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Moscow?€™s New Best Friend

The election of Ukrainian President Viktor Yanukovych has led to a real rapprochement between Ukraine and Russia that has happened far more quickly than anyone expected. We have seen a fleet-for-gas deal and breakthrough initiatives in nuclear energy and the aviation industries. Prime Minister Vladimir Putin on Friday suggested that Gazprom be merged with Ukraine’s national energy company, Naftogaz Ukrainy. These are all long-awaited developments in Russian-Ukrainian relations.

What is behind all of these deals? One motive is to give a boost to Russia’s nuclear industry. Between 2000 and 2009, only two power-generating units went into operation in Russia and two more at the Tianwan nuclear plant in China. And this happened as interest in nuclear energy is falling worldwide.

That could be why there is so much talk concerning the possible consolidation of Russia’s and Ukraine’s nuclear power industries. The talks include the completion of construction of the Khmelnitsky nuclear power plant, an offer of a 25-year contract for the supply of nuclear fuel to Ukraine with substantial discounts, and Russian companies’ access to the development of the promising Novokonstantinovskaya uranium ore deposit.

Cooperating with Ukraine might prove to be not only profitable for but possibly the salvation of Russia’s nuclear power industry. The same may be true of aircraft manufacturing. Although there has been a lot of hype surrounding Russia’s Sukhoi Superjet 100, no aircraft have been delivered. At the same time, Ukraine has already delivered five of its comparable An-148 aircraft and is closer to moving into mass production. It would be illogical to have both players — neither of which is especially strong to begin with — competing on the market at the same time. Under these circumstances, cooperation between the two makes sense.

Regarding gas — Putin’s favorite subject — there may be more advantages to both sides than many people have been led to believe. In securing an extension on its lease of a Ukrainian base for its Black Sea Fleet, Russia did not lower the price of its gas as much is it did prior to Yanukovych’s failed 2004 presidential bid, but it brought the price into line with reality. The price of $230 per 1,000 cubic meters is not the least expensive of all of Europe’s gas suppliers, as critics claim. In fact, that price is 2.4 times higher than the liquefied natural gas delivered by Qatar and Trinidad to Western European terminals. It is therefore better to recognize existing realities and sell gas to Ukraine below the original price but not lower than market prices.

What about Putin’s idea of merging Gazprom and Naftogaz? Critics see this as directly contradicting the European principle of making a transition to spot pricing. That is probably true, but did anybody claim that Russia was rushing to adopt European business practices in the energy sector? Also, it would be better to merge the two companies more or less transparently than to create something like a new RosUkrEnergo company for exports to Ukraine. If Gazprom is Kiev’s main gas supplier and if it wants to preserve that market, then perhaps the proposal is the best option.

The only problem with these deals is that Russian taxpayers will be paying for them, while the benefits will go only to Gazprom and its beneficiaries. In place of gradually making Gazprom accustomed to the possibility of lower prices, Putin offset the discount for Ukraine at the expense of budget revenues. If Naftogaz will be acquired through an exchange of shares, then Gazprom would have to conduct an additional issue. Part of those shares would probably be purchased with budgetary funds — not less than $6 billion to $7 billion so that the state can maintain its controlling stake in the company. And that means we can expect even greater privatization of income and even more nationalization of losses. Russia is shown all too often that it is incapable of acting otherwise.

Although Russia’s politicians are largely motivated by an opportunity to shift public assets into private hands, the two countries are establishing a new, close relationship that promises to earn a lot of dividends for both sides.

Vladislav Inozemtsev is a professor of economics, director of the Moscow-based Center for Post-Industrial Studies and editor-in-chief of Svobodnaya Mysl.

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