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Winter Is Coming
What Europe Can Do for Gas-Strapped Ukraine

Well before Russia seized Crimea and started supplying arms to separatists in eastern Ukraine, the two countries shared a fractious relationship over the purchase and sale of natural gas. Ukraine sources more than half of its gas from Russia but, like many countries in Europe, has chafed over long-term, take-or-pay contracts that tied the price of gas to oil. Then, when things began to deteriorate earlier this year, Moscow nearly doubled the price of gas for Kiev. Ukraine refused to pay and ran up a sizable bill that remains unpaid. Russia insisted on moving to a prepaid plan, and then shut off gas supplies to Ukraine entirely earlier this summer.

That’s where we stand now, but the bigger worry has yet to manifest itself. In many ways, the timing of this spat has been fortunate for Ukraine. Summertime is typically a period of low demand for natural gas; it won’t be until the colder winter months that the need to burn the fuel will really spike as Ukrainians heat their homes. In the meantime, Kiev has attempted to squirrel away what gas it does have in underground storage, and has also sought to secure “new” supplies of gas from its other neighbors. We say “new” because this strategy, to ask other European countries to reverse gas flows back into Ukraine, still ends up with Ukrainians burning Russian gas, albeit through new middlemen.

Poland is one such country to divert Russian flows back into Ukraine, but this week it stopped doing so, accusing Gazprom of cutting down on supplies in an effort to stop these reversed flows. Gazprom denied these claims, and Warsaw has apparently resumed sending gas Kiev’s way. But the incident could be a harbinger of a cold winter not just for Ukraine, but for Europe more broadly. The NYT reports:

Ukrainian officials had hoped for the so-called big reverse. In that situation, Slovakia would have been able to reverse the flow of 30 billion cubic meters or 1.06 trillion cubic feet of Russian gas annually and solve Ukraine’s looming energy crisis.

But many saw the big reverse as, no pun intended, a pipe dream. While European Union rules bar territorial restrictions when gas is resold, and Ukraine has signed an association agreement, Gazprom objects to having its gas redirected without its approval. European regulators are in the midst of an antitrust investigation of Gazprom that is examining this issue.

Slovakia, a major thoroughfare for Russian gas heading to Italy and other points west, balked at the idea of a big reverse. Like Ukraine and much of Europe, Slovakia depends on Russia’s natural gas, so the Slovaks have been treading carefully, seeking to appease both the Russians and fellow members of the European Union.

There’s another worry on the horizon for Europe, in addition to Russian belligerence over these reverse flows. In the past, when Moscow has cut off Kiev’s supplies, the country has siphoned off gas meant for other European countries  (roughly one third of Europe’s natural gas supply transits Ukraine). If this pricing dispute isn’t resolved, it’s reasonable to expect that it won’t only be Ukraine feeling the chill this winter.

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  • Thirdsyphon

    Russia won’t stop transiting gas across Ukraine no matter how much Ukraine steals. Putin needs the money, desperately, urgently, and the gas is worthless to him in the ground. No immediate substitute for the trans-Ukraine pipelines is available. Kiev almost certainly knows this, and will be guided accordingly.

    • Kevin

      Not so sure. Does he need money more (and more immediately) than the Ukrainians and Europeans will need gas come winter?

      Or, perhaps more to the point, will he need money more than he will need to avoid looking like he backed down?

      • f1b0nacc1

        Three problems:
        1) Losing the revenues will hurt Putin pretty much immediately…a great deal of his appeal is that he keeps the money coming in
        2) While Putin could HURT the EU in the short term, he cannot cripple it. The EU has the ability to keep the fire burning absent Russian gas, albeit at a very high price. Depending upon how far Putin wants to push things, this price might be acceptable to the EU, which would allow them to call the bluff.
        2) Even if Putin was able to strong-arm the EUnicks in the short run with a gas shut-off, there is the danger that by doing so, he will wake up some of the Europeans to the problem posed by his control of their energy supplies, and thus encourage them to take steps to cope. This might be something simple such as doing a long-term deal with the US, or something more complicated like reworking their dysfunctional energy policies. It almost certainly would include other geopolitical steps that would not be to Putin’s liking.
        Putin might win some limited gains in the short term (unlikely), but the mid-to-long-term impact would not be to his advantage. Hence he will more likely focus on limited steps peripheral to this main event, such as messing with civil aviation, or diplomatic mischief in the third world…

      • Thirdsyphon

        Without money, Putin will have to back down anyway. All those fake jobs for people in major cities, white elephant public works programs, and large-scale military deployments come at a cost that only the global energy markets can pay.

        The Europeans may or may not be desperate for gas, but if they’re not actually getting it, they’re not going to pay. Ukraine probably will be desperate, but as long as any gas at all is transiting through their territory, they’re not going to be forced to do without.

    • Duperray

      In my opinion, as Russia recently claimed that it would supply Europe according to contracts, not a cubic meter more, invoicing non reliable Ukraine at very high prepaid price, it took a very strong position: Either Ukraine steals Europe paid gas or has no gas: they obviously expects Europe to pay former 5.3B$ bill… big dream!
      EU starts to understand they put themselves in a quagmire; To escape from would anyway cost them a fortune and a political humiliation.

      • Thirdsyphon

        The legalities of Ukraine siphoning Russian gas are, at this point, probably pretty complex. I have no idea how the Hague parses out these things, but on a gut level it seems to me that Kiev can make a pretty persuasive case that Russian incursions, annexations, and shelling of Ukrainian land and people in recent months have damaged far in excess of [insert the value of any gas siphoned off by Ukraine]. Putin might counter by saying that the gas belonged to Europe from the moment it was purchased, so Kiev is really robbing them, but (like the gas itself) that’s neither here nor there.

        Gas will (allegedly) be inserted into the physical pipelines by Russian companies and cross the border into Ukraine. The difference between the gas purchased in Europe and the gas that actually arrives there is something that Putin and the EU can (and most certainly will) argue over; but at the end of the day, unless the difference is enormous, it’s in Putin’s best interest to boost supplies enough to fulfill Russian contracts notwithstanding Ukrainian theft. The Europeans aren’t going to pay for gas they’re not receiving, no matter how loudly Putin snarls. And Putin desperately needs them to keep paying. So he’ll do whatever is necessary to make that happen.

        • Duperray

          So for you, everything is balck and white: All evils are Moscow, all columbus are US !

          Putin is shelling russian people in Donbass while the same refugiees are hastily escape towards Russia where they are over 100,000 received in special camps (verified by UN) !

          Kiev nazi insign private armies are angels and are carefully shooting (courageously from 25km with 6″ guns..) only at separatists hidden in cities ….

          With such contradictions with basic common sense, I see once again how much US propaganda is efficient.

          It fools americans only, Not me, neither UN, nor Amnesty Int and OSCE.

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