Ukraine: Mind the Gap

By Conal Campbell of

Ukraine has again made the news in recent weeks with a high-profile deal being signed at Davos with Shell, touted as being valued at as much as $10 bn. {{{*}}} The 50-year production sharing agreement to explore the Yuzivska shale gas field in eastern Ukraine follows other deals with Western majors such as Chevron all seeking to tap into Ukraine’s huge potential as a shale gas producer. That the red carpet is being rolled out for Western investors in the energy sphere is part of a Ukrainian government strategy to demonstrate to Russia that Gazprom could lose its biggest and best customer if last year’s gas price of $425/tcm, which is higher than that paid by EU states, is not reduced.

However, as has been the way with Ukraine in recent months, the situation dramatically altered the very next day after the Davos ceremony when Gazprom slapped Naftogaz with a bill for $7 bn under a “take-or-pay” clause in the two countries’ 2009 gas contract. Kiev had believed Gazprom would not issue the bill for fear of starting a new ‘gas war’ which would cast doubt on Russia’s reliability as an energy supplier to Western Europe but it appears, much like the jailing of Yulia Tymoshenko for signing the 2009 gas contract, feelings on this issue are more motivated by years of personal animosity than by economic logic.  

Away from the energy melodrama, how is Ukraine faring? Fourth-quarter GDP shrank 0.9% leaving the country in recession for the first time since 2009. The authorities are blaming weak steel demand but this reflects the fact the economy is hopelessly dependent on natural resources in the absence of any type of investor friendly environment (being ranked 137th in the world for Doing Business despite having a highly educated workforce and being a democracy on the border of the EU remains truly a perversely amazing achievement). Negotiations with the International Monetary Fund over a third bailout in four years seem on-going but will only serve to kick the can down the road of meeting repayments to the same organisation. With Ukraine’s current account gap equivalent to 8.3% of GDP last year and GDP growth in the best case scenario expected to be less than 2% this year, tension and pessimism seem to be here to stay.

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