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08/12/2016

Gas deal still eludes Ukraine and Russia at EU talks

Europe's East

Gas deal still eludes Ukraine and Russia at EU talks

Gazprom and Russian flags. Yamburg, 2004. [Shutterstock]

Ukraine and Russia bargained late into the night on Wednesday (29 October) but European Union officials trying to broker a deal to resume gas supplies to Kiev as winter sets in said there was still no accord to announce.

At talks in Brussels hosted by energy commissioner Günther Oettinger two days before he makes way for a new EU executive team, officials cancelled an evening news conference at which they had hoped to announce a deal after months of negotiation.

“Negotiations are ongoing and likely to continue until late in the evening,” the European Commission said in a statement at 9 p.m Brussels time. “In case of agreement, the press conference is envisaged to take place tomorrow morning at 8:30 a.m.”

With Kyiv and Moscow locked in conflict over pro-Russian rebellions in Ukraine and over the former Soviet state’s move to bind itself closer to the West, the European Union, which also depends heavily on Russian gas, is trying to help overcome wrangling about payments that threatens to disrupt supplies.

Russian state utility Gazprom, whose chief executive was attending the talks with Oettinger along with the Russian and Ukrainian energy ministers, halted supplies to Ukraine in June, citing Kyiv’s unpaid gas bill, which Moscow says is around $4.5 billion.

The EU, which has lending facilities to Ukraine along with the IMF, is looking at releasing more funds. And Germany, a key ally for Ukraine’s pro-Western leaders, has spoken of providing international “bridging finance” to see Kiev through the winter.

>> Read: Moscow: Ukraine expects the West to pay its $3.1 billion gas bill

For months, the gas cut-off has had little impact. But pressure is mounting for a deal as temperatures start to drop below freezing and Oettinger, who has been mediating, prepares to leave office on Friday, making way for a new Commission.

The two sides came close in September, but last week differences were wide over Kiev’s ability to pay.

>> Read: Ukraine’s winter gas package almost settled, but cash still an issue

Some of Russian President Vladimir Putin’s many critics in eastern Europe question his interest in concluding an agreement on commercial grounds and see the temperature of Ukrainian homes in the coming months being determined more by Kremlin calculations of its geostrategic interests.

Oettinger, a German, said before talks began on Wednesday that there was a 50% chance of a breakthrough. If he cannot broker a solution, it will be down to his Slovak successor, who takes office on Saturday.

Weekend elections returned a pro-Western parliament in Kiev, potentially stoking tensions with Moscow, although Russia’s EU envoy, Vladimir Chizhov, said earlier in the day that the mood could be more relaxed now the vote had taken place.

“During the last rounds of talks, let’s not conceal it, the pre-election situation had its influence on Ukrainian side,” Chizhov told Russian agency RIA Novosti. The only unresolved problem, he said, was where to get the money from for winter supplies.

Not just about the money

Ukraine’s Naftogaz company has set aside $3.1 billion (€2.4bn) in a special escrow account to pay off a chunk of its debt to Gazprom, but Russia is also demanding prepayment for winter supplies before it is willing to turn the taps back on.

Kyiv says it is working to raise more money from all possible sources of financing, including the European Union. The European Commission is considering Ukraine’s request, made last week, for a further loan of €2 billion.

But Kyiv also says money alone may not be enough.

“I have an impression that the Russian side doesn’t want to agree,” Ukrainian Finance Minister Oleksander Shlapak said on Tuesday.

Analysts said it could be very hard to come up with enough assurances to satisfy Russia, even if Gazprom, and more widely the Russian treasury, would welcome new revenues as the economy suffers from the effects of Western trade sanctions.

Ukraine at the same time is pushing for written guarantees that any agreement on price will be lasting.

For all sides, there is much at stake.

Russia provides around one third of the European Union’s gas, roughly half of which is pumped via Ukraine.

Ukraine in turn relies on Russia for around 50% of its own gas and despite storage has a winter shortfall of around 3 billion to 4 billion cubic metres (bcm), depending on the weather.

For Russia, the gas sector contributes approximately a fifth of the national budget.

Sanctions on Russia, which EU officials decided to leave unchanged on Tuesday while conflict in Ukraine continues, are sapping an already weak economy. But Moscow could well be willing to endure much more hardship for political ends.

“Economic factors are generally not given precedence when national security concerns are at stake,” Pasquale De Micco, a national expert from the European Parliament’s policy department, said in a research paper on Europe’s gas supply options.

“What is certain is that a gas war risks harming both parties in the short term and that it would hamper future efforts to re-establish mutually trusting relations.”

Background

Russia’s gas export monopoly Gazprom sells its gas to EU clients under secretive bilateral deals.

An illustration on how Gazprom uses the price of gas as a political weapon was provided in the context of the unfolding Ukraine crisis.

Ukraine was paying Gazprom a price of $400 per thousand cubic metres (tcm)under an agreement signed under former Prime Minister Yulia Tymoshenko, back in 2009.

Moscow dropped the price to $268.50 after then-President Viktor Yanukovich turned his back on a trade and association agreement with the European Union last year, but reinstated the original price after he was ousted in February.

Ukraine insists on a price of $268.50 per 1,000 cubic meters while Russia stands by its demand for $485. The European Commission is trying to get the two sides to agree in the middle.

Due to disagreement over the pricing the two sides have taken the issue to the Stockholm arbitration tribunal, an institution for international arbitration affiliated with the Chamber of Commerce of Sweden.

It is in this context that the European Commission is acting as mediator between Kyiv and Moscow, hoping to solve the disputes and avoid a repetition of the gas crisis of January 2009 that left part of the EU and of the Western Balkans in the cold.  

Without fresh gas imports from Russia, Ukraine may experience a humanitarian catastrophe, the incoming EU foreign affairs chief Federica Mogherini recently warned.

Moscow has also warned that if Kyiv steals Russian gas transiting through its territory to Western Europe, it would cut off gas supplies through Ukraine.