Gazprom Credibility At Stake with New Threat to Cut Russian Gas Supplies to Ukraine Over Debts

Threats Once Again

In recent weeks, the tension has been building between Russia and Ukraine as fiery Ukrainian Prime Minister Yulia Tymoshenko has stepped up her campaign to rid her country of what she alleges are "corrupt" intermediaries in the supply of Russian and Central Asian gas to Ukraine. Although Ukrainian officials inked a deal with Gazprom in early December covering gas prices and transit for 2008, Tymoshenko came into office shortly thereafter, criticising the deal and vowing to get rid of RosUkrEnergo, the joint venture that holds a monopoly on gas imports to Ukraine, and UkrGazEnergo, another joint venture that dominates the supply of that imported gas to Ukraine's industrial consumers.

Tymoshenko and Ukrainian President Viktor Yushchenko have stated differences of opinion in how to go about scrapping the system of intermediaries, and with both officials slated to visit the Russian capital, Moscow, in the coming weeks, the lack of a coherent, unified Ukrainian strategy has threatened to undermine the country's negotiating position. Yesterday, however, Gazprom gave the Ukrainians a new, more immediate problem to consider, as Sergei Kupriyanov, a spokesman for the gas giant, said that Gazprom will cut supplies of Russian gas to Ukraine from next week unless Ukraine pays its US$1.5-billion debt by 11 February. In a statement, Gazprom declared that, "Ukraine has been unable to provide comfort as to its intentions to provide payment for the additional volumes of Russian gas and there remains a lack of clarity as to the consumers of this additional supply."

The threat sent European governments and the European Union (EU) into a frenzy, conjuring images of a repeat of the January 2006 "gas war" that saw Russian gas exports to Europe—some 80% of which flow via Ukraine—disrupted as Ukraine took transit gas from its pipelines in order to compensate for a reduction in Russian gas supplies to the Ukrainian market. This time, however, Gazprom has tried to soothe fears over Europe's energy security by contacting the European Commission in advance, assuring it that the dispute with Ukraine is commercial in nature and promising that Russian gas supplies to the EU will not be interrupted.

A Tangled Supply Chain

Gazprom's promises are one thing, but keeping deliveries stable may be a challenge if Ukraine fails to pay the debt on time, forcing the Russian gas giant to follow through on its threat. Any reduction in Russian gas supplies to Europe would surely call into further question the reliability of Russian gas exports to Europe, even if Ukraine is the party at fault for taking transit gas for its own consumption needs in the absence of Russian gas. Most likely, this scenario will not come to pass, however, as Gazprom's threat comes at a time in which peak demand for gas for the winter heating season has passed. Furthermore, Gazprom has clarified that only Russian-sourced gas will be cut, with Central Asian gas exports to Ukraine untouched. Gas from Turkmenistan, Uzbekistan, and Kazakhstan makes up the bulk of the gas that is supplied to Ukraine under the country's 2008 supply deal.

What is more, in all likelihood, Ukraine will commit to paying off the US$1.5-billion debt before 11 February, if not actually make the payment, which could alleviate the threat altogether. Still, the fact that Ukraine continues to rack up debt for gas supplies is a source of problems in the Russia-Ukraine gas relationship, and the nature of how the debt was accrued could be a complicating factor in the coming negotiations over the intermediaries. Gazprom said that some US$500 million of the debt is for 1.5 bcm of Russian gas supplied since 1 January. Kupriyanov noted that Gazprom had increased gas supplies to Ukraine, Turkey, and Greece since the start of this year after those countries faced lower deliveries from other suppliers, a reference to a drop in Turkmenistan's gas exports. Gazprom has acted to stabilise supplies to these countries, offsetting the decline in Turkmen supplies with deliveries of its own, more expensive gas. Kupriyanov said that, "All our partners follow payments schedules, and it is only with Ukraine that a paradoxical situation has emerged where it gets the gas it needs, but does not pay for it."

Outlook and Implications

For Tymoshenko and Yushchenko, the Gazprom threat to cut Russian supplies is yet another challenge in rectifying the financial woes of Naftogaz Ukrainy, the state-owned oil and gas holding. Gazprom's supply of more costly Russian-sourced gas to Ukraine to compensate for lower deliveries of cheaper Central Asian gas means further tangles in the supply chain, with Ukrainian officials now trying to determine who is supplying gas to the country and who is responsible for paying for these supplies. If RosUkrEnergo is delivering less-than-planned Central Asian gas to Ukraine (the reason cited by Gazprom for its own increased deliveries), than any cut in Russian gas supplies to Ukraine will leave Ukraine with a supply gap.

However, with RosUkrEnergo and UkrGazEnergo apparently the debtors to Gazprom, and Naftogaz owing both of these intermediaries, the Ukrainian government is faced with a situation similar to last October in which the gas debt is owed by commercial companies and yet the debt is essentially sovereign. The debt racked up thus far, together with the complex web of suppliers, should provide further support for Tymoshenko in seeking to streamline Ukraine's gas trading relationship with Russia, although this episode will make it extremely difficult for her to hike transit prices for Russian gas, while providing further evidence that any return to a direct supply deal with Gazprom will entail higher, not lower, gas prices for Ukraine.

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