Gas in exchange for naval base?

[Kshasty]

Protracted talks between Moscow and Kiev on Russian gas prices for Ukraine have produced some unexpected results. Ukraine has received a substantial 30% discount on the gas prices stipulated by the January 19, 2009 contract.

In exchange, the Russian Black Sea Fleet will remain in the Crimea for another 25 years. Top officials do not conceal the fact that the two agreements are linked, as highlighted by the April 22 summit involving Russian and Ukrainian Presidents Dmitry Medvedev and Viktor Yanukovych in Kharkiv, eastern Ukraine.

President Medvedev said Black Sea Fleet and gas issues were only technically linked. "The discount will be applied against Russia's rent for the deployment of its Black Sea Fleet and the naval base in Sevastopol. This is a technical, rather than political link, and involves a financial transaction only," Medvedev explained.

Trading gas for a naval base explains a highly important point. It was the Russian government, rather than energy giant Gazprom, which gave a gas price discount to Ukraine. The 30% discount will be financed out of the federal budget as no 30% export duties will be levied on the exports of Russian gas to Ukraine.

Gazprom, which did not profit from the amended contract, will be unable to manage underground gas reservoirs and will not receive liberalized access to end consumers. At the same time, the company did not lose anything. Although it is quite logical that the state, which has solved the Black Sea Fleet problem, pays the bill, the equitability of this exchange remains in doubt.

Moscow has made a major concession to Kiev, applying domestic market pricing principles to Ukraine. The price is calculated on the basis of the European market minus transportation costs. Gazprom proposes similar pricing policies for the Russian market, albeit with two reservations.

Russia will opt for a pure netback principle, calculated by taking all of the revenues from the gas, less all costs associated with getting the gas to a market. There will no link to the petroleum basket. The difference is not very substantial because gas prices in the European Union are linked to petroleum costs, all the more so as Ukraine is paid for the transit of Russian gas. Moreover, reduction factors 0.6%, 0.7% and 0.9% of equal-profit prices will be applied on the domestic market in 2011, 2012 and 2013, respectively.

Consequently, Ukraine will pay the same gas prices as any Russian region. This is a serious favor. As a result, part of the Russian elite and the public will think that such agreements are an attempt to bind Ukraine closer to Russia. Analysts will disagree on the alleged profitability of such agreements.

http://en.rian.ru/analysis/20100423/158717895.html