Russia cuts off gas, Ukraine secures borders

Oil pipeline, Ukraine. [Shutterstock]

Russia cut off gas to Ukraine yesterday (16 June) in a dispute over unpaid bills that could disrupt supplies to the rest of Europe and set back hopes for peace between the former Soviet neighbours.

After the loss of 49 troops on Sunday, when pro-Russian rebels shot down a military transport plane, Ukraine’s new president ordered his forces to retake full control of their border with Russia, saying this could then pave the way for negotiations.

Calling time out on weeks of wrangling in talks over natural gas supplies, Russia said Kyiv had missed a Monday morning deadline to repay $1.95 billion owed for previous purchases and announced Ukraine would now only get gas it has paid for in advance.

>> Read: Russian parliament rejects Ukraine gas talks

At the same time, Moscow insisted that Ukraine must let Russian gas flow across the country through international pipelines to Russia’s clients in the European Union – noting a temptation for Kyiv to tap into those supplies in transit.

Kyiv and Moscow blamed each other for the failure to agree on the price of future gas deliveries and refused to abandon well established positions: Russia offering a discount, and Ukraine rejecting that as a tool for political manipulation.

The talks are bound up with the worst crisis between Russia and Ukraine since the Soviet Union collapsed – a crisis that has brought Western sanctions on Moscow, the Russian annexation of Crimea and Cold War-style sabre-rattling along the borders.

Western-backed Ukrainian President Petro Poroshenko, elected last month to replace the Kremlin-friendly leader ousted in February, said on Monday he wanted troops to regain full control of the border with Russia this week. After that, there could be a ceasefire and efforts to come up with a peace plan.

“The ceasefire will be declared as soon as the border is secure,” Poroshenko told his security chiefs. “Declaring a ceasefire while the border is open would be irresponsible.”

His remarks underlined his concern that Russia is supporting the rebels by sending in tanks, guns and men. Hopes of a lowering of tension had already been dented before the gas talks failed by the downing of the plane near the eastern frontier, an attack on Russia’s embassy in Kyiv and new accusations from NATO that Russia is arming the Ukrainian rebels.

All that sent Russian financial markets lower on Monday and helped oil and gas prices climb in Europe that were already firm on fears of supply disruption due to violence in Iraq.

“Thanks to the unconstructive position of the Ukrainian government, today a prepayment system was introduced,” Alexei Miller, the chief executive of Russian state exporter Gazprom , told Prime Minister Dmitry Medvedev during a meeting at a government residence at Gorki, outside Moscow.

He said Ukraine had “adopted a position that can only be called blackmail”, adding: “They wanted an ultra-low price.”

At a news conference, he said it would no longer be enough for Kyiv to pay part of its debt for supply to resume. That would now happen only once Ukraine paid off all the almost $4.5 billion and paid up-front for a month’s deliveries, he said.

‘Not about gas’

Ukrainian Prime Minister Arseny Yatseniuk accused Russia of deliberately blocking a deal to cause Kyiv supply problems next winter, when temperatures plunge and heating needs increase.

“But it is not about gas. It is a general Russian plan to destroy Ukraine,” Yatseniuk said. “It is yet another step against the Ukrainian state and against Ukrainian independence.”

Medvedev said some of Kyiv’s ruling elite were not up to the job, echoing outrage over Ukraine’s acting foreign minister using a coarse anatomical expression to describe President Vladimir Putin during the weekend embassy protest in Kyiv.

“You can see this in many situations; from the paranoid behaviour of the acting foreign minister at the Russian embassy in Kyiv, to the failure of the prime minister of Ukraine to agree on gas on the basis of a discounted price,” he wrote on Facebook.

Supplies in storage

A source at Gazprom said supplies to Ukraine had been reduced as soon as the deadline passed. Ukrainian Energy Minister Yuri Prodan said the country was receiving no gas.

Ukraine has at least 12 billion cubic metres of gas in storage, enough to meet its and the EU’s needs over the summer.

A long-term reduction of supply could hit EU consumers, which get about a third of their gas from Russia, around half of it through pipelines that cross Ukraine. Earlier price disputes led to “gas wars” in 2006 and 2009, and Russian accusations Ukraine stole gas destined for the rest of Europe.

Gazprom’s Miller said Russia would provide Ukraine with the volumes necessary to cover EU demand, but implied that Kyiv may take some of those supplies for their own use – a potential shortfall Moscow could not be expected to cover.

“Regarding transit risks, they exist and they are not insignificant,” Miller said of supplies reaching the EU.

The bloc’s energy commissioner, Günther Oettinger, who has been brokering the gas talks, said in Vienna that the EU should top up its storage or could face problems in winter. He urged Russia to reconsider a compromise and held out the prospect of new talks before officials break for summer.

But with both sides filing lawsuits at the Stockholm international commercial arbitration court to try to recover billions each says they are owed, any quick agreement seems a way off.

Oettinger said Moscow had declined a compromise under which Kyiv would pay $1 billion immediately and then make monthly repayments to Gazprom. It would also pay $385 per 1,000 cubic metres in winter and about $300 in the summer.

The US State Department said the EU had presented a “fair and reasonable” compromise to resolve the gas dispute, and talks should be resumed.

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.

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