Russia leverages its gas, cash supremacy in Ukraine

Gazprom logo.jpg

Ukraine’s struggling gas company Naftogaz said yesterday (3 December) that it had agreed with Russia’s Gazprom to defer payments for gas deliveries to spring next year, the Russian agency RIA Novosti reported. Ukraine, a country on the brink of default, remains highly dependent on Russian gas, experts told EURACTIV.

Naftogaz head Yevgeny Bakulin said his company had secured an agreement to delay settling debts for gas imported from October to December to give it more time to resolve unspecified “problems and issues in the regions”.

Bakulin said that $765 million (€564 million) owed by Naftogaz for gas delivered in August would be paid soon, but that the government's work had been held up by the protests in the capital Kyiv.

The issue of the August debt had previously been due to be settled by 7 December, he said, appealing Gazprom to take the current situation into consideration.

In October, Gazprom complained that Ukraine had not settled an $882 million (€649m) bill for natural gas for August and warned that it could in future begin demanding advance payment for the fuel.

That prompted Ukraine to announce that it would stop buying Russian gas until the end of the year, raising the spectre of a possible halt of deliveries to Western Europe, only for Kyiv to back down a few days later.

The dispute has raised concerns of a new "gas war" over prices between the two neighbours, similar to those which erupted in the winter of 2009, leaving parts of Europe in the cold (see background).

Political unrest

No further details were disclosed.

The apparent concession on payments from Russia’s state-owned Gazprom takes place against the backdrop of political unrest in Ukraine, where thousands of people took to the streets asking for the government and the president to step down.

The protests came in the wake of the Ukrainian government's decision to put its move for closer integration with the EU on hold in favour of talks to revive economic relations with Russia, one week before the country was expected to sign a landmark association agreement with the 28-country bloc in Vilnius.

The decision came after months of intimidation by Russia, which made it clear it would close its borders to goods coming from Ukraine if the association agreement was signed.

Ukraine has been offered cheaper gas if it joins the Russia-led Customs Union, the only members of which are Belarus and Kazakhstan. Russia sells its gas to Belarus at about $170 (€120) per thousand cubic metres, about 40% of the price that Ukraine pays.

Russia vehemently denies using trade embargoes and gas deliveries as a form of intimidation against Ukraine and says it is only taking measures to protect its own economy.

The press reported rumours that Ukraine was to leave the EU-sponsored Energy Community, a project designed to import EU energy policies into non-EU countries. The exit of Ukraine from this organisation has been considered as the main condition so that Gazprom would buy the Ukrainian gas transportation system (GTS).

Asked by EURACTIV to comment the rumours that Ukraine would abandon the Energy Community, a Commission spokesperson only said the EU executive was aware of the press reports.

The Ukrainian GTS badly needs modernisation and heavy investment. The EU is offering that a tripartite consortium involving the Union, Ukraine and Russia manages this effort. Russia insists that the consortium should involve only Moscow and Kyiv.

EURACTIV asked Oleksii Leshchenko, Vice-President of the Gorshenin Institute to comment on the latest energy developments in Ukraine.

According to Leschenko, Russia does not give up its attempts to gain control over Ukrainian GTS. He reminded that on 29 November, Gazprom’s CEO Aleksey Miller stated that to continue talks on creating the consortium, Ukraine needs to amend its legislation and allow the privatisation of its gas pipelines. Gazprom also insists to obtain access to the domestic gas market of Ukraine and to internal gas production.

“The present Ukrainian government has more urgent issues in its agenda and is struggling to close financial gap to finish the year,” Leschenko said.

Shopping spree

The analyst reminded that Russia was on a shopping spree in Ukraine. Indeed, according to information leaked to the media, the government decided to sell some strategic state enterprises, including some which are part of its military-industrial complex.

Thus, on 2 December, Ukrainian vice Prime Minister Yury Boyko organised a roadshow for his Russian colleague, vice Prime Minister Dmitry Rogozin, to present Ukrainian strategic enterprises in Nikolayev, Dnepropetrovsk and Kyiv. In particular, potential buyers visited the Zoria-Mashproject, the 'Black Sea shipyard', the ’61 communards’ Shipyard, and the enterprises Yuzhmash and Antonov.

Concerning the Energy Community (EC), Leschenko said the Ukrainian membership had not been a deterrent for Russia in its attempts to gain control over Ukrainian gas pipeline. Ukraine is member of the Energy Community from February 2011, while Russian attempts to get hold of the pipelines began in late 90-s, he reminds.

“Ukrainian president Viktor Yanukovich states that Ukrainian membership [in the Energy Community] lost sense as five European countries signed agreement on South Stream construction. But leaving EC will release Ukraine from many obligations and thus make it more vulnerable to Russian attacks,” Leschenko said.

Indeed, Ukraine’s leadership is furious about EU energy policies and in particular the door-opening by EU members Bulgaria, Hungary, Slovenia and Italy to South Stream, a Gazprom-favoured pipeline project aimed at bringing gas to the EU and to the Western Balkans bypassing Ukraine.

Leschenko also minimised the importance of reverse gas flows from Western Europe to Ukraine.

“Ukraine has not secured gas supply to meet its demand without Russian gas. The country is still importing about 60% of consumed gas from Russia (about 32 billion cubic metres per year (bcm/y)”, he said.

He added that reverse volumes were at about 2-5 bcm/y, and domestic production at the level of 21 bcm/y.

“An LNG terminal will be started only in 3-5 years and shale gas production is also a long time perspective. Thus in the nearest 5-10 years Ukraine will strongly depend on Russian natural gas,” the expert said.

On 31 December 2008, Russia stopped supplying gas to Ukraine over a payment dispute. Russia said Ukraine was stealing natural gas destined for Europe for its own needs. Ukraine denied the charges, but said it needed "technical gas" to pump fuel through the pipeline system. 

On 6 January, supplies to Romania, Bulgaria, Greece, Macedonia, Serbia and Croatia were completely halted. It also emerged that several countries, including Bulgaria, did not have enough reserves to make up for a supply cut. 

But at a later stage, the conflict left Europe with no supply of Ukrainian gas. At this point, the EU agreed to send observers to monitor the supply of gas earmarked for Europe. 

At a summit in Moscow on 17 January 2009, Russian President Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko struck a deal, saying that the crisis was over. The EU reacted cautiously.

Three days later, on 20 January, supplies to Europe began to flow again. European Commission President José Manuel Barroso welcomed the resumption of deliveries, after a two-week standoff that left millions of Eastern Europeans without heating in the middle of winter. But he also warned that long-term lessons should be drawn from the crisis. 

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