EU unblocks ‘unprecedented levels’ of cash to secure gas for Ukraine

EU Energy Commissioner Günther Oettinger favours an EU-wide solution to road tolling. March 2014 [The Council of the European Union]

Oettinger: "We can say to the citizens of Europe that we can guarantee security of supply over the winter." [European Commission]

Ukraine, Russia and the European Union signed a deal Thursday (30 October) that will see Moscow resume vital supplies of gas to its ex-Soviet neighbour over the winter in return for payments funded in part by Kyiv’s Western creditors.

After several failed rounds of talks in recent weeks as conflict rumbles on despite a ceasefire with pro-Russian rebels in eastern Ukraine, the accord also eases concerns that a new “gas war” could disrupt winter supplies if energy to EU states, notably through pipelines shut down across Ukraine since June.

With overnight temperatures already nudging below freezing in Ukraine, European Commission President José Manuel Barroso hailed an accord clinched in Brussels barely 24 hours before he and the rest of his team make way for a new EU executive.

“There is now no reason for people in Europe to stay cold this winter,” he told a news conference after witnessing the signing of documents by the Russian and Ukrainian energy ministers and EU energy commissioner Günther Oettinger.

Oettinger said he saw in the agreement a “first glimmer” of detente between Moscow and Kyiv in a conflict that has plunged East-West relations into a chill not seen since the Cold War.

Worth $4.6 billion in total, the package calls for Ukraine to pay $3.1 billion (€2.46 billion) in two tranches by the end of the year to cover debts for previous supplies from Russia’s Gazprom, and Kyiv will have $1.5 billion (€1.19 billion), some from existing accords with the EU and IMF, to pay for about 4 billion cubic metres of new gas until March, for which Russia is insisting on cash up front.

“Unprecedented levels of EU aid will be disbursed in a timely manner, and the International Monetary Fund has reassured Ukraine that it can use all financial means at its disposal to pay for gas,” the European Commission said in a statement.

“Further work with the international financial institutions on financial assistance to Ukraine, also in relation to gas supplies, will still continue. But all three sides are reassured that Ukraine will have the necessary financial means.”

Russian Energy Minister Alexander Novak had left Brussels early on Thursday, disappointing hopes of a deal then, saying he wanted firmer commitments from the EU on Ukraine’s finances.

Asked at the joint news conference where Ukraine would get the money to buy new gas for its 45 million people, Oettinger noted that Kyiv had already set the money aside to pay the agreed debt to Gazprom and that discussions with the Washington-based International Monetary Fund had clarified that Ukraine would be able to draw down more cash for pre-payments.

Ukraine’s gas company Naftogaz also had revenues of its own that it would use to pay for some of the new Russian supplies.

Oettinger said the new, pro-Western Ukrainian government being formed after a parliamentary election last Sunday should work quickly with the incoming European Commission and the IMF to implement reforms that would enable it to secure further international financing, not just this winter but after next March.

Ukrainian Energy Minister Yuri Prodan noted that Kyiv hoped for a favourable outcome from an arbitration court in Stockholm in a dispute with Gazprom about prices and the size of bills run up before pro-EU street protests overthrew the pro-Moscow president in February, triggering Russia’s annexation of Crimea.

In any case, he said, Ukraine had the means to buy gas for the rest of this year at $378 per 1,000 cubic metres, and at $365 in the first quarter of next year. Novak noted that these prices represented a discount of $100 according to a formula contained in the gas supply agreement dating back several years.

While Russian President Vladimir Putin’s administration, which cut off supplies in June as relations worsened, was keen for the European Union to commit itself to financing Ukraine, officials from Kyiv also underlined their view that having the EU as a co-signatory would “guarantee” Moscow did not renege.

Both Novak and Prodan highlighted the role that pipelines across Ukraine play in delivering gas from Russia’s Siberian and Arctic fields to the major economies of Western Europe. Novak said Russia would remain a reliable energy supplier to Europe.

Oettinger said: “We can say to the citizens of Europe that we can guarantee security of supply over the winter.”

While the gains for Ukraine are evident – without Russian gas many of its people would face death over the winter – Russia also gains from a deal that brings in cash at a time when its economy is suffering from a slide in world oil prices and from Western trade sanctions imposed over the Ukraine crisis.

Gazprom’s spokesperson Sergey Kupriyanov released the following statement regarding the results of the gas negotiations:

"Today's agreement is an important step in preventing gas supply disruptions in Europe this winter. It is a compromise and Gazprom has shown substantial flexibility to make this deal possible. Gazprom is and will be a reliable gas supplier for Europe.

The agreement also sends a clear message that signed agreements have to be respected and payment obligations must be fulfilled. This is hopefully the start of a new, more constructive chapter in gas relations among the EU, Russia and Ukraine. With relations based on equal sharing of risks and respect of contractual obligations.”

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.

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