Russia and Ukraine jockey for position before another round of gas talks

By bne IntelliNews October 21, 2014

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Russia and Ukraine are meeting on October 21 to hammer out a new agreement over Ukraine's debts to Russia and future pricing for Russian gas, as winter approaches and Ukraine desperately needs Russian supplies to be restarted. 

Russia's president Vladimir Putin and his Ukrainian opposite number Petro Poroshenko reached a provisional oral deal on October 17 at a meeting in Milan, but almost immediately voices in Ukraine disputed the deal, in particular prime minister Arseny Yatsenyuk and energy minister Yury Prodan.  

While the sides have reached an agreement on the price of gas to be supplied during the winter months - fixing this at $385 per thousand cubic metres - the formula behind this price is the new battlefield. Russia wants to continue its practice of providing a gas price rebate as part of an intergovernmental agreement, whereby Russia simply exempts its gas monopoly Gazprom from paying export duties on gas supplied to Ukraine, with Gazprom passing the savings on to Ukraine's energy company Naftogaz.

For Russia the advantage of this is that it retains the very high $485 per thousand cubic meters reference price laid down in the last valid contract between Ukraine and Russian signed in January 2009, providing a more realistic gas price only as a concession on the part of Moscow towards Kyiv, and one that can in fact be revoked at any time. 

Yatsenyuk and Prodan met with European energy commissioner Günter Öttinger in Kyiv on October 20. According to Naftogaz, the two sides agreed that Gazprom and Ukraine's Naftogaz should sign an agreement fixing the volume of gas that Gazprom will supply under the winter price. Gazprom representatives previously stated to media that the volume of gas would correspond to the level of prepayments made by Ukraine. 

"The position agreed jointly between the European Commission and Ukraine envisages Naftogaz and Gazprom signing binding agreements excluding any unilateral changes," Naftogaz said in a statement following the meeting between Öettinger and Prodan, which was also attended by Naftogaz CEO Andriy Kolobev.

However, any new contract signed between Gazprom and Naftogaz might weaken the legal strength of Gazprom's original contract from 2009, which is the subject of lawsuit in Stockholm's international arbitrage court, and Russia has said it will reject any such moves.

An additional missing ingredient to a deal successfully being signed on paper is that Ukraine simply cannot pay down the debts and make the advanced payment for gas demanded of it, say experts and officials from both Russia and Ukraine. Both Moscow and Kyiv have called for the European Union and International Monetary Fund to provide funds to Ukraine to this effect. 

Russia's ambassador to the European Union Vladimir Chizov said that the size of the funds needed by Ukraine for gas was small compared to the size of funds the EU had spent bailing out Greece, Portugal and Ireland in recent years, as quoted by Interfax.

"Three weeks ago Russia, EU and Ukraine had already agreed on the same terms of gas supplies as last week, only to have them later dismissed by [Ukraine's energy minister] Prodan and Yatsenyuk as a misunderstanding," Konstantin Simonov, head of Moscow-based thinktank National Energy Security fund, said on October 20, as quoted by Moscow Times.

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