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Ukraine and Russia Tentatively Agree on Interim Gas Deal

Russian President Vladimir Putin and Ukrainian President Petro Poroshenko seem to have finally agreed on a solution to a very serious problem for Ukraine this winter: staving off gas shortages. After meeting in Milan last week, the two heads of state reportedly found some common ground to ensure up to 5 billion cubic meters (bcm) of additional gas for Ukraine this winter in a short-term deal.

Russia’s Gazprom cut off supplies to Ukraine earlier this summer over disputes about pricing and a sizable unpaid gas bill. Russia prices that bill at $5.3 billion, but Ukraine argues that it owes much less, that the gas it bought should be priced lower. To secure supplies this winter, Ukraine has agreed to pay $1.45 billion by the end of October, and another $1.65 billion by the end of the year.

But make no mistake: Kiev isn’t out of the woods yet. The 5 bcm it could receive from Russia out of this new deal might not be enough to heat its homes and power its industry should this winter turn out to be a particularly cold one. Kiev will be hoping for some outside assistance to help pay its gas bill—presumably from the West—as its economy isn’t exactly booming at the moment. Reuters reports:

Kiev faces a $3.5 billion funding shortfall for this year and next but the International Monetary Fund has said the government should be able to cover most of it with planned debt issues and an expected $900 million in further donor support.

“[I]t remains unclear where Ukraine would get the money for either the back payment for the gas delivered or the prepayment for future gas. Ukraine does not have the means to pay, and no one has yet offered the country a loan to finance this gas,” analysts at Sberbank CIB said.

The EU gets a third of its gas from Russia, and roughly half of that transits Ukraine as it wends its way westward. That makes this Ukraine-Russia gas standoff a continental concern; when Russia has played hardball with Ukraine in the past, Kiev has siphoned off this transiting gas, causing shortages elsewhere in the trading bloc.

It’s in the West’s best interest, then, for Ukraine to sign some kind of deal with Russia, preferably before temperatures start dropping and gas demand starts spiking. Putin knows this, and is using it to his advantage. This latest deal keeps Ukraine in an uncomfortable position (no one is feeling very energy secure in Kiev right now), and there’s a strong possibility that the West will have to step in to finance it. If that happens, Europe will be pouring money straight into Putin’s pocket.

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  • Sibir_RUS

    According to the Russian Energy Ministry, the Russian and Ukrainian leaders reached a preliminary agreement on Kiev’s payment of its gas debt to Russia during talks at the Asia-Europe Meeting (ASEM) forum in Milan last week. Ukraine is to pay $1.45 billion of the debt in October and another $1.65 billion by the end of 2014. The parties also agreed on the temporary price of $385 per 1,000 cubic meters for the winter season.
    In addition, the European Commission should help Ukraine find $1.6 billion by the end of the year as a bridge loan or as a guarantee of the top rank financial institutions. Ukraine is now facing the forthcoming winter with low natural gas reserves. In June, Gazprom switched Kiev to a prepayment system for gas supplies in light of its massive gas debt, in excess of $5 billion. The next round of trilateral gas talks between Russia, Ukraine and the European Union is scheduled for October 21.

  • Sibir_RUS

    As far as I understand, Ukraine will get as much gas as make an advance payment after repayment of the first tranche of the debt. And at the end of the year Russia will expect repayment of the second tranche of the debt.
    EU leaders artificially limit the capacity of the gas flows that bypass Ukraine, hoping to put pressure on Russia. These capacities can be loaded at 100% – this is useful to know to simple European consumers, who far from politic.

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