Russian-Ukrainian Gas Conflict: Financial Effects of the Russian Side - 2

The state gains in tax collection, but loses more as shareholder of Gazprom

Media reports and political statements of both sides still lack economic analysis of the Russian-Ukrainian gas dispute.

According to official publications, management of Gazprom is aware of consequences of gas price increase for Ukraine. At a briefing on June 7, 2005, Mr. A.Ryazanov, Deputy Chairman of Executive Board of Gazprom, said that the price and the tariff rate were very profitable for Gazprom and there was a good partnership and mutual understanding with Ukraine. The original agreement assumed the price of $80/mcm and transit tariff of $1.75/mcm per 100 km. Later Gazprom and Ukraine negotiated a cut of both the price and the tariff. Mr. Ryazanov said that a shift to European price for Ukraine would mean an increase of transit cost of Gazprom, so calculations of costs and benefits were required. The price increase was required because politicians could blame Gazprom for using dumping price of gas. The Russian state would gain because of a higher export duty.

Source in Russian: Briefing of June 7, 2005

Note that on June 10, 2005, when the transit deal with Ukraine was considered very profitable for Gazprom, the spot price of Mediterranean Russian Urals was $50.28 per barrel. On November 28, 2005, when Gazprom made a statement about increasing the gas price for Ukraine from $50 to $160/mcm, the price of Mediterranean Russian Urals was $49.65.

Our earlier publications give estimations of losses of Gazprom from the Ukrainian price raise. Table 1 gives our preliminary evaluation of the growth of tax collection from Gazprom in case of the Ukrainian gas price of $200/mcm. The table compares it with the case of sales at the cost of Russian gas delivered to Ukrainian border.

Table 1: Change of Tax Collection from Gazprom, $ billion

Case of $200/mcm	2006	2007	2008	2009
Additional export duties	0.86	0.83	0.81	0.79
Additional profit tax	-0.49	-0.46	-0.42	-0.38
Total:	0.37	0.38	0.38	0.41

The case of $200/mcm assumes that Gazprom pays about 0.7 of "European tariff" for the use of underground storage facilities of Ukraine. Formally, Gazprom is not using the facilities now under the special low-cost transit agreement.

Under this case, the state gets additional income with the net present value of $4.1 billion (using discount rate of 10%).

However, the growth of export duties and increase of costs of transit and storage reduce the net present value of cash flow of Gazprom by $9.4 billion. The state as the major shareholder would lose $4.7 billion.

This is not the worst-case scenario of the raise of gas price for Ukraine. The situation for Gazprom can be worsened by introducing the following steps.

(a) payment at European rate for the storage of 7 bcm of Gazprom gas currently stored in Ukrainian underground storage facilities;

(b) chain reaction of increases of price of gas imported from Central Asia and Kazakhstan;

(c) other moves of Ukraine that negatively affect the capitalization of Gazprom.

These negative effects may not be noticed while the European gas price is growing. However, we believe the Russian state sends a signal that the goal of Gazprom is not the profit maximization, but rather tax maximization and fulfillment of political goals of the current presidential administration.

There is one positive effect of the "gas war". RosUkrEnergo, that transfers part of Gazprom profits to Switzerland, is likely to be liquidated.

Mikhail Korchemkin

 

Previous publications on Russian-Ukrainian gas dispute:

Russian-Ukrainian Gas Conflict: Financial Effects of the Russian Side

Brief history of Soviet and Russian gas pipeline policy

Clarifying the math of Ukrainian transit tariff