Ukraine LNG Prices Go Through the Roof Following Unbundling, Russian Escalation

As a conflict between Ukraine and Russia may be on the horizon, natural gas prices in Ukraine have gone through the roof.

The risk of war has caused LNG prices in Ukraine to increase five-fold because of the hazards involved in operating in a conflict zone. But gas prices were not always so volatile.

In 2014, during the previous Ukranian-Russian conflict surrounding the Donbas region of eastern Ukraine, gas prices increased around 81 percent according to a report by Bloomberg News that it described as “reaching a level higher than for any European Union nation and increasing the risk of a “gas war” affecting shipments to the bloc.”

At that time, the price paid by Ukraine for Russian gas, $485 per 1,000 cubic meters (mcm), was caused by an annulment of an export-duty exemption for OAO Gazprom in place since 2010. Based on currency exchange rates at the time (.085 USD/UAH), that would equate to about ₴5,705 Ukrainian hryvnia. Currency exchange rates have fluctuated since then and the hryvnia is now worth about 3.5 cents and the 2014 gas price would equate to about ₴13,857.

While that might seem like a lot at the time, Bloomberg considered it to be “going through the roof”, currently gas is being traded somewhere between ₴35,000-₴73,000 per mcm around the end of January according to data from Naftogaz and Ukrainian Energy Exchange (UEEX). This is 7-10 times what it was prior to the 2014 conflict.

The difference being that Ukraine’s gas market had recently been deregulated to access billions in international loans.

Between the two conflicts, Ukraine went through a major restructuring of its energy sector at the behest of the U.S. State Department, World Bank, and IMF. In order to qualify for $5 billion worth of loan guarantees in 2019, Ukraine was required to “unbundle” or deregulate its natural gas market—separating out it natural gas distribution companies from its natural gas producers—as well as a host of other requirements to ensure third party access to Ukraine's gas market, encourage market competition, and ensure the loan would be dispersed properly.

Previously, national companies like Naftogaz produced the natural gas as well as delivered it. While unbundling was passed through Ukrainian parliament back in 2016, it came into effect in January of 2020 despite the pleas of various Russia-aligned members of Ukranian parliament who were against the reforms. Ukraine needed the loan as it was heavily in debt for prior gas supplies.

By June of 2020, the unbundling was hailed as a success by the Atlantic Council. Ukraine was becoming a major hub of natural gas distribution, with significantly higher volumes moving through the country to Europe and elsewhere.

At the same time as the Ukraine-Russia conflict, Russia has been trying to complete its Nord Stream 2 pipeline to Europe, although the U.S. has threatened to stop the project, as well as impose sanctions and military options, if Russia invades Ukraine. The pipeline was expected to lower gas prices to Europe, which have also increased with the heightened conflict.

During the most recent conflict, the U.S. offered another $1 billion loan guarantee with a possible $3 billion loan through the Export-Import Bank (Ex-IM) to cover Russia’s destabilizing effects.

Loan Guarantees and Burisma

In the run-up to the 2020 election in the U.S., President Trump accused then presidential candidate Biden's son, Hunter, of being on the payroll of a Ukrainian gas firm, Burisma, and arranging a meeting between one of Burisma's executives and Joe Biden. The meeting was ostensibly to ensure that the U.S. would only provide the loan guarantees to Ukraine if the Ukrainian prosecutor dropped money laundering charges against Burisma.

While Hunter Biden did work for Burisma, the accusations were widely dismissed as a conspiracy by news outlets at the time, President Biden denied the accusations, and U.S. intelligence believed the accusations to be manufactured by Russia.

At a time, Burisma was controlled by Mykola Zlochevsky who was also the Ukrainian natural resources minister. The money laundering charges against Burisma were centered around millions controlled by Zlochevsky from the sale of an oil storage facility that a United Kingdom court believed to have been earned from criminal conduct. But the case was closed in 2015 because of a lack of evidence that U.K. prosecutors blamed on a lack of cooperation from Ukrainian prosecutors. Representatives for Zlochevsky stated that he never personally benefitted from his time in office.

The Ukrainian prosecutor, Viktor Shokin, was dismissed in 2016 after the U.K. closed its case, and the Ukrainian case was closed by the next prosecutor, Yuriy Lustenko. Based on interviews between both the Ukrainian prosecutors and Rudolph Guliani, Shokin testified that he was let go as prosecutor because of the Burisma case and to ensure the U.S. loan guarantee would proceed.