Russian gas at European prices for Ukraine
The import of Russian fuel to Ukraine is still not prohibited, writes ZN
Russia’s military aggression has led to a radical change in logistics in the Ukrainian market of oil products, in particular, liquefied gas. To replace Russia and Belarus, Poland, Romania, Lithuania and Latvia became the main key suppliers of liquefied petroleum gas for Ukraine. But it is not yet possible to talk about a complete rejection of Russian fuel. There is reason to believe that products from the aggressor country continue to arrive in Ukraine, only now with a European passport. The development of the phenomenon is facilitated by various requirements for the execution of documents on the origin of goods and the low moral threshold of the trading community in Ukraine and the EU.
Russian gas and gas werewolves
From April 2022 to this day, trading platforms are full of gas offers in Vilnius, Riga, Kaunas, Daugavpils and other places in Lithuania and Latvia, where a year ago all LPG trading was placed in a bucket (see Fig. 1).
Russian gas at European prices for Ukraine
During the full-scale war in 2022, 82 thousand tons of liquefied gas were shipped from Latvia and Lithuania to Ukraine. At the same time, by the end of the year, the rates increased markedly. All this is carried by road transport. In a period of acute shortage, supplies from such remote points may have an adequate explanation, but the last time they heard about an acute shortage of gas in Ukraine was in May 2022.
The success of the new direction is due to a single factor – the price. Gas on Latvian bases is much cheaper than the European resource in any neighboring country. In January, the difference between the prices of various sources of supply exceeded $120/ton, or 15% (see Fig. 2). Because of this, many Ukrainian traders have completely switched to the supply of Baltic gas.
Russian gas at European prices for Ukraine
According to the A-95 Consulting Group, in March-December 2022, only 5% of the volume of gas from the Baltics had an Orlen certificate, another 38% had another certificate, usually EUR1, and 57% arrived without a certificate at all ( see Fig. 3). In the first case, when there are no documents on origin, you will have to pay a special duty of 3%, in the second case, entry is free.
Russian gas at European prices for Ukraine
Where does so much gas come from in the Baltic region? Eurostat clearly shows that up to 90% of gas comes from Russia (see Figure 4-6).
Russian gas at European prices for Ukraine
That is, all the gas that comes from the Baltic countries without a certificate is Russian. This should be clear. But what about gas that has a EUR1 certificate? With this document, the supplier declares that the consignment contains at least 51% of gas of European origin. In order to mix 34 thousand tons of “European” gas for Ukraine during the ten months of the war, sellers in Lithuania and Latvia would have to purchase somewhere around 17 thousand tons of EU-produced gas. Theoretically, this could be a product of the Orlen Lietuva plant in the city of Mazeikiai, the only manufacturer in the Baltics, especially since almost all batches are generously accompanied by quality certificates of the Lithuanian refinery. But the quality passport has neither an addressee, nor a unique number, nor is it tied to a specific batch, that is, it is for reference only.
Calculations show that the gas produced at the Mazeikiai Refinery is unlikely to be enough to produce a “Baltic mix” of 51% strength in the volumes mentioned. Up to 75% of the plant’s resource is sold at PKN Orlen filling stations in Lithuania and Poland. With a monthly production of 10-12 thousand tons of gas at the Mazeikiai refinery, at best, 1-2 thousand tons of the product gets into free sale. In particular, according to Eurostat, about 13 thousand tons went to Latvia. Obviously, this is Orlenovsky gas, because there is more than enough Russian gas in Latvia. Another 4.5 thousand tons were shipped directly from the Lithuanian plant to Ukrainian counterparties.
A source in the Lithuanian office of Orlen also notes that in 2022, a lot of gas produced by the Mazeikiai refinery did not leave the plant at all, but went to its own consumption instead of expensive natural gas. This has happened in many refineries in Europe.
In general, it should be noted that it is very difficult to negotiate with the Orlen concern on the sale of LPG. Any trader who once tried to buy at least a car of Mazeikiai gas knows very well how difficult it is.
And how then is so much fuel with the EUR1 certificate born? There are two options. And while they are hypothetical, traders interviewed agree on the viability of both. The first is that certificates can be obtained not in a completely legal way. For example, to submit to the body that imitates them (this is something like our Chamber of Commerce and Industry), not entirely accurate documents. “No one will check whether you really have a contract with a manufacturer in the EU, how much has been purchased under this contract and how much has already been shipped. Moreover, no one can say exactly how many times the same volume has already taken part in the issuance of certificates,” says a trader from Vilnius. According to him, no one is interested or needed in Europe with a certificate of origin, and, from the point of view of the law, no one cares where this gas comes from. Indeed, we should not forget that the circulation of Russian gas in the EU is not prohibited or restricted in any way.
“Our company sells gas with a certificate of origin when the client needs it,” says the manager of the Lithuanian company. The interlocutor adds that for the sale of gas on the territory of the European Union, the EUR1 certificate is not needed, it is usually asked only by Ukrainians.
It should be noted here that a considerable flow of gas of Russian origin goes to Ukraine and from Poland, which, by the way, in 2022 maintained the rate of Russian gas imports at the level of 2021. But apart from Russian gas, Poland also buys a lot of gas from Sweden, Germany, Kazakhstan, etc. Therefore, in theory, part of Russian gas can be consumed on the domestic market, and part can go to Ukraine as part of the Euromix.
“In Poland, many companies buy and sell Russian gas, including to Ukraine. Poles are not forbidden to work with Russian suppliers, but they usually do not brag about this, ”the Polish trader admits.
The owner of the company in Warsaw says that even exposure of the fraud will not entail any sanctions.
“Because the LPG certificate of origin is an optional document. All efforts of the state are aimed at collecting taxes. Cleared customs in Lithuania, Latvia or Poland – you can continue to sell the product in the EU. Do you export? Okay, the main thing is that all taxes are paid, no extraneous papers like certificates of origin are of interest to anyone, ”the trader says.
The second option is a carousel. Suppose a company from Lithuania, Latvia or Poland actually mixed the export batch with European gas by more than 51% and honestly received the corresponding certificate. The only question is how many times this particular certificate was presented at the Ukrainian border. Sources in the Ukrainian customs say that the certificate number is on the list of documents required for cargo clearance, but there is neither a task nor an opportunity to check the number for previous use.
“There is no public open registry of certificates, checking all the data will take a huge amount of time,” says an experienced trader familiar with the workings of customs.
In general, banks most often require a certificate in order to weed out the Belarusian product and individual companies from Russia, against which European sanctions have been introduced. At the same time, avoiding paying duties is a bonus.
Another geographic and political invention of the Baltic trading is the trade in “Kazakh” gas. The origin is taken in quotation marks because LPG is supplied from the territory of Kazakhstan to the Baltic countries in tiny volumes. But this does not prevent gas trade with a certificate of Kazakh origin from boiling in Lithuania and Latvia. We are talking about the resource of the KazRosGaz company from Orenburg, which, although close to Kazakhstan, is not part of it at all. The enterprise processes raw materials extracted by it in Kazakhstan at the Orenburg GPP and directly from there sends its products for export with Kazakh documents. But even Eurostat identifies this flow as Russian in its report. The question of how Kazakh is the gas that is produced at the Gazprom plant, distributed by a Gazprom trader and travels to Europe in Gazprom wagons, should be asked by every Ukrainian trader.
Summing up the certificate history, we can state that the lion’s share of the gas that goes to Ukraine from Latvia and Lithuania without an Orlen Lietuva certificate is of Russian origin. An important argument in favor of the performed assessment is the price. The cost of the Baltic mix does not find an adequate explanation. Even a real 51% European mix will be more expensive than the Latvian sellers ask. All because of Russian “generosity”. Since the beginning of the large-scale aggression, Russian producers have faced big problems with the export of LPG, so prices have collapsed. At the end of last year, the exchange price of gas at the plants in snowy Siberia was approximately $60/ton. You can imagine how interesting it is to sell the same gas in the Baltic region for $600-700. Even considerable funds for transportation ($250-300) leave the Russians a huge gap to reduce the price to a level unattainable for Europeans.
Demon Exorcism
The invasion of Russian gas causes painful losses to companies that value their reputation and do not want to work with a bloody product. The head of a large Polish trading company believes that until there is a complete ban on Russian gas imports, he will continue to influence the market. “In the end, everything will come to a situation where you will have to choose between conscience and profit. Either everyone trades, or no one, the third is not given, ”says the trader. He admits that he would like to say that Poland or even the EU may soon ban Russian LPG, but this would not be true: “We are too dependent on Russian supplies, the country’s leadership is well aware of the political consequences of suddenly abandoning them.” As for the greater Europe, LPG is unlikely to get into its field of vision in the near future.
Therefore, we must prepare for the fact that the Russian resource will not soon leave Eastern Europe, leaving Moscow not only profits, but also influence on energy security.
To understand the impact of Russian gas on the energy security of the market, let’s take a fresh example. As of January 2023, Baltic mix has become so cheap that it has effectively made it impossible to import from other sources. Ukrainian traders are faced with the question asked by the Pole above: either you work with a Russian resource, or you don’t work at all. It turns out that the market will either be filled with Russian gas, or destabilized due to a shortage. Both options are bad.
So how to eliminate the influence of the Russian product on the Ukrainian market? There is no quick and 100% effective recipe. As you can see, the calculation on the conscience of Ukrainian importers failed. We must face the truth: everyone knows very well where the Baltic traders get gas from, but this does not reduce the circle of those who want to buy it.
The most common proposal is to increase the duty on petroleum products without a certificate. Taking into account the profitability of the Baltic region for Russian producers, a duty of 10% will not save the situation, we should be talking about 25% or more.
But, as always, there are a few buts. Firstly, as we found out, there is no problem to make a EUR1 certificate in Europe. Just as there is no effective method for Ukrainian services to quickly check its authenticity and purity. Raising the financial barrier for non-certified gas will not be successful without the introduction of strict control over the issuance of certificates of origin by Lithuania, Latvia, Poland and other countries. How quickly can this be implemented with neighbors?!
Second, even if the scope for issuing certificates is streamlined, the Ukrainian market will remain open to 49% of Russian gas in total imports from Europe (see Figure 7). During the war months, this is about 150 thousand tons …
Russian gas at European prices for Ukraine
One of the working options is based on a nuance that for some reason has been left behind the scenes for almost a year of the war. For many, this was a surprise, but the import of Russian fuel to Ukraine is not prohibited. There are no oil products on the list of sanctioned goods, and 3% special duty on autogas and 4% on pipe diesel are all the legal barriers that exist today for supplies.
“Of course, we are unlikely to allow customs clearance of a product with Russian documents, but their import is not prohibited by the letter of the law,” says an employee from the Energy Customs.
Therefore, perhaps we should start with the introduction of severe penalties for working with Russian oil products? The criminal perspective will obviously critically narrow the circle of those who want to play with bloody gas. At the same time, experienced traders understand that any increase in liability or tax burden will increase the already rich manipulation tools for civil servants. And, as experience shows, in such cases it is the conscientious operators who suffer first of all.
At this point, it would also not be superfluous to mention the neighbor’s experience in streamlining the market. In Poland, access to the oil products market, a strategic sector of the economy for the country, is very tight. Everyone who wants to acquire a license (concession) finds himself under a financial microscope. The owner of the concession must keep a certain supply of fuel, that is, in fact, is responsible for the stable functioning of the market. A tidy amount of a deposit in a bank acts as a financial obligation. The company risks this deposit in case of violation of the law by it.
Concessions at one time weeded out the majority of non-systemic small players, who usually formed the basis of illegal schemes and did not bear any financial and economic responsibility for their activities. Perhaps in Ukraine it is time to think about the systematization of the market in order to increase its stability and the responsibility of its operators.
In conclusion, it should be noted that liquefied gas is not the only fuel that, under the European banner, enters Ukraine en masse. In particular, there are many questions regarding the flow of diesel fuel imports from both the West and the South, but this is a topic for a separate story.
Artem Kuyun, Expert, A-95 Consulting Group / Ivan Marchenkov, Analyst, A-95 Consulting Group
