Russia and Ukraine: New Gas War Coming?

By Tatyana Stanovaya

Starting from March 31 the validity term of the winter package of agreements on gas supplies between Russia and Ukraine ends. During this period Ukraine gets the fuel at a preferential price on the prepayment terms. As March 31 approaches the risks of new gas aggravation increase acutely: Russia warns that in case of no new agreements the risk of no more blue fuel supplies persists. However in the current situation another matter occurs in addition to the dispute on prices and terms of supplies: the problem of direct supplies from Russia to the LPR and DNR. Now the gas issue shall be tightly connected with the conflict in Ukraine.


Gas agreements reached in the night of October 31 with the participation of the EU provided that the gas price was defined under the formula fixed in the contract of 2009 considering the export duty preference of USD 100 per 1000 cubic meters established by the Government of the Russian Federation (if the price under the formula is lower USD 333.33 per 1000 cubic meters, the preference would comprise 30%). Gas is supplied on prepayment terms with no exceptions, and Ukraine has accomplished its obligations in full despite the worries of Gazprom which demanded prepayment guarantees (which were not provided as a result). The EU guarantees were only fixed in the letter of Jose Manuel Barroso addressed to Petro Poroshenko: Brussels promised that Russian gas prices would not change till March 31.


Also Ukraine satisfied the debt to Gazprom in the amount of USD 3.1 bln with two tranches. However the interpretations of the amount of the debt still differ. Ukraine considers that the unpaid but consumed gas during November-December 2013 and April-June of 2014 in the amount of 11.5 bln cubic meters shall be covered completely with these amounts on the basis of USD 268 per 1000 cubic meters. Disagreement of Gazprom with the kind of line was specified in the documents signed: the gas monopoly estimates the debt of Ukraine in the amount of USD 5.3 bln on the basis of USD 485 per 1000 cubic meters.  I.e. the gas monopoly reserves the right to demand the “underpaid” sum any time.


The agreements for the winter period were rather of politics. The Kremlin made concessions ground on two basic reasons. The first is about non-failure of Minsk cessation of arms reached in September (especially considering that the elections in DPR and LPR were planned to be held in November and Moscow wished them to be held in peace). The second – winter is the period of the peak gas consumption and termination of supplies would have meant the risks of interruptions in blue fuel delivery to European consumers. Russia was not eager to take the risks of aggravation of enough badly spoilt relations with Brussels.


That is why the signed winter package was just a peculiar postponing of gas crisis. Let’s remind that initially Russia demanded Kyiv to pay USD 480 per 1000 cubic meters of gas starting from March 2014 (when the State Duma voted for termination of the power of the Kharkov agreements in relation to the annexation of Crimea and Sevastopol to Russia). Earlier Ukraine had had a preference of USD 100 per 1000 cubic meters within the frameworks of the agreements on the Black Sea Fleet rent. Ukraine did not accept the price of USD 480 and Russia terminated gas supplies till the winter package signing. Kyiv counts for the dispute to be resolved by the International Arbitrage which Ukraine has already addressed.


In such situation Russia attempts to exert pressure towards Ukraine using two main levers. The first one is the demand to cover the debts. The case is about USD 11 bln of “loss of profit” as Dmitry Medvedev specified last March (recalculation of the price of already supplied gas due to the termination of Kharkov agreements, which is not recognized by Ukraine). Except for that Russian Ministry of Finances does not exclude that soon Kyiv shall be demanded to settle the credit in the amount of USD 3 bln obtained by Viktor Yanukovych a few months before overthrow. The second lever is the gas price itself. We should not exclude that Moscow would not refuse of USD 480 per 1000 cubic meters and the prepayment, which is currently absolutely unreal for Ukraine.


And it means that starting from March 31 a new gas war becomes quite possible. And simultaneously it would go along with another obstacle: the dispute between Russia and Ukraine on legal relevance of direct Gazprom’s supplies to the LPR and DPR through the gas-measuring stations out of Kyiv’s control. The gas monopoly started supplying gas from February 19 using the fact that Ukraine terminated supplies of the blue fuel for the rebels due to allegedly ruined gas infrastructure. Kyiv is assured that Gazprom violates the gas contract by supplying gas to the stations not specified in the application of the consumer. Gazprom in its turn states tha the contract does not exclude such an option and does not provide the loss of Naftogaz’s control over individual GMSs.


Ukraine has found itself in a quite complicated situation. Gazprom supplies gas to the LPR and DPR at the cost of Kyiv. It can be avoided only if Ukraine shall consume the prepaid gas as fast as possible. To prevent it Gazprom attempts to prolong the terms of fuel supply As a result Kyiv blames Gazprom in non-accomplishment of its obligations and Gazprom demands from Kyiv to give an official confirmation that the GMSs pumping gas to LPR and DPR situate within the territory of Ukraine. It is clear that the kind of requirement is provocative, and Kyiv would rather evade the response than give the gas monopoly the ground to proceed with gas supplies to the territories not controlled by Kyiv.


Unwillingness to pay for gas supplied to the LPR and DPR also stops Kyiv to make a timely prepayment. Ukraine demands to terminate the supplies to the non-recognized republics. As a result at first Russian Prime Minister Dmitry Medvedev and afterwards Vladimir Putin warned that Kyiv had gas left only for a few days. On February 27 Naftogaz made the advance payment in the amount of USD 15 mln but Gazprom claims that it shall cover only 24 hours.


It’s worth underlining that the motives of direct gas supplies to the LPR and DPR are connected not only with that Russia wishes to “punish” Kyiv by forcing it to pay for the gas coming to the separatists. The motives of Moscow are more of the matter of fact: during winter period the rebels especially need reliable fuel provision without the risk of supplies termination by Naftogaz as it happened on February 19. This matter is rather technical than political that is why too harsh line of Russia is unlikely. Moreover the Kremlin is perfectly aware of that during a warmer period Kyiv may terminate the prepayments at all and in such case the LPR and DPR shall not be able to get Russian gas as well. That is why there are still chances for the agreements to be reached.


Kyiv and Moscow are able to find an option for the gas coming to the LPR and DPR would not be covered by Ukraine. On February 27 the Chairman of Naftogaz Ukrainy Andrey Kobolev confirmed that Gazprom anticipates a possibility not to consider the gas delivered to the area of conflict in the east of Ukraine within the frameworks of the contract with Naftogaz. An official representative of Gazprom Sergey Kupriyanov said on the air of Russia 24 channel that Russian company is ready to supply gas to Donbass beyond of the frameworks of the contract with Naftogaz. And the Press Secretary of President Dmitry Peskov did not exclude that Russia would deliver gas to the LPR and DPR for free, justifying it with humanitarian disaster. But in the evening of February 27 Gazprom specified that gas for the LPR and DPR would not be counted if Kyiv refused to supply gas to Donbass in writing.  Quite a response was incited also by the statement of Vladimir Putin made under the results of the meeting with President of the Republic of Cyprus Níkos Anastasiádis held on February 25. Putin called the termination of gas supplies to the LPR and DPR by Ukraine to be genocide.


Meanwhile the EU as well as Ukraine is getting ready to reduce their dependence from Russia significantly after the end of the most complicated winter period. Let us remind that in 2014 Ukraine managed to stand for almost 5 months (from June to November) without gas supplies, by this it was able to avoid undersupplies to Europe. In the middle of February Prime Minister of Ukraine Arseniy Yatsenyuk stated that the country was ready to refuse from Russian gas supplies completely. “We have almost gone through the winter. Few people hoped us to. I said that it would not be warm, but we would not also freeze – and it was warm, and we didn’t get frozen”, he noted. On February 24 Kobolev also specified that NAK Naftogaz Ukrainy was holding talks on conclusion of long-term contracts on natural gas supplies to the country with European companies. “Recently we have obtained an offer from three big European companies to transfer to long-term relations, to sign a comprehensive long-term contract”, he said. According to him these are the companies that currently perform supplies to Naftogaz.


Moreover Hungary raised gas reverse by 15% despite the promise given during the talks between Prime Minister Viktor Orban and President Vladimir Putin in the middle February not to forward gas purchased from Russia to Ukraine. Hungary acquired a gas preference from Russia as well as release from the terms “take or pay”. According to the Press the refusal to resell Russian gas to Ukraine was a part of that deal. But as the web-site of Ukrtransgaz reported Ukraine enhanced daily scope of natural gas imported from Hungary by 15% up to 5.9 mln cubic meters. By this it is important to underline that already now a greater part of Fuel comes to Ukraine from the territory of Europe. It is by 39% more than from Russia.


Also Europe tightens its gas relations with Russia. On February 24 the European Commission presented the plan on the foundation of an Energy Union: this project had been promoted by Poland and Baltic states for several years with the purpose to reduce the EU dependence from Russia. Till 2014 the project was considered as relatively unviable: the countries of Western Europe were skeptical about the offer to centralize gas purchases. However after the beginning of the war in Ukraine the line has changed, starting from Germany primarily. In the document presented in Brussels it is suggested to enhance transparency of intergovernmental agreements and commercial contracts on gas supplies signed on their basis. At the moment such contracts are confidential. Except for that the EC shall have an opportunity to check the treaties before their signing. The purpose is to “reduce pressure exerted on individual states and to enhance the level of European laws observance”. The changes should assist the EU to “gain the unanimous voice during the talks with the third parties”, specifies the plan. As the European Commissioner on Energy Maroš Šefčovič stated on February 25 it is provided that the EU member-states will have to uncover the cost of a contract to the regulator, as well as the scopes of supplies and other terms of purchases. Yet such plan is supported not by all countries. But according to him the readiness to discuss the new Energy Union is currently “expressly higher than a few years ago”.


Simultaneously European Commissioner on Competition Margrethe Verstager stated that soon the EU shall resume the antimonopoly investigation in relation to Gazprom. It was interrupted because of the Ukrainian crisis. We also remind that in September 2014 the General Prosecutor’s Office of Switzerland declared about the intention to bring charges in corruption in relation to the Gazprom’s top-managers. They are suspected of receiving bribes during the construction of Jamal-Europe gas pipelines.


The policy of arm-twisting in the gas market results in natural loss of market advantages of Gazprom: not only the reputation of the supplier worsens but also its marketing options regarding the markets of the EU and Ukraine. However it is not a surprise: within foreign affairs of Russia geopolitical interests are prior to commercial interests of Gazprom, which frequently remains the instrument of achievement of the objective of foreign policy. However the abuse of such instrument as eventually reduces its efficiency as the pressure lever. Yet within the relations of Russia and Ukraine we can forecast a long-term period of instability and conflict in gas sphere with frequent cases of supplies suspension, failures of payments and unsanctioned offtakes. Until the relations of Russia and Ukraine are of conflict (and most likely it is already the matter of another decade), we should not excpect stability within gas relations.


Tatyana Stanovaya – the Head of the Analytical Department of the Political Technologies Center



Translated from Politcom.ru






April 2016