Ukraine hooking up on Russian nuclear energy, too?

Last week the talk was of Russia settling some of the long-running tensions between the two post-Soviet countries by offering a 30 per cent discount on natural gas supplies from Gazprom. The main concession asked of Ukraine was a lengthy extension of the Russian Navy’s lease of a strategic Black Sea port.

Then on Monday night, Russian prime minister Vladimir Putin made a “large-scale offer” to Ukraine to merge their nuclear power generation businesses. The FT reports:

“At issue is large scale co-operation between our nuclear sectors. We are offering to establish a major holding, which would unite our generation, nuclear engineering and nuclear fuel cycles.”

“If Ukrainian specialists find this to be too revolutionary, then we could act in phases,” Mr Putin added.

The offer came not only on the eve of the 24th anniversary of the Chernobyl disaster, but after a day of testiness in Ukrainian politics over last week’s gas announcement.

Several commentators have pointed out that Russia would receive a fairly big commitment on security in exchange for what amounts to a modest discount on gas.

Steve LeVine notes that the strategic questions around the deal – particularly the NATO angle – are less interesting than the fact that the price itself on offer from Russia is so poor.

As spot gas prices fall, long-term contract are looking increasingly poor, and Ukraine’s agreements with Russia are no exception.

The discount of 30 per cent off Ukraine’s Gazprom gas supply contract through 2017 may sound significant, but former Russian negotiator for Chevron and Center for Strategic and International Studies senior fellow Ed Chow writes (H/T LeVine) that it is not so impressive:

The $330 per 1,000 cubic meter price we are told Ukraine would have had to pay for Russian gas this quarter is higher than the Russian gas sale price to Western Europe today.

A price of $230 would be closer to the European price after accounting for transportation cost differential between Ukraine and West European destinations. It is still higher than current spot gas prices in West European markets. So the “30 percent discount” of 2010 is just as phony as the “20 percent discount” of 2009.

There is no price discount, but a normal price that Ukraine should have been able to negotiate without undue concessions.

However Ukraine is not in much of a position to argue. As the FT’s Tony Barber wrote, “The prospect of cheaper gas was too enticing to refuse.  The Kremlin spotted its chance and went for it.” The issue, he adds, is not Ukraine cooperation with NATO, which is unpopular, but the country’s connection to the EU.

Pro-Western elements of Ukraine’s government are vowing to stop the passage of constitutional changes needed to let the Black Sea deal go through.

Yanukovich and some economists argue that the savings the deal will generate will make it easier for Ukraine to obtain badly-needed loans from the IMF. Whether the IMF agrees is yet to be seen.

Related links:

Gazprom’s Nord Stream and South Stream are go, but are they needed? FT Energy Source
Behind the nuclear resurgence - FT Energy Source
Gazprom’s quest for world domination - FT Energy Source

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