And All That Gas: Russia and Ukraine Finally Seal the Deal

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After a period of tense negotiations, Russia, Ukraine and the European Union finally reached agreement on Oct. 30 and signed a deal for deliveries of Russian natural gas to Ukraine and Europe for the upcoming heating season.

With the ongoing fighting in Ukraine, the stakes are higher. Ukraine and Russia have been locked in a dispute over gas prices since last spring, when Russia annexed the Crimean peninsula and canceled gas discounts for Ukraine. The U.N. is still pressing Russia with sanctions and Russia is aggressively responding with a food embargo, but when it came to an everyday necessity—heat for the winter—all sides had to come to an agreement. Russia accounts for about a third of European gas imports, and about half the Russian gas that the EU buys is transported via Ukraine.

Winter is fast approaching in Ukraine.

flickr / Adam Baker under Creative Commons

Winter is fast approaching in Ukraine.

Within the EU, Bulgaria and Slovakia depend on Russian gas the most. According to Mikhail Krutikhin, an analyst and co-founder of the independent consulting agency RusEnergy, bypassing Ukraine when delivering gas to Europe, especially Southern European countries, is not an option at the moment. The capacity of the Nord Stream pipeline running at the bottom of the Baltic Sea is only 55 billion cubic meters a year, while in 2013 alone Russia exported 161.5 billion cubic meters of gas to European countries.

“Part of this amount [delivered via the Nord Stream] goes to Germany, for example, according to long-term deals,” Krutikhin said. “This gas pipeline cannot provide Southern European countries, such as Bulgaria, Greece, Macedonia, Serbia, etc. Turkey would be less affected because it also gets Russian gas via the Black Sea pipeline.”

In June, Russia cut off gas supplies to Ukraine, accusing Kiev of not paying its bills on time. According to the agreement signed in Brussels on Oct. 30, the supplies will return as soon as Ukraine pays back what it owes Russia. Ukraine’s current debt for gas is $5.5 billion, but Russia has agreed to recalculate the amount, lowering the price by $100 per 1,000 cubic meters. As a result, Ukraine is expected to pay back the total of $3.1 billion for Russian gas, $1.45 billion right away and the remaining $1.65  billion by the end of the year. And even though Europe is currently dependent on Russian gas, it wasn’t very enthusiastic about helping Ukraine financially.

Russia demanded that the EU becomes a financial guarantor of Ukraine’s payments. As President Vladimir Putin pointed out in a letter to EU leaders, “Russia doesn’t have to deal with Ukraine as a financial burden on its own.” Putin stressed that the “inactivity of the EU when it comes to Ukraine’s gas debts looks like an attempt to transfer responsibility for economical crisis in Ukraine to Russia’s shoulders.”

The European Commission said in a statement that “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.”

Russian President Putin (far left) and Ukrainian president Poroshenko (far right)meet in Milan, Italy, to discuss a gas supply deal

flickr / The Speaker under Creative Commons

Russian President Putin (far left) and Ukrainian president Poroshenko (far right)meet in Milan, Italy, to discuss a gas supply deal

European Union spokeswoman Marlene Holzner said that the bloc decided to disburse 760 million euros ($954 million) of financial aid to Ukraine earlier than scheduled to help it pay for gas. She made it clear, though, that the EU made no pledge to step in. “The EU is not paying fresh money or additional money to help Ukraine pay its gas bills,” Holzner said. “And the EU is not giving any guarantee to the Russian side in case Ukraine says we cannot order X amount of gas or we cannot pay.”

As estimated by RusEnergy, the export of Russian gas has dropped by one-third since September 2014. The analysts predict the decrease of exportation in the long term. It is suggested that Europe will put all its efforts toward buying less gas from Russian gas giant Gazprom, and Russia will start delivering gas to China around 2020, starting at 4.5 billion cubic meters per year and going up to 30 billion in 2030.

“China won’t substitute the European market for Russia,” Krutikhin said, noting that Russia still relies on Europe’s dependence on Russian gas. “De facto, Gazprom now acts not like a commercial enterprise but like a political instrument. It underestimates the consequences.”

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