Ukraine and Russia: should the EU worry about a ‘gas war’? | beyondbrics #EuroMaidan

Ukraine and Russia: should the EU worry about a ‘gas war’? | beyondbrics:

As beyondbrics foresaw last week, Russia has turned to Gazprom, its state-controlled natural gas monopoly, to put pressure on the new Ukrainian government. Over the weekend, Gazprom warned that Kiev may lose the discount agreed by ousted president Viktor Yanukovich from the second quarter of 2014. The big question now is, should the European Union worry that an escalating gas row between Russian and Ukraine would lead to cuts in Gazprom’s gas exports to Europe?

Gazprom said its price could be increased in view of Ukraine’s debt for previous deliveries, estimated at $1.55bn.

Andrei Kruglov, Gazprom’s deputy chief executive, said during a meeting with investors in London on Monday: “The situation with payments is worrying. Ukraine is paying, but not as well as we would like it to… We are still thinking whether to extend the pricing contract into the next quarter based on current prices.”

On Saturday, Sergei Kupriyanov, a Gazprom spokesman, told Reuters that “it seems that with these gas payments overdue and its obligations unfulfilled, Ukraine may not keep its current gas discount… The gas discount agreement assumed full and timely payment.”

Also on Saturday, an official at Russia’s energy ministry told the Interfax news agency that it would be “stupid and wrong” to extend Ukraine’s gas discount into the second quarter, considering Kiev’s debt. “If this continues to happen, is there any point in continuing the existing agreement to supply gas at discounted prices? No,” the unnamed official said.

Yanukovich agreed a $20bn support package with the Kremlin after he refused at the eleventh hour to sign a trade agreement with the EU in November. As part of the deal, Gazprom cut its price to Ukraine by a third, to $268.50 per thousand cubic metres of gas. The agreement calls for quarterly reviews.

The situation is complicated by the fact that Russia has frozen the second tranche of its support package, after buying an initial $3bn in newly-issued Ukrainian eurobonds. The possibility of alternative aid from the west remains unclear. Oleksandr Shlapak, Ukraine’s financial minister, said on Saturday that Kiev expected to receive a stand-by loan from the International Monetary Fund “not earlier than April, in the best-case scenario.”

A previous dispute over gas prices between Russia and Ukraine in 2009 led to cuts in exports to Ukraine, resulting in shortages in the EU. This happened in winter, when consumption was at its peak.

Might a similar crisis erupt again? It certainly could. However, the EU states currently have significant gas stocks, thanks to a mild winter. According to Gas Infrastructure Europe, most central European countries, which rely heavily on Russian gas, had inventories of between 37 and 70 per cent of capacity on Sunday.

Source: Gas Infrastructure Europe

Hungary had stocks of about 22 per cent of capacity but, according to Reuters, “because its inventory facilities are larger in volume, its reserves are still enough to meet almost two months’ worth of demand.”

Meanwhile, Ukraine has doubled gas imports from Russia over the last few days. According to Ukrtransgaz, gas transit monopoly, it imported 45m cubic metres of gas on March 1, compared with 20m on the same date in 2013. Some analysts believe that Kiev is trying to get as much gas as possible at the discounted price.

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