NAK Naftogaz Ukrayiny is paid for its transit services not in hard currency but in kind, i.e. in natural gas. Though the monetary value of this gas is substantially higher than the operating costs of the Ukrainian gas transit system (GTS), under-investment in maintenance and rehabilitation of this gas transit system is obvious. In addition, NAK Naftogaz Ukrayiny is one of the biggest debtors to the budget. In 2000 the company had to transfer 1,005 m UAH to the state budget as a special tax on its transit services.
In fact it paid only 23.4 % of this amount. The main reason for these problems is that Ukrainian legislation restricts how and under which conditions the natural gas obtained as a transit fee (NGTF) has to be used. According to these rules the NGTF has to be used to cover the demand of gas of private households, of budget organizations of all levels and of communal heating enterprises (altogether called “funds of oblast state administrations” - OSA funds).
Any remaining NGTF and the natural gas extracted domestically should be sold to the power generating companies.1 Prices for these customers are politically set and do not reflect market prices. Thus, the current system of managing the received payment for NAK Naftogaz Ukrayiny’s transit service is inefficient and creates big losses for the economy. In 2000 losses for the Ukrainian economy which occurred by selling the NGTF below market prices were about 5 bn UAH. Even if 100% of the gas supplied would have been paid losses would still have been about 4 bn UAH.
