Russia twists Ukraine’s arm on gas pricing

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Russia insists on sticking to its current gas supply agreement with Ukraine despite repeated calls from Kyiv to renegotiate the deal, the head of Russia’s Gazprom says.

 

Gas disputes between Moscow and Kyiv worry Gazprom's European customers because pricing conflicts have in the past disrupted Russian gas supplies to Europe, most of which flow through Ukraine (see background).

After failing to get a price discount from Moscow in prolonged negotiations throughout 2011, Ukraine has sought to cut the volume of its gas imports, which were set at 52 billion cubic metres (bcm) a year under a 2009 agreement.

But Gazprom chief Alexei Miller said yesterday (27 June) the state-owned company was against cutting either the volume or the price of supplies. A take-or-pay clause obliges Ukraine to pay for the contacted gas even if it doesn’t import it.

"We are working strictly in line with the contract, strictly in line with this volume," Miller told reporters after a Russian government delegation led by Prime Minister Dmitry Medvedev held talks with the Ukrainian government in Kyiv.

"We see no reasons to review the price," he added.

Ukraine aims to reduce costly natural gas imports to 27 bcm this year and cut them further in the future by saving energy, switching to coal, increasing domestic gas production and diversifying its imports.

In line with that plan, Ukrainian gas imports from Russia fell 49% year-on-year in the January through May period, to 12.8 bcm.

Ukraine imports about two-thirds of the gas it consumes from Russia at a price that has been rising steadily for the last few years. It has been paying $425 (€340) per 1,000 cubic metres in the second quarter, up from $416 (€333) in the previous quarter.

Moscow has said it will cut the price for Ukraine only if Gazprom is allowed to buy into Ukrainian gas pipelines. Ukraine has so far refused to accept the trade-off.

Stretched finances

Monthly gas bills, which sometimes reach $1 billion (€800 million), have stretched the finances of Ukraine state energy company Naftogaz and the state in general, prompting them to borrow, sometimes from Gazprom itself.

This month Gazprom agreed to make an advance payment of $2 billion (€1.6 billion) to Naftogaz so the company could afford to fill up its storage facilities, which help Russia meet peak European demand in winter.

"If Ukraine needs more money to fill up underground storage facilities in order to live through the next winter without any issues, we will consider providing these additional funds," Miller said on Wednesday.

Russia's refusal to cut the price and volume of gas supplies makes it harder for Ukraine to secure fresh funding from the International Monetary Fund, which wants the Kyiv government to hike gas and heating prices for households.

Ukraine provides generous subsidies for domestic consumers and removing them would be politically risky.

Since Viktor Yanukovich was elected president of Ukraine in 2010, the country’s government has sought to negotiate a lower price on Russian gas but talks have produced no results so far.

Under a controversial 2009 deal under the former Prime Minister Yulia Tymoshenko, Kyiv is paying $425 (€340) per thousand cubic metres. Ukraine sees a fairer price at $250 (€200).

Ukraine's government says the high price of imported gas is a drag on the country's economy and state budget. Ukraine heavily subsidises gas supplies to households and heating companies.

Yanukovich is now under political pressure to deliver a solution to the gas issue as his Party of the Regions has been slipping in opinion polls ahead of the October parliamentary elections.

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