Ukraine eyes coal after Russian gas price hike

Ukraine's Western-backed leaders scrambled on Friday to find new sources of energy after Russia hiked its gas price by 80 percent in response to the overthrow of Kiev's pro-Kremlin regime. The crisis-hit nation saw the amount it must pay for 1,000 cubic metres of blue fuel soar to $485.50 from $268.50 after Russia imposed two price increases in three days that reflected its deep displeasure with the ex-Soviet nation's new westward course. Energy Minister Yuriy Prodan called the new rate "political" and vowed to explore solutions that included a heavier reliance on coal -- a polluting resource whose consumption has imperilled the air quality of nations such as China. "We are now reviewing our electricity and fuel balance for 2014 with a view of using as much domestic coal as possible at the expense of natural gas," Prodan told a cabinet meeting in comments posted on the government website. Ukraine has relied on coal throughout much of the past century despite efforts by global institutions such as the World Bank to help Kiev phase out its use following independence from Moscow. The International Energy Agency estimates that coal accounts for about 30 percent of Ukraine's total energy supply compared to the 40 percent of the balance assumed by natural gas. - Credit rating lowered - Rating firm Moody's again lowered Ukraine's credit rating by a notch on Friday, citing the "escalation" of its political crisis, and put the country on a "negative" outlook for further downgrades. Moody's Investors Service pushed the country's rating deeper into speculative territory, to "Caa3" from "Caa2" -- a one-notch move matching the rating firm's prior downgrade in January. Three factors which underlie Ukraine's longstanding economic and fiscal fragility drove the downgrade, the rating firm said. The first was "the escalation of Ukraine's political crisis as reflected by the recent regime change in Kiev as well as the annexation of Crimea by Russia," it said, noting that Russia, rated Baa1, is being reviewed for a downgrade. The second was the country's strained external liquidity, given the continued decline in foreign-currency reserves and the withdrawal of Russian financial support and the rise in gas import prices. Ukraine's eroding fiscal strength was the third driver. The risk of further economic sanctions by Russia was also weighing on Ukraine's credit rating. "An escalation of economic sanctions by Russia, with increases in the gas price and potentially escalating to trade restrictions, would also be detrimental to Ukraine's economic outlook, given that Russia accounts for almost all of Ukraine's gas imports, and for around 25 percent of Ukraine's goods exports. "Whilst it is extremely challenging to assess the probability of such an event occurring, Moody's considers it sufficiently material to be a factor in the rating." The nation of 46 million on the EU's eastern frontier is rich in resources but still imports about 30 percent of its needs due to inefficiencies and heavy state subsidies to both households and industries. Ukraine consumed about 50 billion cubic metres of gas last year of which it imported 28 billion cubic metres from Russia -- a figure it would like to reduce despite the penalties this might incur under the terms of its contract with Russia's state energy giant Gazprom. "There is a probability of Ukraine reducing gas purchases from Russia," Moscow's VTB Capital investment bank wrote in a research note. The hike in Russia's gas price to what Ukraine believes is now the highest in Europe is unlikely to hit consumers with full force because of Kiev's continued state subsidies programme. However Ukraine has promised to raise the price households pay for gas by 50 percent in May -- and for heating by 40 percent in July -- under the terms of an IMF-backed austerity programme that could lead to the release of up to $27 billion in global assistance over the coming two years. Russia's new rate is certain to put Ukraine's cash-strapped state energy firm Naftogaz deeper into debt and force the government to use a part of its foreign assistance on meeting payments to Gazprom. "There are very few gas companies in the world that actually makes losses," said the World Bank's country director Qimiao Fan. "Unfortunately, the Ukrainian one is one of them." - European market rates - Prime Minister Arseniy Yatsenyuk said on Friday that Ukraine could receive $13.5 billion in IMF and other aid this year should it quickly pass and implement the required economic restructuring measures. But Yatsenyuk added that Ukraine's economy would still probably shrink by three percent this year -- a figure that also features in the World Bank's updated country outlook. Ukraine's decision to refocus its attention on coal is being accompanied by increasingly urgent efforts to secure alternative supplies of gas. The energy minister said he was negotiating with traders in Poland and Hungary that could use Ukraine's existing pipeline network to ship in limited quantities from the west. "These gas traders are ready to supply gas that corresponds to European market rates," Prodan said. Yatsenyuk added that similar talks were also underway with Slovakia. But Ukraine's decision to reverse the flow of some of its pipelines could further complicate its relations with Russia because Gazprom uses the network to transmit gas to its clients in southern and western Europe.