Ukraine links with Russia on energy

The Ukrainian energy sector is mostly state-owned

Ukraine is keen for Russia to participate in the privatisation of its energy industry.

Ukraine's prime minister, Anatoliy Kinakh, on a visit to Moscow said the two countries should participate in each other's privatisation processes and implement serious investment projects.

This is a clear reference to Moscow's intention to allocate credit for the completion of the construction of two nuclear reactors in Ukraine.

Until recently the so-called K2R4 project was backed by the Western banks, primarily European Bank for Reconstruction and Development (EBRD).

The project is part of a deal to close the Chernobyl nuclear power plant, site of the devastating explosion in 1986.

European demands

The two reactors in Rivne and Khmelnytskyi in Western Ukraine are three-quarters complete and are intended to play the role once taken by Chernobyl.

The two reactors are intended to play the role once taken by Chernobyl

But Kiev refused to sign the agreement with the EBRD recently and Ukrainian president Leonid Kuchma called conditions imposed by the Bank "unacceptable" leading to "eternal slavery" for the country.

EBRD insists that Kiev should compile a report on adequate nuclear safety at the plants, provide evidence of the government's solvency, increase electricity tariffs and confirm that other sponsors will help with the construction.

Ukraine says the K2R4 project is overestimated by the Western experts and its real price is merely $600m, almost three times lower than the EBRD estimate.

Risking popularity

But the crucial point is the bank's insistence that Ukraine should liberalise its heavily subsidised electricity market which would lead to a rise in tariffs.

That would be unpopular and politically damaging for the President and the Parliament as elections are looming in four month's time.

Although Leonid Kuchma proposes to renegotiate the conditions with the Bank, EBRD officials have said its members would probably not be willing to do so before Ukraine clarifies its position.

Ukrainian officials think the Bank imposed unacceptable conditions in order to cancel the project after the main aim of closing the infamous Chernobyl station was achieved.

Ukrainian and Russian analysts say that Kiev will accept less strict conditions proposed by Moscow, and that the two reactors will be completed with Russian help.

This swift shift is regarded as another sign of Ukraine's close links to Russia and it's uneasy relationships with the West.

Keeping the West at bay

Kiev still hopes to get the attention of Western companies as Leonid Kuchma encouraged the Government to sell out its stake in regional power grid companies.

Last year a Slovak and a US company bought more than 65% of stocks in eight regional grid companies.

The government is planning to sell controlling stocks in 12 regional grid companies and four energy-generating companies.

But as Russia and Ukraine are close to completing the unification of their power systems and Russian companies are getting more and more active in Ukraine, it looks likely that West will be kept out of the Ukrainian electricity market.