergytradersells theundervaluedsteelfor alowprice toan offshoresteeltrader,ownedby theenergytrader.Subsequently theoffshore companymakesbigprofitsselling theundervaluedsteelfor the worldmarketpriceabroad.

Onpaper,both thesteelenterprise and theenergytraderaremakinglosseswiththis deal.Onpaper, theenergytraderreceivesonlypaymentsforpart of thedeliveredgas. Thesteelenterprisebecomesindebtedwith theenergytrader.

Inmanycases,steelenterprisesarelossmaking (onpaper) andreceivedirect orindirectsubsidiesfrom the state. Energytradersareoften onpaperalsolossmaking anddonotpayfor allenergydeliveredbyenergyproducers.Often, the statejumps in andsubsidises theenergytraders andenergyproducers. Energytradersoftenboughtfromenergyproducersenergy onloans,guaranteedby the state.When theenergytraderfailed topay, the statepaidback theloan.

Independentenergytraderscanbuycheapgas,forexamplebypayingimmediately incash andbypassingGazprom.According toYuliaTimoshenko, insuch acasegascouldbeboughtfor 25-30dollarsper 1000m3,while UkrainebuysgasfromGazpromfor 80dollars inbarterdeals. Itera, theRussian/Ukrainianjointventurecan,according toher,sellgasat 60dollarsper 1000m3. Theadvantage ofpayingbycashgives thesmall privatetradersenormousprofits. [>xii]

Thewholeset upfavours theenergytraders,not theenergyproducers.AsPresidentKuchmasaid inearly 2000: '>Bygetting hold of andmonopolising the (>energy)market,countlessintermediariesaremakingsuper-profits,lootingenergyfacilities andenterprises.'[xiii]Unfortunately, thepresidenthimselfhelped tocreatesuch asituation.[xiv] Theenergyproducersare all stateowned,therefore the statepayshere thebill.Despite thefact thatenergytradersare thewinners in theequation,theydonotinvest in theenergytransportationinfrastructure,becausenon-reportedprofitsarechannelledabroad. Thedeteriorating state of theelectricitygridgenerateseachyearmore poweroutages. Gasleakageincreaseseachyeardue tobadmaintenance of thepipelinesystem.

Governmentplaced alot ofenterprises andinstitutions on a list ofentities thatcannotbedisconnectedfrom theenergygridunderanycircumstances.Amongtheseare themostchronicnon-payers ofenergy.Thisfurtheraggravates thepayments crisis.

3. Energyproduction

 

>Almosthalf of theenergy Ukraineconsumesisproduceddomestically.Almost allconsumedcoalisproduced in Ukraine.Animportantassetis thenuclear powerstations thatproducealmosthalf of theelectricityconsumed in Ukraine.

Of all Ukrainianenergyneeds, 26percentareaccountedforbyoil, 35percentbygas, 34percentbycoal and 4percentbynuclear power andhydroelectric power. [>xv]

Theoutput ofcoal, themajorpartmined inSouth-Eastern Ukraine,declinedfrom 216milliontons in 1975, to 189milliontons in 1985, 165milliontons in 1990, 84milliontons in 1995 and 81milliontons in 1999.Since theindependence of Ukraine, 1991,coalproductiondeclinedbymorethanhalfwhileemploymentdroppedbymorethanonethird.While thecoalindustryemployed 650 000employees in 1995, thebeginning ofrestructuring, itcounted 410 200employees inJanuary2000.[xvi]

>Table 1 Energyproduction in Ukraine

1990 1995 1999

>coal (>milliontons) 165 83.8 81.7

>electricenergy (>kWh) 298 194 172

>gas (>m3) 28.1 18.2 18.1

>oil (>milliontonnes) 5.3 4.1 3.8

>Source: Ukraine vTsifrax 1999,p. 65

Thelossmakingcoalminingsectorisstillfor thelargerpartnotprivatized andreceiveslargedirect andindirectsubsidies.[xvii]Coalminesarebeingkeptafloat thatproducecoaltwice the worldmarketpricewhileconditionsforcoalminingaredeteriorating,given theprospect ofevenmoreexpensivecoal in thefuture.

Theeasilyavailablecoalhadbeenextractedso thatwhatremainedlay inthin andslopingseems,oftenmorethan 1200metersdeepwitheachpassingyearaveragedepth of thecoalfacesincreasedby 10-15meters.Quality ofcoalwasdeclining.Miningtechnologyisveryprimitive: 75percent of alljobs in theminesaredonemanually (>from themid-seventiesonwardsinvestments incoalminingwerechanneled tootherregionsthanSouthEastern Ukraine).Onethird of theminesismorethan 50yearsold, andsomedate of the19thcentury.Manykeypieces ofequipment,includingonethird of theropeshauling themineelevators,arewellbeyondtheir servicetime.[xviii]

Minersfoundthemselves in adownwardspiral ofdecliningrates ofproductivity andinvestmentleading to theincreasinghazards oftheirwork.In 1998everythousandtons ofcoalcost thelives offourminers.[xix]

The UnitedKingdomproduceswithonly 3.8percent ofminers 57.9percent ofcoalproduced in Ukraine.Laborproductivity of Americanminersis 58.7timesas highas that of Ukrainianminers.Herewedonottakeintoaccount thefact that onaverage, Ukrainiancoalcontains 4000-5000kcal/kg,whileinternationally, 7000kcal/kgisusual.[xx]

Onaverage, in Ukraineproductioncosts ofcoalare 40dollarspertoncomparedwith a worldprice of 35dollars aton,requiringhugegovernmentsubsidies.According to theformer minister ofcoalindustry,MrTulub,coalenterprisesowedlate 1998 8.5billionhryvnas tocreditors and 63percent ofmineswereoperatingatextremelosses.[xxi]

Supportby the stateisprovided tocover '>accountinglosses'whichequals to '>profit onpaper',reducedby thesum ofoperationallosses. '>Profit onpaper'iscalculatedbymultiplyinglistedpricesby thesalesamount,providedbyfinancialestimation.Infact, the realprice ofcoalsoldby theminesismuchlessthan thelistedprice.Thatiswhy themineswhichfulfiltheirproductionplancannotcover theoperationcosts,evenwhensubsidizedby the state.

Wellfunctioningminesarepunishedbysiphoning offprofitswhilebadlyperformingminesarerewardedwithsubsidies.InDonetsk,fiftypercent ofmines, alllossmaking,produceonly 15percent ofcoaloutput.Theseminestake,however, twothirds of allsubsidies to thecoalminingsector.[xxii]

Alot of (>expensive)coalisconsumedbyelectricity powerstations.There theeconomicsituationisdisastrousasmanyclients,includingindustrialclients,donotpay, orhavebigpaymentarrears.In Ukraineas awhole,only 7percent ofdeliveredelectricityispaid incash,halfispaid inbarter, and therestisnotpaidforat all (>1999).[xxiii]Electricitytariffsarestillbelowcostprice.Ontop of that,governmenthasdenominated 645000energyconsumersasprivilegedenergypayers. Thegovernmentdoesnotcompensate theenergyenterprisesforthesediscounts.[xxiv]As aresult,electricity powerstationsdonotpayfor alargepart ofcoalsupplies.

Also,big stateenterprises,likecokes andsteelenterprises,consume alot ofcoal thatisonlypartiallypaid.

End 1998, 60percent ofpaidcoalswaspaid inbarter,downfrom 77.5percent inearly1997.[xxv]InJanuary/February 1999,just 20percent ofcoalsold toconsumerswaspaidforusingcash.Thiscontributed towagearrears.

Privatemiddlemensellingcoal,keeponethird of theproceedsfromcoalsales,according tofederaltaxpolice.[xxvi]

In 1998 amiddlemansold 6.3millionm3gas toKrasnodonugol, alocalmining companyat aprice of 88.7dollarsper 1000m3.However,othersupplierssoldfor 66dollars. Gassoldatauctionssoldevenlower.However, in 1998Krasnodonugolshipped 33, 457tons ofcoal to themiddlemanfor atotalamount of 564 722dollars.[xxvii]

Anotherexample: afiscalreport ofgovernmentdated 1998,showed thecase of amiddleman whosold apiece ofmachinery to aminesixtimes themarketprice.[xxviii]

Itmeans that theperformance ofcoalminesis onpaperworsethan itwouldbe in asituation of opencompetition.Ofcourse,otherfactorsareinvolved,suchashidden and open statesubsidies, thatmakesanassessment of theperformance ofcoalminesevenmorecomplicated.However,is itsafe tosay thatwith theelimination ofcorruption in thecoalsector,manymorecoalmineswouldbeprofitable andless statesubsidieswouldbeneeded.

>Animportantmineralresourceis themethaneaccumulatednearcoalseams.Estimates ofreservesvaryfrom 1 to 20trillioncubicmetres (>depending on thedepth ofoccurrence). The problemis thatbiginvestmentsareneeded toextractmethane. Foreigninvestorscoulddo thejobbutarenotinteresteddue tobadinvestmentclimate inUkraine.[xxix]

Ukrainiangasconsumptionwas 90billionm3 in 1999. 18billionm3wasdomesticallyproduced.Within Ukraine the stateowned companyNaftogaz,founded in 1998 tounite all stateoil andgasenterprises,isresponsiblefor allgas andoilextraction. (5-96).

Early 1998, thegaspricewas 83dollarsforindustrialconsumers and 66dollarsforbudgetaryorganizations andhouseholds.VonHirschhausencalculated thatundercompetitiveconditions thepricecouldbe 40percentlower.Onecostfactoris thesalaries ofworkers in the Ukrainiangassectorwhereemploymentis 20 to 30timeshigherthan incomparablemarketeconomies.[xxx]Bymid 2000, thegasmarketwasdividedamongNaftogaz and 10 privatefirms whoaccountedfor 80percent ofgasturnover.All privatefirmsdependedheavily ongovernmentprotection.[xxxi]Naftogazsupplies alargepart ofgasconsumed in Ukraine.However,only 34percent ofgasispaid, 11percentispaid incash.[xxxii]As aresult,Naftogazaccumulatedhugedebtswith thegovernment.

Ukrainehassixoilrefineries,four ofwhichhavehaltedproduction,due toinsufficientsupplies ofoil. Onlyhalf of therudeoilisrefinedintobenzene,diesel andothercleanfuelswhilehalf of itisforwarded tothermal powerstationsforfuel.Withmodernrefiningmethods 80 to 90percent ofcrudeoilcouldbetransformedinto highqualityfuels.[xxxiii]

>Abouthalf ofUkraineselectricityisprovidedbynuclear powerstations.As all powerstations,theyarefacedwithnon-payment of theenergybills.Thisresulted,amongothers, innon-payment ofwages,lack ofinvestmentfunds,lack offundsformaintenance andevennon-payment ofsuppliedfuelsfrom Russia. The Ukrainiangovernmentsought toremedy thesituationbydesignating themostliquidindustrialenterprisesasprivilegedcustomers ofEnerhoatom, thatis theumbrellaorganisationfor allnuclear powerstations in Ukraine.Itwasargued that insuch away,Enerhoatomcouldgetcashpaymentsfordeliveredenergy andsogenerate thecashneeded tobuyfuelsupplies inRussia.[xxxiv]Thisdrainedliquidconsumersfrom thethermal powerstations.

However,Enerhoatomisstill inbigfinancialproblems.Thisispartlyrelated tocorruption inEnerhoatom.VicepremierTimoshenkoaccusedEnerhoatom ofembezzlement.[xxxv] Aministry'sreportcalculated that 40percent ofEnerhoatom'scostshadnothing todowith theactualproduction ofenergy.[xxxvi]Intermediarycompaniessupplyingnuclearfuelcharge 30percentcommission.Also, 23percentcommissionischargedforsendingspentfuel to Russia.Also,Enerhoatomsuppliedelectricityfor 20percent of themarketprice.[xxxvii]According topresidentKuchma,Enerhoatomprovided in 1999intermediariesworth 1.5billionhryvnas (>approximately 300milliondollars)worth ofelectricityat aonethirddiscount.[xxxviii]Timoshenkoaccused Ukrainian Creditbank ofsqueezingEnerhoatombylevyinganinterestrate of 1percent adayforloansprovided toEnerhoatom.[xxxix]In 1999,Enerhoatomrecorded a 1.4billionhryvnasloss thatwascoveredby the state.

Thesituation inthermal powerstationsisevenworse.Theyaremostlybuilt in the1950s and1960s andalreadypassedtheiranticipated service life.Operatingexpensesareveryhigh.[xl]Increasingly theelectricity powerstationsareoverloadedwith theresult thatnuclear powerstationsareautomaticallyswitched offdue totoolowfrequency in theelectricitygrid,As aresultthermal powerstationsareevenmoreoverloaded andforced tocut offenergysupplies topart ofcustomers,especially in thecountryside.In Kharkiv, the secondtown of Ukraine,electricityiscut offtwice orthreetimes aday.[xli]

Ageneral problemwithenergyproducersis that Ukrainedepends onformerSovietrepublics,primarily Russia,for arange ofelectricitytransforming andtransmissionequipment,units ofrefineryequipment,pumpingstations andparts ofnuclearreactors. Thedisruption of theSovietdivision oflabouraffected the Ukrainianenergycomplexverymuch.Forexample,uraniumisextracted in Ukraine, itisprocessedintofuelfornuclear powerstations in Russia,thensent to Ukraine.Subsequently, theusedfuelisagainsent to Russiaforprocessing.

Theconclusionis thatenergyproducersaresqueezedbyintermediaries anddonotgetincentives toinvest. Areformedenergysector andbetterinvestmentclimatecouldlead tolesssubsidies andturninglossmakingenergycompaniesintoprofitableones.Insomeareas,likemethane andnuclear power,productioncouldbeenhanced.Toreplace thenuclear powerstationChernobyl, two newnuclear powerstationswillbefinished, inRivne andKhmelnytsky,with Westernhelp.

4.Reform of theenergysector

Itwasmainlyunder thepressure ofIMF, World Bank andotherinternationalfinancialdonors, that thegovernmentunderPrimeMinisterVictorYushchenkoembarkedupon areform of theenergysector inearly 2000.Surprisingly, itwasYuliaTimoshenko,head of United Energy Systems of Ukraineduring 1995-1997, whobecame theviceprime ministerresponsibleforenergy.WhilebeingPrimeMinister,PavelLazarenkogave United Energy Systems in 1996monopolyrights and ataxbreakforfiveyears.Thisgave the company andLazarenko, whoisnowprosecuted in the United Statesfor moneylaundering,hundreds ofmillions ofdollarsprofit.

Theenergysectorreformwasaimedatboostingcashreceiptsfor theenergyproducers anddistributorsbyforbiddingbartertrade andforcing thesettlement ofenergydealsthroughspecial,governmentcontrolledaccounts in theOshchadbank.AllconsumersmustdepositelectricitypaymentsintospecialaccountsatOshchadbank.Subsequently thecashisdistributedamongoblenergos andenergygenerators.[xlii]

Theimpact ofthesereformsisdifficult toassessgivencontradictory informationfromgovernmentsources.WhenTimoshenkopresentedbeforeparliamentfiguresaboutpayments in theenergysector, inOctober 2000,shetoldparliament thatcashpayments ofenergyconsumersincreasedconsiderablysince theonset ofreforms.Sheclaimed thattaxauthoritiesreceivedmuchmore in 2000compared to 1999.However,theseclaimsweredeniedby thetaxauthorities and acommissioninvestigatingtheseconflictingclaimscame to theconclusion thatTimoshenkomisinformedparliament.Itwasstated thatpayments to thebudgetfrom theside ofactors in theenergyconsumersdidnotincrease in 2000.Debtforelectricitydeliveriesrose in 2000,according totaxauthorities. [>xliii] Theconsumerdebt toNaftogazwas upfrom 2.6 to 4.4billionhryvnas in thefirst 9months of2000.[xliv]Electricitysuppliedby stateownedgeneratorswasonlyhalfpaid incash

Conflictingfigureswere,amongothers,based on thefact thatTimoshenkoallowedoblenergos tooffsetdebtsowed toenergyproviderswithtaxdebts oftheseenergyproviders. TheCabinet ofMinisterspermitsmutualsettlements ofgovernmentfinancedentities'energydebts.[xlv]Also,governmentorderedOshchadbank toprovidegovernmentbackedloans tooblenergos toallowthem topayforenergysupplies.Inthisway, thepaymentsrecord ofoblenergoswasartificiallyboosted. The World Bankexpressedconcernaboutthis.[xlvi]

Moreover,YevhenMarchuk, thedirector of thenationalsecurity service,accusedYulyaTimoshenko thatsheusedcredits ofOshchadbank topurchaseexpensiveenergyfromoffshorecompanies.[xlvii]

Oblenergosstarted topaymore toelectricityproviders,butdonotcollectanymorefromtheircustomers.[xlviii]WithLvivoblenergo. thecollectionrateincreasedfrom 60 to 70percentfrom 1999 to 2000.However,therearecashflowproblemsbecause ofincreasedpayments to theenergyproviders.Therefore,thereisless moneyforsalaries andbasicsupplies.Formerly,energyproviderswerepaidwithgoods andpromisorynotes.

Theenergyproducersprofitedfrom theenergyreforms andreceivedinitiallymorecash thatwasused topaywagearrears. Thefinancialsituation ofcoalminesimproved.Cashpaymentsforelectricitysuppliedby stategeneratorswas 50percentpaidfor incashduring thefirstninemonths of 2000,while itwasonly 19percentduring thesameperiod in1999.[xlix]Governmentfiguresshow that, onpaperatleast,losses ofcoalminesgraduallydiminishedover thefirst 10months of 2000 andturnedintoprofits inJuly andAugust.During thefirstthreemonthsapproximatelyhalf of allpaymentswas incash,butthis ratiodeclinedsubsequently toapproximately 8percent inOctober 2000. Theshare ofmutualsettlementrose to 10-20percentduringJuly-October 2000. Theshare ofbarterrosefromapproximately 50percent of allpaymentsduring thefirstthreemonths of 2000tillapproximatelythreequartersduringAugust-October2000.[l]

Also, itseems thathouseholdsarepayingmore, Thepopulationpaid 75percent ofhousing services inJan-Sept 2000,while itwas 48percentfor thesameperiod in 1999.However, insomeoblasts,like Kharkiv, thecollectionratewentdown.[li]

Onepart of thereform of theenergysectoris theprivatisation ofoblenergos.Early 2000sixoblenergoshavebeenprivatised.However, theeffectwas thatprivatisedoblenergospaidonly 7percent ofdeliveredelectricitywhile stateownedoblenergospaid 60 to 98percent (>alsowithhelp of thegovernment-seeabove).

Energorynok, thatgot therole of stateownedelectricitywholesaler andoverseeer of theelectricitymarket,profitedfrom the newarrangement.

Theban onbarterhit theenergytraders whobasedtheirshadowyprofitabledeals onbartertrade.Manymembers ofparliamentderivedprofitsfromenergytrade andenergytradersfinanced there-election ofpresidentLeonidKuchma.Therefore theenergyreformswereundercontinuousattack andreformeffortswereunderminedby the statebureaucracy andparliament.Moreover, thejudiciaryfailed totacklecorruption in theenergysector.YuliaTimoshenkocomplained that thegeneralprosecutorfailed toinstigatecriminalproceedingsagainstembezzlement in theenergysector.[lii]

Generally, thesituation in theenergysectorcontinued todeteriorate,owing toinsufficientliquidity and politicaldisagreement.Inautumn 2000, Ukrainiangovernmenthad toresort toexternalborrowing tosecureenergysupplies. 100milliondollarswasprovidedby the EBRDfor thepurchase offossilfuels,while 300milliondollarswasprovidedby thebank Credit Suisse First Boston. [>liii] Totaldebts of thefuel andenergysectorincreasedduring thefirst 9months of 2000by 1.1billionhryvnas andtotalled 13.6billionhryvnas inOctober 2000. [>liv]

Poweroutagesareoccurringmorefrequently,oftenblamed onbadweather.Largepart ofcustomers in Ukraineisregularlydisconnectedfrom theenergysupply.

AlthoughTimoshenkourgesforenhancement ofpaymentdiscipline,shesaid thatshewouldnotallowelectricitycutoffs to thepopulation.[lv]Thismayberelated to thefact thathouseholdsarenot theworstoffenderswithrespect tonon-payments ofenergy.Neverthelesselectricitycutoffsoccurred,forexample in Kharkiv.

Also, 42percent ofenergyindebtedenterprisescontinued tofunction.[lvi]

Theposition of thethermal powerstationsworsenedastheywereforced topaymoreforcoaldeliveries.As aresult,theirpaymentsforgasdeliveriesworsened.InSeptember, Iteratold thatthermal powerstationspaidforonly 27.4percent of thegassupplied.[lvii]

Nevertheless,Timoshenkoclaims that,due tomorecashpayments. 178milliondollarshasbeenpaidforfreshfuelfornuclear powerstations, andhalf of thegasdebtforTurkmenistanhasbeenpaidwhile thedebt to Iterahasbeenslashedbymorethan 40percent.[lviii]

Although theenergyreformwashalfhearted andobstructedbymany in theenergysector,oligarchs whomadetheirfortuneswithenergytradefeltthreatened andtried toundermine theposition of theYushchenkogovernment andmore inparticularYuliaTimoshenko.Herhusbandhasbeenarrested,beingaccused ofembezzlement.Also, theRussianprosecutoropened acaseagainstherinvolvingbribes indealingwithRussianofficials.Thisisnoticeableas ithappenssomanyyearsafter theassumedbribingtookplace (1996).Someargue that Russiaisnotinterested inenergyreforms andmarketorientedreforms in Ukraineasthismayallow Ukraine toturn to the West. Theargumentis that Russiacanbetter dealwith anon-reformed Ukraine.

Theattempts toreform theenergysectorshow howdeeplyrootedvestedinterestsare thatprofitedfrom thenon-reformedenergysector,based onbartertrade.

5. Energyimports

During the1990s, onaveragehalf ofdomesticallyconsumedenergywasimported andbetween 35 and 50percent ofimportsconsisted ofenergy,mainlydeliveredby Russia.

During 1991-1994, Ukrainehadgreatdifficulties inpayingfordeliveredoil andgas and Ukraineaccumulateddebtswith Russiadespite thefact that Russiacontinued todelivergas andoilbelow worldmarketprices and onfavourableconditions.Nevertheless, Russiatried touseitsleverage andlinkedenergydeliveries to politicaldemands,especiallyduring 1993-1994wheninterruptions ofenergydeliveriesled toclosures ofenterprises andschools.October 1993, theenergy crisishadforced theclosure ofhalf ofKyiv'sindustrialenterprises.Through thewinter of 1993-4,most publicbuildingswerenotheated,moststreetlightswereturned out and Ukrainiantelevisionbeganoperating on areducedschedule inorder toconserveenergy. [>lix]

In theearly1990s, Ukrainiangovernmentputpriority indevelopingcoalmining andnuclear power inorder todiminishenergydependence.

Ukrainiansdecidednot togive in toRussia'sdemands andrefused,amongothers, thehandover of amajoritystake in thetransitgaspipeline.Frommid 1994 thesituationbegan tostabilise and Westernlending to Ukrainehelped Ukraine inpayingitsenergybill.Especially the USArealised that Ukrainianindependencewasatstake.In themeantime, Russiaenhancedfurther theprice ofdeliveredgas. Theaverageprice ofRussiangasincreasedfrom 45.2dollarsper 1000cubicmetres in 1993 to 80dollarsper 1000cubicmetres in 1996.

Ukrainedidnotreactbyreforming theenergysector anddespite Westernassistance,difficultiesarosearoundsecuringenergysuppliesfrom Russia,although Russiawaspressedby the West tobelenienttowards Ukraine. Russiaacceptedbarterarrangements thatwerenotalwaysfavourablefor Russia.

Gazpromaccepted in 1994 and 1995settlement ofgasdebtsworth 1.4milliondollarswith thedelivery ofpaper.[lx]Later,gaswasdelivered inexchangeforelevenstrategicbombers and food.Paymentarrearswereaccepted.

Thefee Russiapaidfor thetransit ofRussiangashaddeclinedsince 1996 tooffset adrop ingasimportprices.[lxi] Ukrainian servicesurplus in 1999hadfallenbymorethan 50percentsince 1996.

Since theadvent ofpresidentVladimirPutin, inDecember 1999, Russiabecamelesslenienttowards Ukraine anddemandedhigherpricesfordeliveredgas.Promptcashpaymentwasexpected.Also, avalueaddedtaxwaslevied on theexport ofoil andgas (a 30percentexciseduty ongas,per 1June 2000). Russiaprotestedagainst theunauthorisedsiphoning ofgas.Russianviceprime ministerViktorKhryshenkocomplainedabout thefact that 'Russiapracticallysubsidises Ukrainianindustry'.[lxii]

According to mediareports inMarch 2000, Russiaproposed in thenegotiationsaboutsettling theoutstandinggasdebts, tooffsetdebtswithstakes instrategic Ukrainianenterprises.According to theEastern Economist,Russianviceprime ministerKasyanovhandedover a listwith Ukrainianenterprises.[lxiii]InDecember 2000,thisissuesurfacedagain.

Itbecamemoredifficult tonegotiate asettlementaboutgasdeliverieswith Russia. Themainnegotiator in 2000wasYuliaTimoshenko. United Energy Systems, thatsheheaded in 1995-97,hadanoutstandingdebtwithGazpromworth 334milliondollars.As a minister,Timoshenkotried tosettlethisdebt.

From 1999onwards, Ukrainesiphoned oflargequantities ofgasdestinedforCentral, Western Europe andTurkey.According toPresidentKuchma,during thefirstninemonths of 2000, 700millionm3havebeenstolen [>lxiv]Itcausedgreatproblems.Altogether,for 1.4billiondollarsworth ofgaswassiphoned of in 1999.

Forexample, in 1999,Turkeygot 40percentlessgasfrom Russiathanforeseen. Threebig powerstationshad to stopworking andbigindustrialenterpriseshad tointerruptproduction.Turkeyprotestedwith the Ukrainiangovernment.[lxv]

At thesametime, Ukrainecontinued tore-exportgas.In 1999, 8.5 ofUkraine'sexportsconsisted offuels. Ukraine Russiaprotestedagainstthisre-export (17November 2000).

Ukrainiangovernmentwasunable toprevent theunauthorisedsiphoning ofgasbyNaftogaz,despite thefact that Itera,anUkrainian-Russianjointventure,got theexclusiveright tobuygasfromGazprom. Ukrainereachedanagreementwith Russia thatsiphoned ofgaswouldautomaticallybeadded to the statedebt ofUkraine.[lxvi]

Ukraineresponded toRussia'sdemandsbytrying todiversifygas andoildeliveries.Thiswasdifficultbecauseearlier Ukrainefailed topayforgasfromTurkmenistan.May 1999Turkmenistanhaltedgasdeliveries to Ukrainedue tonon-payment ofgasworth 315milliondollars.Mid 2000,PresidentKuchmasecured agas dealwithTurkmenistan, tobedeliveredthrough agaspipelinepassing Russia.Underthis deal,formergasdebtsweresettled and newgaswouldbedeliveredbyimmediatepayment incash,goods andinvestmentprojects,throughNaftogaz. (40percent incash, 60percent ingoods andinvestments).[lxvii]

InDecember 2000 ithasbeenagreed inMinsk that in 2001 30billioncubicmetres ofgaswillbeprovidedby Russia (>includinggasdeliveredastransitfee) andanother 30billioncubicmetresbyTurkmenistan.Turkmenistanisinterested injoining theGUUAM group,consisting of a group of CISstates thatwant todistancefrom Russia (Georgia,Azerbaizjan,Moldova, Ukraine,Turkmenistan).On theotherhand, Russiafoundedrecently theEurasianEconomicCommunity,consisting of Russia,Belarus,Kazachstan,Kyrgysistan andTajikistan.

Russiaresponded to thecontinuingstealing ofgasby Ukrainebyproposing agaspipelinethroughBelarus,bypassing Ukraine.Re-routinggassupplies to Western EuropethroughBelaruswoulddeprive Ukraine oftransitfees,worthonethird of thenaturalgasconsumedby Ukraine.Itwould italsomakeeasier tocutgassupplies to Ukraine alltogether.Nowadaysthisisverydifficultgiven thefact thatgasdestinedforcustomers in Western Europehas togothrough Ukrainianpipelines.

Ukrainereckonswith theco-operation ofPoland thatisinterested indiminishedRussianinfluence inCentral Europe.However,alsoPolandsufferedfrom thestealing ofgasby Ukraine,destinedforPoland. The European Unionexpects adoubling ofgasimportsfrom Russia and EUfirmsareinvolved inplansfor a newpipelinethroughBelarus. Thepipelinecouldbelaidwithin twoyears.Itmeans thatwithin twoyears Ukrainecouldbefacedwith aloss oftransitfeeworth 18billioncum3annually.

Hitherto, itseems

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