OREANDA-NEWS. June 08, 2011. “Today we have made an important step toward expanding our bilateral partnership: we signed the ambitious Russian-Ukrainian Economic Cooperation Programme for 2011-2020. We intend to base it on the most promising areas of cooperation. The implementation of these plans will not only strengthen long-standing trade and economic ties but also create new science-intensive high-tech industries,” said the Russian prime minister.
Transcript:

Vladimir Putin: Ladies and gentlemen,

The Russian-Ukrainian Interstate Commission's Economic Cooperation Committee has just finished its eighth meeting. In a very constructive exchange of opinions and information we discussed the entire range of issues connected to our trade and economic relations, and mapped out new areas of cooperation for the development and modernisation of our economies. Our joint efforts helped to ensure a quick recovery from the crisis of previous years. Our trade grew by 62% last year to USD 37 billion, and by almost 70% in the first quarter of this year, as I said during the meeting. We expect it to hit the USD 50 billion mark this year, exceeding pre-crisis levels.

It is important to maintain this momentum and ensure that there is qualitative progress of economic cooperation on the basis of our complementary industrial, research and technological potentials. We must increase our efforts as we launch breakthrough projects, especially in the spheres where our countries have major scientific, personnel and resource reserves. I would like to reiterate in this connection that we are successfully implementing space exploration programmes, and working on the prospects for the joint construction of nuclear power units. We are also extending aircraft-building cooperation and promoting our aircraft in third-party markets.

Ukraine is one of Russia's principal trade partners in the CIS. Russian businesses are investing ever more in Ukrainian industries. I regard the increase of mutual investment as the key indicator of our joint achievements. Joint business projects create new jobs and promote urban development at a new level. That is the human dimension of economic cooperation, about which so much is said.

I would like to note that today we have made an important step toward expanding our bilateral partnership: we signed the ambitious Russian-Ukrainian Economic Cooperation Programme for 2011-2020. We intend to base it on the most promising areas of cooperation. The implementation of these plans will not only strengthen long-standing trade and economic ties but also create new science-intensive high-tech industries.

The committee discussed another essential topic: further integration among former Soviet states. I am confident that we will find the most acceptable options for integration-oriented cooperation – the most lucrative options for Russia and Ukraine.

During the one-on-one talks Mr Azarov and I had, we paid major attention to energy cooperation, particularly in the gas industry.

Russia and Ukraine are well aware of their shared responsibility for the stability of supplies and for the energy security of all of Europe. We have confirmed our determination to closely comply with all the existing agreements concerning both Russian fuel prices and reliable energy transit via Ukraine. I would like to add that Ukraine gained USD 2.9 billion last year, and USD 2.1 billion in January-April 2011 due to considerable gas discounts.

I am confident that today's decisions will open up new prospects for the further development of Russian-Ukrainian relations in every field.

In conclusion, I want to sincerely thank our Ukrainian friends for our talks, which were substantial, business-like and very candid. Mr Azarov and I agreed, as we said at the end of the talks, that we will work to improve the tools of our cooperation. We would like to move forward in certain critical fields – all energy industries, including oil and gas, nuclear energy, and energy transport; space exploration, aviation, and some other fields. To promote this work, we have agreed to improve ad hoc working groups, which will report to us about their efforts within the next three or four weeks. If need be, we will take part in a limited attendance meeting to see what progress has been made on particular projects and what can be done at our level to accelerate them. I hope these agreements will also help us to move forward. Thank you very much.

Mykola Azarov: Thank you, Mr Putin, for your detailed description of the issues we discussed today. I would like to say a few words about our dialogue, which was very interesting. We acknowledged that Ukraine is an important partner to Russia, while Russia is Ukraine's principal trading partner, which accounts for a major part of our trade.

We also discussed our economic interdependence. Ukrainian economic problems might adversely influence the Russian economy, though their influence is likely slighter than the impact that the Russian economic situation has on Ukraine. And we would not want this, as we are eager to see the Ukrainian economy develop. That is our goal, so we intend to be as cooperative as possible. We would like, however, to see Russia understand our problems. That is why, as I analyse the positive aspects of our cooperation, mentioned by Mr Putin, whose opinion I fully share, I would like to highlight problems, particularly in the gas and energy sectors, in spite of how much the Russian side might approve of the agreement on the terms of gas supply – I’m just kidding, Mr Putin.

Vladimir Putin: We are quite serious about it.

Mykola Azarov: From your perspective, it is very good. However, it might result in a wide range of problems. We think that a discussion of this issue is long overdue. At any rate, we should look for mutually acceptable solutions. We have agreed to establish working groups on the critical issues. These groups are to quickly produce practical proposals that would allow our cooperation to reach a new level, and settle some of the problems of our bilateral relations.

Cooperation on such a scale as ours certainly involves issues that need to be discussed. We had a long and constructive dialogue today. I think it was to the benefit of both parties. Mr Putin, I am deeply convinced that this summer will give us enough time to arrive at the solution of all the problems we have discussed.

I would like to thank you once again, and thanks to our colleagues for all their work. I wish you all the best.

Question: As far as I understand, the talks have not brought the parties to a consensus on gas prices. Have I got it right? Ukraine wants the price to be reduced while Russia prefers to keep to the agreements in effect. Did you find a comprehensive plan or mechanism to find a mutually beneficial solution to the problem?

Vladimir Putin: As you know, the seller always wants the highest price while the buyer insists on the lowest. It is always like that, but a dialogue eventually leads to a mutually acceptable solution. Contracts crown such agreements in the modern civilised world. We have a contract. It has been signed and is in effect. We think it reflects both Russian and Ukrainian interests. Do you know that we have made a USD 100 discount for every 1,000 cubic metres of gas as the result of agreements made on the Russian naval base in the Crimea? I have already said that we lose several billion dollars a year through this discount. It is not at Gazprom’s expense but at the federal budget’s because we have abolished export customs duties. The money bypasses the Russian budget to wholly come to the Ukrainian one. True, prices are rising but through no fault of our own. Gas prices are tied in with the world market prices of oil and petrochemicals, whose ups and downs automatically change gas prices. When the prices of petroleum and oil products go down, gas prices plummet with them, and Gazprom does not get the expected profits.

I think I should repeat that this pricing formula was calculated not on administrative designs but according to market laws. It is tied to market quotations at the world stock exchanges, and to oil and petrochemicals. Mr Azarov and I discussed the problem in great detail today. We are willing to discuss it and analyse all options connected with protecting Ukrainian interests. All this is sheer commerce, but we have shown how much the neighbouring countries are paying – just look. However, I suppose that there are other options to allow us to discuss the matter in a dialogue, and eventually make an acceptable decision. One of the working groups which I just mentioned will elaborate on such energy-related problems. However, such work should mainly be conducted at the professional and corporate level.

Mykola Azarov: Should I add anything?

I am very satisfied with Mr Putin’s answer, though I would like to make a comment: for some reason, this ideal formula enables our neighbours to buy gas cheaper than we do. So the formula is not so close to the ideal as it might seem, and the price range is very interesting. I told Mr Putin about a component of this gas formula, which makes 0.1% of the Ukrainian energy balance. We have many things to talk over, and it is very important that Mr Putin has agreed to take up this matter. I agree with him that there should be an expert discussion. Incidentally, he can confirm that I did not ask for any concessions for my country. Right?

Vladimir Putin: What’s this about? The question is disallowed.

Mykola Azarov: I only said that we need a logical approach which my country could understand. You think it is the ideal, while we find it quite far from perfect. We should come to consensus, and that’s all there is to it. Ukraine is not demanding  any concessions! We only want a normal approach that accounts for both parties’ interests, mutual respect and equal cooperation. I am glad that Mr Putin agreed to base our talks on these principles. Thank you.

Vladimir Putin: To be exact, I would like to say that the formula of natural gas pricing used for Ukraine is the one that works for all our European partners. The same formula applies to gasoil, heating oil and other oil products. Now, our Ukrainian friends wish to change the formula and include other components in it. But we cannot apply certain components to Germany, another ones to Poland, these components to Ukraine and those – to Romania. The minister  mentioned gasoil here. I have known him for ten years as a true professional. Now, gasoil prices are tied in with crude oil prices, and fluctuate in the world markets with them. I say all this merely to show that we did not invent the price-setting formula. It fluctuates with crude oil and its derivatives in the world markets. We might talk about what Mr Azarov said, and look around for some other options, in which both sides would see more justice. Be that as it may, this is a universal formula, which is valid for Ukraine just as for any other country. This is a critical matter, and I want everyone to understand it.

Question: My questions concern both prime ministers. Mr Azarov, the first one is for you. When you were preparing for this meeting, you made a statement the day before you departed from Kiev. You said that raising gas transit fees might be one of Ukraine’s arguments. Are you ready to say so to your colleague? Was it mentioned today? Now, Mr Putin, what do you think of such things? It might be a fair arrangement with large fees for the transit of expensive gas. Thank you.

Mykola Azarov: I voiced many of Ukraine’s arguments as I talked with Mr Putin – practically all the arguments from which the relevant working group might proceed. But we use a civil approach to the existing agreement, and as long as it is not revised, we will perform our obligations under it with regard to transit (transit terms), prices, etc. We are performing our obligations and will continue to do so until we agree on different terms. We brought these arguments to the table today, but like I said, this was just a preliminary discussion. Certainly, the experts will analyse these documents in greater detail and discuss the universal applicability of this formula. I believe that the experts should discuss it.

Vladimir Putin: Regarding transit. Like gas prices, transit fees are calculated using a formula that takes into account the pumped volume per 100 km which also depends on the distribution terms. This can be easily calculated. When we signed this contract, we agreed that it would be based on market distribution fees and on European gas prices. We gave a discount the first year, and our Ukrainian partners gave us a transit fee discount, actually leaving the previous year’s transit fee unchanged. Then the price discount expired, and the transit discount followed. The transit fees went up to the same market level pricing that Gazprom uses for all other European countries. The pricing is based on a formula, with no administrative input. Price and transit fees depend on each other. If transit fees start growing unilaterally, gas prices will follow. However, Mr Azarov and I have agreed that we will look into this question in its entirety.

Question: We have heard the Ukrainian government say on many occasions that Ukraine is seeking deeper integration with the European Union. On the other hand, Ukraine has so far been unclear about its stance on joining the EurAsEC integration processes. I am referring to the Customs Union and Common Economic Space. Could Mr Azarov let us in on Ukraine’s intentions? Mr Putin, your comments are also very welcome. Thank you.

Mykola Azarov: Media representatives and colleagues, Ukraine is a large European country… On the one hand, there is a Customs Union in the European Union, on the other hand, a Customs Union represented by Kazakhstan, Belarus, and Russia. They are both functional. Beginning July 1, Russia, Kazakhstan and Belarus will remove customs checks at their common borders and the Customs Union will become operational. A common customs border is already in place in Europe. In other words, Ukraine is facing customs unions on both sides. Is there a need for Ukraine to find its place with regard to these two customs unions? Absolutely, there is.

Russia accounts for over one-third of our trade turnover, and Europe also for about one-third of it. Therefore, it’s very important for us to agree on workable trade terms and conditions. It’s only natural that we consider the issue of establishing a free trade relationship with the European Union. I have commented on this many times. It is also quite natural that the Council of the CIS Heads of Government considered a draft agreement on a free trade zone at one of its sessions. I hope that we will sign this document at or before the end of October.

Now, as for our relations with the Customs Union of Russia, Kazakhstan and Belarus, as you may know, the Ukrainian President came up with a 3+1 formula. In other words, Ukraine will study the agreements underlying the Customs Union and will agree to the ones that will help expedite its trade processes.  

The other day the president signed a decree on establishing a special working group led by the minister of foreign affairs to develop a strategy for our relations with the Customs Union. This work is in progress, and the government will keep  it under constant control. I think we will draft the basics of our relations with the Customs Union.

Vladimir Putin: I will begin with the most basic things. I believe that the Russian and Ukrainian people are very closely related, and the closer they are to each other, the better off they will be. That’s my first point.

Second. Any sovereign country is free to choose the integration space it might want to join. Russia and Ukraine are not exceptions to this rule. This is a decision of the Ukrainian people and of the legitimate Ukrainian government.

Now, as for the practical aspects of the situation: Russia accounts for 34%-37% of Ukraine’s trade turnover. Russia is Ukraine’s largest trade and economic partner. Ukraine is Russia’s fifth largest trade partner. The level of cooperation between our two countries is very deep. None of the EU countries has even come close to the levels we have now.

If Ukraine joins the Common Economic Space, the annualised economic benefit will amount to at least USD 10 billion right from the first year. Instantly. Gas prices have a lot to do with that. And regarding energy prices, we have reached an agreement with Belarus and Kazakhstan that we will move toward establishing common energy prices. We will move ahead slowly, but steadily. They will enjoy Russian domestic energy prices.

Russia is raising its prices to match international rates, less transport expenses and export duties. Certainly, prices will always be lower for Russian consumers than for the Europeans, much lower. The export duty alone accounts for a 30% markup less the transport expenses. On top of that, we also make an exception for individual residential customers.

We just need to sit down, grab a calculator and crunch some numbers. Do these proposals make sense or not? There’s no politics involved in these calculations. We believe it’s good for Russia, but Ukraine must think for itself. Mr Azarov just mentioned the free trade zone. We discussed this issue today, and I told my colleagues honestly that if … I am not saying that this is exactly how it’s going to play out for Ukraine, but if certain export items that are sensitive for Ukraine fail to find their way to the European markets, or, do so in very limited quantities, and Ukraine opens its market to European goods for some reason, then what are we supposed to do? We will be compelled to protect the outer borders of the Customs Union in order to prevent Ukrainian-made goods from infiltrating our markets, because Ukraine doesn’t have markets elsewhere. Europe won’t give a green light to Ukrainian imports, and Ukraine would drown in overproduction. Where do you take all that? Obviously, to our market. That means we will need to do something with this border. You should be aware of this scenario. We should be clear about this upfront so that no one accuses us later of building up our borders. What will we do then? We will have to protect our domestic producers in various economic sectors, that’s what.

I am not trying to bully or pressure anyone. However, we should all be aware of how things might play out and honestly let each other know what to expect. Let me reiterate, no one should ever be forced to do anything he doesn’t want to do. This issue is about a sovereign state taking a sovereign decision. That’s the only way to do. This process may take its course in phases… Ukraine’s president decided to establish this 3+1 group. We spoke about it with Mr Azarov today. We are prepared to join in this work and see what we can do, and consider how Ukraine can join in this process. We will see how things turn out eventually. We will do our best to facilitate this process.

Question: Mr Putin, do you really think it is fair that gas prices for Ukraine are higher than for other European countries though it is located closer to Russia than other European countries? Maybe I’m missing something, but you are saying that fair European market prices are in effect for transit and for gas. Why then are gas prices for Ukraine higher than for other European countries, but transit prices are lower than in the European countries? 

Vladimir Putin: You information is slightly distorted.

Audience remark: Distorted by what?

Vladimir Putin: By transit and gas price indicators. Take a look at gas prices in Poland. Maybe it’s qualified as a trade secret in the contract, but I’m going to tell you that even with the fleet discount, Russian gas costs more in Poland than in Ukraine. Transit prices are also derived from a formula, and they are not lower. There might be an increasing gap between gas prices and transit fees. Yes, the gap might be growing.

Audience remark: By six to seven times…

Vladimir Putin: Transit tariffs in Ukraine are similar to the ones elsewhere in Europe. When we were signing the corresponding agreement with the government of Yuliya Tymoshenko, our Ukrainian partners came up with a condition: if we are going to base prices on a market formula, then transit tariffs should also be based on a market formula. We agreed. This transit fee formula also applies to our European distribution; it has become a generally accepted market formula and applies to all our exports. Take a closer look. Gas prices are higher, maybe slightly, for  major gas consumers in Europe, be it Poland or Germany, than for Ukraine. We have a joint venture with Germany, our key partner. Using a joint venture arrangement we have provided access to gas production to our German partners. Together, we built a pipeline across the Baltic Sea bed (the underwater segment of the project has been completed, by the way), and they in turn gave us access to the German gas transport system. You see? Now we have much deeper integration with Germany than with Ukraine. Gazprom made certain concessions to its German partners under these arrangements, but even so, Germany pays steeper gas prices than Ukraine. Your information is not accurate.

Mykola Azarov: He is right about the transit tariffs, Mr Putin.

Vladimir Putin: No, he is not.

Mykola Azarov: We will discuss gas prices when the commission meets, and transit…

Vladimir Putin: …and transit, too… We should take a look at the formula. Like I said, we had a long dispute. You know, I can feel the political undertow here: whatever was done by the previous government is bad, whatever is being done now is good. It works like that everywhere, and Ukraine is no exception. It works the same way in Russia, the same way in Europe. I can tell you that our disputes with the government led by Tymoshenko were tough, and they posed a very strict condition: if we are to go with market prices for gas, we should also go with market prices for transit. That’s how we agreed. However, it was clear right from the outset (you know what I’m talking about) that the difference will be significant, because transit tariffs cannot be as high as gas prices. Transit just doesn’t cost as much, the formula tells us so. This pipeline doesn’t go across mountains or other difficult terrain.

We have built the Nord Stream pipeline across the Baltic Sea bed in less than two years. It will transport 27.5 billion cubic metres of gas. We will now be able to transport gas without paying anyone. Next year, we will launch another line with a capacity of 27.5 billion cubic metres. That way we will have 55 billion in capacity. Then, we will build South Stream and go transit-free again. Do you see where I’m going? We are trying to bypass the transit countries. We are negotiating pipeline construction with China, and it will be a direct Russia-China line.

However, if there are transit countries, then market gas transit prices must be in place. Transit fees have nothing to do with gas prices. These prices are not interrelated, they take shape themselves based on inner market variables. That was our understanding, we agreed with that, and we decided to go ahead under these conditions. If our Ukrainian partners believe that things should be revised, then we need to sit down at the corporate level, and have the experts crunch the numbers again. We are not against recalculating, we are all for it.

As far as I understand, the issue is not only about transit prices. The overall situation is difficult, I know. Look what is happening to gas and energy prices in Russia. We do have disruptions in petrol supplies in Russia, too. Why? Because global crude prices and prices on petroleum products are going up, and Russian producers want to sell them to foreign buyers at a premium. This causes disruptions in petrol supplies among other things. Certainly, we can relate: these may be rather steep prices. But we are not creating the conditions for higher global energy and oil prices.

Were we involved in Iraq? No, we weren’t. Are we involved in futures trading? Do you know that real commodities account for only 12% of the total oil contracts traded on the futures exchanges? The rest is just paper. Does Russia have anything to do with that? No. Who’s involved in North Africa? Russia? No. Iraq? Not us.

Those are the driving forces behind global prices. We have nothing to do with that, but bills should be paid nevertheless.

Mykola Azarov: Well, Russia is a great country and could have something to do with that.

Vladimir Putin: In what way, Mr Azarov? That’s how the global situation plays out. When prices on our traditional export items (oil, gas, metals, and chemical products) fell during the crisis, and exports shrank, was there anyone out there saying: hey, guys, here’s an extra bonus for you, we know you are going through hard times? No, we had to make do with our accumulated reserves. We had it hard, too.

Let me reiterate: we always try to stay in the real world and we have agreed with Mr Azarov to keep this conversation in mind. We understand the problems and will address them accordingly.

Mykola Azarov: Thank you.