Gazprom Issues New Threat to Cut Gas Supplies to Ukraine over Unpaid Debts

A New Ultimatum

When Russian President Vladimir Putin and his Ukrainian counterpart Viktor Yushchenko emerged from marathon talks on 12 February to announce that they had reached a last-minute deal to avert a threatened reduction of Russian gas supplies to Ukraine, both sides breathed a sigh of relief. As details of the agreement filtered out, with Ukraine set to pay off its US$1.5-billion debt for supplies already received and Russia agreeing to eliminate intermediaries in the two countries' trading relationship, the deal appeared perhaps too good to be true (see "Related Articles" below). Sure enough, over the course of the last two weeks, the two sides have differed in their interpretation of the deal, and while the prime ministers of both countries said last week that they were committed to it, final details still have not been worked out, putting the deal in peril.

Ukrainian Prime Minister Yulia Tymoshenko and President Yushchenko have clearly not seen eye-to-eye here, with Yushchenko castigating the government for its slow payment of the arrears in fulfilling Ukraine's end of the presidential agreement. Tymoshenko's deputy, Oleksandr Turchinov, earlier this week sought to reject part of the deal, saying that Naftogaz Ukrainy, the state-owned oil and gas holding, does not need Gazprom to help distribute gas to the domestic market. The Ukrainian government says that it has enough money in its accounts to immediately pay off the debts, but thus far Naftogaz has only paid off around US$340 million, with another US$240 million slated to be paid off this week. Thus, it appears to be foot-dragging rather than Naftogaz's dire financial straits that has resulted in the slow payment of Ukraine's gas debts.

Yesterday, Gazprom took the bull by the horns, acting to force Ukraine's hand and ensure that the Ukrainians uphold their end of the earlier deal. Gazprom said in a statement that it believed that 1.9 bcm of additional gas has gone missing and is now considered Ukrainian debt, Yushchenko said that Putin warned him by telephone that Gazprom could begin cutting supplies, with Yushchenko's office releasing a statement saying that "President V. Putin stated that the payments made so far for gas consumed are clearly unequal to the whole debt and cannot be sufficient for further uninterrupted gas supplies to Ukraine." Gazprom spokesman Sergei Kupriyanov then issued the ultimatum to Ukraine, saying, "This cannot go on. If the problems are not settled, to uphold its economic interests in view of [Ukraine's] failure to pay for gas, Gazprom will from 10 a.m. [0700 GMT] March 3 cut gas supplies to Ukrainian consumers by 25 percent."

Assurances and Caveats

The new threat to Ukraine's gas supplies once again triggered concern in Europe, which gets 80% of its Russian gas imports via Ukraine. However, European Union (EU) officials said that Gazprom had informed the European Commission about the renewed commercial dispute, reassuring the Commission that gas supplies to the EU will not be affected. Of course, it is impossible for the Russian gas giant to provide a 100% guarantee of stable supplies, considering that Ukraine could always take transit gas intended for European consumers if the dispute with Gazprom turns ugly, but there is little Gazprom can do—aside from building alternative pipelines to bypass Ukraine to supply Europe (which Gazprom is doing)—to ensure an uninterrupted supply of Russian gas to Europe via Ukrainian territory.

As in the threat earlier this month, Gazprom also clarified that only Russian gas supplies to Ukraine were at threat; Central Asian gas deliveries, which account for approximately 75% of Ukraine's total gas imports, are supposed to continue flowing unhindered. Although this should effectively limit the scope of the current dispute, in reality it is this very confusion over the source of Ukraine's imports that is contributing to the current problems. In 2007, Central Asian gas accounted for 100% of Ukraine's gas imports, with Gazprom playing no direct role in the supply of this gas, although it did have an indirect role via its 50% stake in RosUkrEnergo. The controversial joint venture (JV) has held a monopoly on gas imports to Ukraine since it was handed that role in the deal that resolved the January 2006 "gas war" between Russia and Ukraine.

This year, however, Turkmenistan experienced a shortfall in gas exports from the start of the year, due to a severe cold snap that caused the country to keep more gas to supply increased demand on the domestic market. Thus, Gazprom stepped in to provide Russian-sourced gas to Ukraine, averting a disruption in the country's gas supplies. Gazprom said that Naftogaz agreed to this deal in order to keep supplies flowing during the worst of the winter heating season, even though the cost of the Russian gas (at around US$314 per 1,000 cm) was well above the price at which RosUkrEnergo is supposed to be supplying Central Asian gas to Ukraine this year (US$179.5 per 1,000 cm). Without a contract to stipulate terms, however, Gazprom is now saying that the bill for those Russian gas supplies has come due.

Outlook and Implications

With the presidential gas deal from two weeks ago now in jeopardy of collapsing altogether, Gazprom's decision to issue another threat to Ukraine appears to be oriented at forcing Ukraine's hand, a none-too-subtle warning to the Ukrainian government to live up to its end of the agreement that Yushchenko negotiated with Putin. The Gazprom ultimatum is further proof that the Russian gas giant is no longer willing to subsidise former Soviet states in providing gas as "charity", demanding prompt payment even for supplies to states that—like Ukraine—have leverage over Gazprom's major source of cash flow; namely, Russian gas exports to Europe.

Turchinov said that Ukraine has now settled its arrears for gas supplies received in November-December 2007, but Gazprom has said it has not received payment yet. This may be the result of the fact that Naftogaz owes UkrGazEnergo, the JV that supplies Ukraine's domestic industrial gas sector, which then pays RosUkrEnergo, which then pays Gazprom. However, if Ukraine has only paid for supplies received in the final two months of 2007, then RosUkrEnergo would be the final creditor, since Gazprom did not, technically, supply any gas to Ukraine last year (even if the Russian firm sold the Central Asian gas to RosUkrEnergo which in turn sold it to Ukraine). Further Naftogaz payments for gas supplies received in 2008 would end up with Gazprom, albeit via UkrGazEnergo and RosUkrEnergo, it seems.

Gazprom wants payment from Ukraine for Russian gas supplies delivered this year, and regardless of who owes who, the Russian gas monopoly is demanding prompt payment. Kupriyanov said that Gazprom is insisting on Ukraine settling the problem by the end of February, although it does not expect the whole debt to be paid off by then. He did not give a timetable for full payment, although it would seem that the threat to reduce supplies by 25% by 3 March is effectively the deadline. Ukrainian officials could "settle the problems" before then by agreeing to a timetable for debt repayment with Gazprom even without paying the debt in full by 3 March, but then an easier—and more effective—way of resolving the problems is to simply pay up. After all, Ukraine and Russia went down this road just two weeks ago, yet another threat to reduce supply is now on the table.

Related Articles

Ukraine: 25 February 2008: Deputy Ukrainian PM Rejects Part of Russia Gas Deal; Gazprom and Naftogaz to Continue Talks

Ukraine: 22 February 2008: Details Remain Obstacles as Ukrainian PM Fails to Finalise Gas Deal with Gazprom

Russia: 21 February 2008: Ukrainian, Russian Prime Ministers Ease Lingering Tension, Reaffirming Gas Deal

Ukraine: 20 February 2008: Naftogaz Seeks 35% Increase in Wholesale Gas Price on Ukrainian Market

Ukraine: 15 February 2008: Ukraine Begins to Put Naftogaz Back on Solid Financial Footing

Ukraine: 14 February 2008: Ukraine Backs Down from Threat to Increase Gas Transit Tariffs; Gazprom Chairman Says Intermediary Will Remain 

Ukraine: 13 February 2008: Last-Minute Russia-Ukraine Gas Debt Deal is Victory for Transparency, But Will Agreement Hold?

Ukraine: 11 February 2008: Ukraine Willing to Settle Russian Gas Debt, But with Conditions

Russia: 8 February 2008: Gazprom Credibility At Stake with New Threat to Cut Russian Gas Supplies to Ukraine Over Debts

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