 Washington DC, January 3, 2006 - Raising the price Ukraine pays for its gas imports from Russia and other suppliers to bring it closer to international levels makes economic sense in the long-term, but any price hike should be staggered in a way that avoids undue economic hardship and is affordable for consumers, according to World Bank assessments of Ukraine’s energy sector.
The Russian gas company Gazprom has demanded that Ukraine immediately raise the price it pays from $50 per 1,000 cubic meters to $230.
“While Russia has a legitimate expectation of securing international prices for the gas it exports, the four-fold increase being proposed in the price of gas sold to Ukraine would cause significant economic damage,” said Peter Thomson, Sector Director for Infrastructure in the World Bank’s Europe and Central Asia region.
“A phased approach with incremental price increases would avoid the adverse economic consequences of an overnight hike.”
 According to a Bank study published in December 2005, Ukraine’s economy could adjust to a gradual increase in the price of imported natural gas over a two year period.
The study posits that an increase in gas prices from the current US$50 per 1,000 cubic meters to $200 would amount to a terms of trade loss of about 7 percent with a negative current account impact of 3.5 percent of GDP. This would be a major blow to some enterprises, notably in the petrochemical, metal and coal sectors. But overall the economy would adjust, according to the study.
The Ukrainian government and the state-owned gas company Naftogaz, have been working since the mid-1990s on establishing financial viability in the gas sector and on ensuring that transit rates ensure a reasonable rate of return. In support of this exercise, the World Bank has undertaken several studies analyzing Ukraine’s vulnerability to energy price increases and outlining options for better managing the gas sector.
Read Ukraine: The Impact of Higher Natural Gas and Oil Prices - December 2005 (Chapter summaries and PDF files).
And: Ukraine: Challenges Facing the Gas Sector - September 2003 (Chapter summaries and PDF files).
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