Gazprom Cuts Gas Supplies to Ukraine Further as Internal Ukrainian Split Remains

Tension and Escalation

Yesterday at 1700 GMT, Russian state-controlled gas giant Gazprom cut a further 30-35 mmcm/d of gas, or 25% of its Russian-produced gas deliveries to Ukraine, bringing its total cut this week to 50%. As the further cut was implemented, Gazprom said that unless negotiations were commenced at the soonest opportunity it would continue to implement further cuts, until a settlement of the US$600-million debt at the centre of the dispute is reached.

Gazprom has accused Ukraine of failing to fully settle back-payments for gas received in 2006 and 2007, although the core of the issue is the apparent lack of any Ukrainian payment at all this year for the gas imported from Russia since the beginning of January, resulting in a debt of US$600 million. Ukraine sources the largest single volume of its gas imports from Turkmenistan—transited through Russia—while Russia itself remains the second-largest source of gas coming into Ukraine. There have been threats that if debts to Gazprom continue to be unpaid, the Russian gas giant could also start to block Ukrainian access to Turkmen gas. By that point, however, the shortages in Ukraine would already be severe enough to have either spilled over into the European Union (EU), or forced some kind of settlement of the dispute.

Naftogaz Ukrainy, the state-owned Ukrainian gas company, immediately answered Gazprom's second cut by saying that Ukraine reserved its right "to respond appropriately" in order to protect its domestic customers, sparking fears all over the EU that the shortages would be passed on westwards, according to Bloomberg. Gazprom transits around 80% of its gas exports to the EU through Ukraine and the scenario would be reminiscent of the early 2006 "gas war", in which Russian cuts in deliveries to Ukraine were being passed on to Europe when the Black Sea country tapped the transited volumes for its own use (see "Related Articles"). Later yesterday, however, Ukrainian Prime Minister Yulia Tymoshenko told a cabinet meeting that Ukraine would honour its transit commitments, soothing EU fears amid all the pumped-up rhetoric. Reuters reports her as saying "Ukraine is a reliable partner. We will not stray one iota from our obligations in terms of exporting natural gas to European countries, this is very important for Ukraine."

Control

Nevertheless, there is no sign of negotiations beginning, as there is no consensus in Ukraine on its standpoint in such talks. President Viktor Yushchenko maintains that the solution should be based on an agreement he reached in mid-February with Russian President Vladimir Putin, but Tymoshenko is opposed to this. At the core of the dispute within Ukraine itself is not the US$600 million in debt, but Gazprom's access and control—through intermediaries—of the domestic Ukrainian gas market. Currently Gazprom sells the gas being delivered to Ukraine to two intermediary companies, RosUkrEnergo and UkrGazEnergo, which then sell the gas on to Ukrainian gas companies, a set-up that has been especially criticised by PM Tymoshenko for harbouring corruption and price-rigging. The Yushchenko-Putin deal heeded the criticism of the intermediaries, by outlining their replacement with a joint venture (JV) owned by Gazprom and Naftogaz Ukrainy. According to Tymoshenko, however, such a settlement would still fail to disconnect Gazprom sufficiently from the domestic Ukrainian market. The prime minister has also pushed for a renegotiation of the transit fees paid by Gazprom for the gas it exports to the EU, an issue which will require further hard bargaining.

Gazprom, for its part, has refused to be completely disconnected from the arrangement, claiming it does not want to deal directly with Ukrainian gas companies. It is also understood that the Russian giant wants to have some insight into the domestic market of such an important transit country for Russia's wider gas exports.

Think Twice

Fundamentally, it is not in the interest of either of the national sides in the dispute to see it affecting the EU. In the wake of the 2006 gas war, after which Gazprom was suddenly seen as a threat with too much power over the gas market, the company has invested heavily in mending its reputation as a trustworthy and reliable long-term energy supplier and partner to Europe. It has gone to great lengths to make sure that it is not perceived to be using its role as a core gas supplier as a political tool in conflicts and negotiations. Nevertheless, Europe has increasingly regarded it as a threat, accelerating investment into alternative energies, alternative gas pipeline routes, and LNG supplies.

Ukraine is in a similar position, as its core role as the main gas transit country for Russian exports is in danger of being eroded by every new pipeline project that Russia launches. As Russian unreliability has been the main EU preoccupation in recent years, there has been little additional support for its Nord Stream and South Stream Ukrainian bypass ventures. However, if domestic Ukrainian politics are seen as spilling over into a Europe-wide gas crisis, the Russian argument for more diverse routes would indeed gain favour, undermining Ukraine's strategic importance.

Outlook and Implications

With talks between the presidential and prime ministerial camps in Ukraine seemingly deadlocked, the emergence of a negotiating stance seems some way off, making further cuts by Gazprom probable in order to force Ukraine to the negotiation table. As the dispute is not purely bilateral, but extends into opposing political factions within Ukraine, the possibility of it growing beyond the principal actors' control cannot be ruled out. If Gazprom's cuts extend swiftly into the volumes Ukraine is taking from Turkmenistan—and paying for—the Ukrainian argument could be that Russian blackmail has legitimised meeting its domestic demand from the EU-destined gas volumes. Gazprom would on the other hand find it very hard to back down in the face of the two warring Ukrainian camps' inability to find a common standpoint.

In order for the dispute not to spill over into a new gas war, intra-Ukrainian dialogue is likely to be facilitated by EU leaders over the coming days. Ultimately, the high strategic stakes for both the Russian and Ukrainian sides call for a settlement to be made, and there will probably be no shortage of willing European negotiators wanting to help. The domestic Ukrainian stalemate has to ease first, however, before negotiations with Gazprom and Russia can be resumed and a compromise—probably building on the mid-February presidential agreement but reducing intermediaries' roles in the Russo-Ukrainian gas trade somewhat further—reached.

Related Articles

Ukraine: 3 March 2008: Gazprom Chairman Elected President as Russia Makes Good on Threat to Reduce Gas to Ukraine by 30 mmcm/d

Russia: 29 February 2008: Gazprom Keeps Heat on Ukraine, Vows Cut in Russian Gas Supplies Unless Debts Resolved

Ukraine: 28 February 2008: Slow Progress in Ukrainian Gas Debt Payments Heightens Potential for Russian Supply Cut

Russia: 27 February 2008: Gazprom Issues New Threat to Cut Gas Supplies to Ukraine over Unpaid Debts

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

Find out more about Same-day Analysis