Ukraine will bargain for cheaper gas

UKRAINE expects this week to persuade Russia to cut the price of vital supplies of gas, a key element in stabilising its chaotic economy, but attention will focus on what concessions Russia will press for in return.

Ukraine's new leadership needs a lower price for strategic imports of Russian natural gas to help it nail down the detail of a 2010 draft budget and secure a resumption of credit from the International Monetary Fund.

Russia said on Friday it had agreed to revise the present gas deal with Ukraine, "including on price parameters", on the basis of proposals made by President Viktor Yanukovich.

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Newly-elected Mr Yanukovich, who meets Russia's Dmitry Medvedev in Kharkiv on 21 April when the outline of a new deal should emerge, says the present ten-year agreement signed with Russia early in 2009 exacts an unfair price.

Ukrainian officials say they want the country's total annual gas bill to be lowered by $4 billion and are seeking an average price of $240-260 per 1,000 cubic metres for 2010 to help them balance their books.

The European Union, which receives a fifth of its gas from Russia via Ukraine's pipeline network, has a stake in the outcome since a pricing dispute preceding the 2009 deal left customers without gas for nearly three midwinter weeks.

Any agreement on a new price will be hailed by the new government as a triumph for Mr Yanukovich, who took power in late February only after a bitter campaign that highlighted the sharp east-west division in the ex-Soviet republic.

Since then, he has moved swiftly to repair ties with Moscow which went into cold storage during the presidency of the pro-Western Viktor Yushchenko.

But analysts said that while prime minister Mykola Azarov's government will be able to quickly flesh out a draft budget – a requirement for new IMF credit – it remains to be seen how hard a bargain Moscow will drive, politically and economically.

One sensitive issue is the status of Russia's Black Sea fleet in Crimea, which is part of Ukraine. Analysts say this will be discussed as part of a package of measures, including economic relations.

Russia would like an extension of the lease of the fleet's base in Sevastopol beyond 2017. Mr Yanukovich has hinted he is ready to talk – though Ukrainian officials say they want to raise the rent.

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"Ukraine has many trump cards to play against Russia. One of these is the rent for the Black Sea fleet," Hanna Herman, deputy head of Mr Yanukovich's administration, told the Shuster Live TV talk-show at the weekend.

A wrong move on the issue could, however, draw fire from the political opposition and leave Mr Yanukovich open to accusations of damaging Ukraine's sovereignty.

Kiev has already signalled its readiness to change legislation that forbids the privatisation of its pipelines, which would allow Russia and the European Union to co-manage and upgrade the outdated system.

In addition, it could allow Russia's Gazprom to double its share of the Ukrainian gas market to 50 per cent and to supply its major industrial enterprises in the steel and chemical sectors.

As additional incentives, it could propose co-ownership of future nuclear power reactors to be built by Russian loans, ease restrictions on Russian firms seeking to take advantage of privatisation opportunities in Ukraine and give guarantees for Russian investment.