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06/12/2016

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

Europe's East

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

Günther Oettinger [Council of the European Union]

Russia and Ukraine failed to reach an accord on gas supplies for the coming winter in EU-brokered talks yesterday (21 October) but agreed to meet again in Brussels in a week, in the hope of ironing out problems over Kyiv’s ability to pay.

After a day of talks widely expected to be the final word, European Energy Commissioner Günther Oettinger told a news conference the three parties agreed on the price Ukraine would pay Russia’s Gazprom – $385 per thousand cubic metres – as long as it paid in advance for the deliveries.

But Russian Energy Minister Alexander Novak said Moscow was still seeking assurances on how Kyiv, which earlier in the day asked the EU for a further €2 billion in credit, would find the money to pay Moscow for its energy.

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

Dependent on Western aid, Ukraine is in a weak position in relation to its former Soviet master in Moscow, though Russia’s reasons were unclear for wanting further assurances on finances, beyond an agreement to supply gas only for cash up front.

Citing unpaid bills worth more than $5 billion (€3.9 billion), Russia cut off gas flows to Kyiv in mid-June. The move added to East-West tensions sparked by Russia’s annexation of Ukraine’s Crimea and conflict in Russian-speaking eastern Ukraine.

The two countries are fighting in an international court over the debt, but Oettinger noted that Ukraine had agreed to pay off $3.1 billion in two tranches this year to help unblock its access to gas over the winter.

European Union states, many also dependent on Russian gas and locked in a trade war with Moscow over Ukraine, fear their own supplies could be disrupted if the issue is not resolved.

Despite cutting off gas for Kyiv, Russian state exporter Gazprom has not halted supplies flowing through the country en route to EU member states. Novak again ruled out Gazprom’s agreeing to let EU states re-export its gas to Ukraine.

The European Union relies on Russia for around a third of its gas, roughly half of which flows via Ukraine. Two previous price rows between Russia and Ukraine in 2006 and 2009 did have an impact on supply to EU nations.

The row this time is complicated by the deterioration in relations between Moscow and Kyiv, although EU leaders also say solving it could help to defuse wider tensions.

Reasons to get a deal

US and EU economic sanctions against Russia, plus a fall in the price of oil, have increased incentives for Moscow to resolve the dispute. State-controlled Gazprom earns around €4.7 billion a month selling gas to the EU.

Oettinger has been brokering talks since May after Russian President Vladimir Putin called on the EU to intervene.

“We made another step towards a possible solution and are close to an agreement on important elements. Others still need to be addressed, such as the financial gap,” Oettinger said following Tuesday’s talks.

“At the next meeting, which we hope will be the final trilateral meeting, next Wednesday here in Brussels, we will be able to reach a decision and we’ll have the signature of all the partners.”

A summit held in Milan on Friday produced hopes for a breakthrough, after Ukraine President Petro Poroshenko met Putin and said they had reached a preliminary agreement on a gas price until 31 March. That price, of $385 per 1,000 cubic metres, is higher than the average of some $350 that Gazprom charges EU companies but $100 less than Russia had demanded.

Putin, meanwhile, said Ukraine’s debt for Russian gas supplies stood at $4.5 billion, considerably less than the $5.3 billion previously demanded by Gazprom.

However, in Brussels on Tuesday, Novak said Moscow was still not satisfied with agreeing to advance payments for new gas without further assurances, notably from Ukraine’s Western allies, about where the money would come from.

“Today we should establish the availability of financial resources for advance payments for November and December,” he said. “We haven’t received these assurances, either from Naftogaz and Ukraine or the European Commission.”

Kyiv had balked at the earlier Russian calculation of its debt, arguing that the price used to calculate the arrears should be $268.50, which is what it was paying in the first quarter of this year. Oettinger said that price would be used to calculate how much gas had been paid for with the $3.1 billion to be transferred this year.

The EU commissioner said Ukraine may require around 4 billion cubic metres of Russian gas this winter. That would cost $1.54 billion.

Kyiv faces a $3.5 billion funding shortfall for this year and next, but the International Monetary Fund has said the government should be able to cover most of it with planned debt issues and an expected $900 million in further donor support.

On the sidelines of the gas talks on Tuesday, the Commission said it would consider a request from Ukraine for a further loan of €2 billion.

That would be on top of €1.6 billion handed out so far in cooperation with the International Monetary Fund.

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.

Further Reading