Gazprom, Kiev Blast Pipe Tax Plan

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Natural gas monopoly Gazprom on Wednesday came out against a Economic Development and Trade Ministry proposal to levy a 40 percent duty on pipes imported from Ukraine.

The ministry has proposed protectionist measures against Ukrainian pipemakers following heavy lobbying by local pipe plants. It is considering imposing a duty or a quota of 500,000 tons a year on imports of Ukrainian pipes.

Yelena Sorokina, managing director of metal production at Gazkomplektimneks, a Gazprom subsidiary, said at a news conference that pipes accounted for 60 percent of the cost of building a pipeline. Consequently, the proposed duty would substantially raise Gazprom?s costs for building pipelines, she said.

Ukraine is Gazprom?s primary supplier of large-diameter pipes, used primarily for gas and oil pipelines, and such pipes are not yet produced in Russia, she said.

Ukrainian pipe production has been steadily falling and producers control only 13 percent of Russia?s market.

Other major pipe suppliers to Russia are Germany and Japan.

The Russian Association of Industrialists, which organized the news conference, also lashed out at the proposed duty.

"Ukrainian producers offer pipes of superior quality and for better terms," the association said in a statement.

Local pipemakers require from one to six months to fulfill an order, whereas their Ukrainian counterparts can fill orders within one to two months, the association said.

Ukrainian pipes are also cheaper, thanks in large part to the Ukrainian government. In late 1999, Kiev lowered profit taxes by 70 percent for 64 Ukrainian metallurgy factories and canceled the value-added tax on exports to a number of countries, including Russia.

Sorokina reported that in 2000, Gazprom purchased 500,000 tons to 600,000 tons of pipes, of which 50,000 tons to 60,000 tons were Ukrainian.

Ukrainian pipe makers can fill an order up to six times faster than Russian firms.

In 2000, Gazprom plans to purchase about 180,000 tons of Ukrainian pipes.

The imports are worth about $1,000 per ton, not including customs costs, according to the Vedomosti newspaper.

In addition to Gazprom, Tyumen Oil Co. and the Bashkortostan-based oil firm Bashneft are major customers of Ukrainian large-diameter pipes.

"Pipes produced by Russian manufacturers do not meet all of Gazprom?s needs," Sorokina said.

It will be two years before Russian pipemakers such as steel giant Severstal begin producing large-diameter pipes, officials said.

However, the government wants Gazprom to buy its large-diameter pipes locally.

In September, Prime Minister Mikhail Kasyanov ordered Gazprom to place orders for large-diameter pipes at the Urals-based Nizhny Tagil Metals Combine.

Gazprom has grudgingly submitted to government pressure and agreed to buy pipes from the combine.

The combine, however, is still in the process of building a factory for the production of the pipes.

Mikhail Armyakov, a metals analyst with the Nikoil brokerage, said that Nizhny Tagil will need three to five years to build the plant.

Gazprom, meanwhile, is unlikely to contribute a significant amount of investment to the construction of the plant.

The gas giant has already said that it intends to pay the Nizhny Tagil plant for the pipes with deliveries of gas.

Armyakov said that the refusal to make cash payments is a "sign that Gazprom is not eager to participate in production with Nizhny Tagil."

Dmitry Kulikov, head of the Interpipe association of Ukrainian pipe makers, said that Ukrainian pipe makers will lose their already small profits if the 40 percent duty is imposed, Interfax reported.

Ukrainian pipe makers are dependent on the export market because they lack large domestic consumers of pipes.

Mikhail Seleznyov, metals and utilities analyst for brokerage United Financial Group, said that protectionist measures may not even be necessary.

Local pipe makers have experienced strong growth this year, and the production of large plants, such as the Chelyabinsk pipe factory, located in the Urals Mountains, already exceeds pre-crisis levels, Seleznyov said.

According to the State Statistics Committee, the nation?s pipe production has risen by 78 percent in the past year.

During the first six months of 2000, Russian pipe producers manufactured 2,220 tons of pipes.