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Payback Time
Russia: Ukraine Must Prepay Its Gas Bill

By next Friday, Ukraine will have to pay Russia for next month’s supply of gas. Whatever it forks over by that May 16 deadline will determine how much gas it gets in June. On the surface, this requirement makes a lot of sense: Naftogaz, Ukraine’s state-owned gas company, owes Gazprom, Russia’s equivalent, a lot of money in unpaid gas bills—around $3.5 billion, according to Russia’s energy minister. In other circumstances, moving to a pre-paid plan would be the sensible thing to do.

But, of course, this isn’t one family negotiating with the local gas utility. This is Ukraine dealing with its bellicose eastern neighbor, who recently annexed the country’s only coastline and jacked up gas prices some 80 percent. And Gazprom already charges the former Soviet state some of the highest gas prices in Europe under “take-or-pay” contracts (in which Ukraine is charged for an agreed-upon amount of gas, whether it consumes that amount or not). As the FT reports, this isn’t just a Ukrainian problem, it’s also a threat to European energy security:

The move to pre-payment raises the prospect of a disruption in gas supplies through Ukraine – a key transit point for about 15 per cent of European gas supplies. […]

Oleksandr Todiichuk, deputy chairman of Ukraine’s state gas company Naftogaz, told the Financial Times on Thursday that the risk of the dispute leading to gas disruptions that could affect EU markets was “pretty high.”

To hear Todiichuk tell it, Naftogaz isn’t going to come up with enough cash by next Friday to prevent a pan-European disruption next month. Brussels could take Medvedev’s suggestion (which bordered on extortion), and pay Kiev’s debts in order to keep the gas flowing from Russia. But every European leader has to be getting nervous right about now; not only are these countries heavily reliant on Russian gas, they are also counting on the shambolic Ukrainian government to ensure the reliable transport of that supply.

Europe’s shaky energy security is being laid bare, and most of its alternatives—like domestic shale reserves, imports of American LNG, new nuclear reactors, or even Israeli gas—are years away from significantly transforming its energy portfolio. There’s only one consolation for Ukraine and its western neighbors: At least this impending cutoff is coming at the beginning of summer, when demand for gas is relatively low.

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  • gabrielsyme

    who recently annexed the country’s only coastline

    Ukraine still has a lengthy Black Sea coastline, including the famous port of Odessa.

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