SNAP ANALYSIS: What does Russia's gas cut-off mean for Ukraine?

Thu Jan 1, 2009 9:58pm EST

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(Reuters) - Russia cut gas supplies to neighboring Ukraine on Thursday after a row over unpaid bills and prices, raising the specter of supply disruptions to the European Union.

What does it mean for Ukraine, already hit by a sharp economic slowdown, weak currency and political instability?

* Ukraine has plenty of stored gas. Ukraine's state energy company, Naftogaz, says it has 17 billion cubic meters in storage, 22 percent of Ukraine's annual consumption. It says intermediary RosUkrEnergo has a further 11 bcm.

* Higher gas prices would be negative for current account, closely watched by investors after the hryvnia currency suffered steep falls in the recent months against major currencies. Higher gas prices mean Naftogaz would have to buy more dollars to pay for gas, adding to pressure on the hryvnia.

* A gas price hike could hit the profits of major industries. However, Ukraine actually needs less gas now as the economic crisis has reduced industrial energy consumption by 25 percent. And many of the country's biggest metals producers -- the drivers of Ukraine's economy -- use coal instead of gas.

* Price hikes would strain Naftogaz finances even more in a year in which it has to repay a $500 million Eurobond. The company avoided technical default on the bond only two days ago when it published its 2007 audited accounts -- one of the conditions of the bond. Default would lead to far more expensive foreign debt for Ukrainian companies as well as the state.

* Higher gas prices will eventually feed through to Ukrainian households, who are already facing rising unemployment and lower wages, though prices are subsidized heavily by the government.

* Politicians may have to take unpopular decisions, such as raising gas bills, as they gear up for a presidential election in 12 months. Yushchenko and Prime Minister Yulia Tymoshenko, at loggerheads for months, are expected to stand.

* Relations with Russia could dominate the political agenda and deflect attention away from dealing with the economic crisis. It is unclear how the gas row will affect the longstanding conflict Yushchenko and Tymoshenko.

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