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06/12/2016

Russia and Ukraine achieve progress in gas talks

Europe's East

Russia and Ukraine achieve progress in gas talks

Gazprom, with smog. Moscow, 2010.

[Albert Alien/Flickr]

Russia and Ukraine agreed yesterday (2 June) to examine a payment plan to settle Kyiv’s multi-billion gas debts and fix a price for supplies until June 2015, offering the promise of averting an energy crisis over the crucial winter period.

The argument over prices for natural gas has added to tensions, as the two countries squared off over Moscow’s seizure of Ukraine’s Crimea peninsula and over a pro-Russian rebel uprising in eastern Ukraine.

Russia’s Gazprom had been threatening to cut off Ukraine’s gas today, with potential knock-on effects for the European Union because much of the gas it receives from Russia is pumped via Ukraine.

But the immediate threat of a supply disruption was avoided after Kyiv paid a first installment, prompting Gazprom on Monday to grant it a week’s grace.

Since a pro-Moscow president was toppled in Ukraine in February, Russia has demanded a sharp increase in the price Ukraine pays for gas. Kyiv says it cannot afford it, and wants to pay the discounted price that it negotiated in the past.

While the dispute has gone on, Gazprom has continued billing Kyiv at the higher rate. It says Ukraine already owes it more than $5 billion in unpaid bills and is running up more debt at a rate of more than $1 billion per month.

Late on Monday, after some six hours of talks brokered by the European Commission, Energy Commissioner Günther Oettinger said the CEOs of Gazprom and Ukraine’s Naftogaz had agreed to consider a plan that could avoid price disputes recurring over the European winter when demand peaks.

“My request and my expectation is that we come up with a package that covers the period until June next year,” Oettinger told reporters.

He did not disclose details of the price being considered, saying only that it was less than the $485 per 1,000 cubic metres Russia has demanded and more than the $268.50 on which Kyiv has been insisting.

A further round of three-way talks brokered by the Commission could be held at the end of this week or next week, Oettinger said.

Last minute payment averts crisis

After Kyiv paid Moscow $786 million as a partial payment, Gazprom announced a six-day extension of the deadline until 9 June. Gazprom also said that it would not sue Ukraine’s gas supplier Naftogaz over unpaid bills during the coming week.

That means gas will continue to flow to Ukraine and Europe while President Vladimir Putin and other world leaders – including Ukraine’s new president-elect Petro Poroshenko – are in France this week for events commemorating the allied forces’ “D-Day” landings in Normandy during World War Two.

The Kremlin has not announced any plans for talks with Poroshenko or U.S. President Barack Obama during Putin’s visit on Thursday and Friday but has said it cannot rule out the possibility of informal meetings. They are all expected to attend a lunch on 6 June.

Putin has pulled back some of the tens of thousands of troops he had massed on Ukraine’s border and says he is prepared to work with Poroshenko, who won a landslide presidential election a week ago. But the past week has also seen increased violence in eastern Ukraine.

The delicate negotiations over gas supplies provide the economic backdrop for the crisis in Ukraine, which has led to the biggest confrontation between the West and Russia since the Cold War.

Ukraine’s industry-heavy economy depends on Russian natural gas to be competitive. Since the fall of the Soviet Union in 1991, Moscow has frequently used its control over energy resources to influence politics.

Europe gets roughly a third of its gas needs from Russia, and almost half of that is sent via Ukraine.

Most European countries are believed to pay Russia around $300-$400 per 1,000 cubic metres for gas, although the prices are not published.

The debt Moscow says Kyiv already owes is equivalent to around 3% of Ukraine’s GDP. Delaying an agreement will make it increasingly difficult for already cash-starved Ukraine to meet its obligations.

Moscow’s leverage is blunted, because the peak winter demand season is over and storage tanks across Europe are full. Past pricing disputes between Moscow and Kyiv in 2006 and 2009 took place during times of peak winter demand, causing shortages and freezing across Europe.

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 $485 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. Oettinger is trying to get the two sides to agree in the middle [read more].