Ukraine and Russia move close to gas agreement

By bne IntelliNews October 20, 2014

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Russia and Ukraine have moved a step closer to an agreement on gas supplies and pricing, but have called for the international community to help Ukraine pay its gas bill.

"[We] reached an agreement," Ukraine's president Petro Poroshenko said on Ukrainian TV on October 17, immediately following Russia-Ukraine talks with European Union mediation. "Until March 31 we will fix the price at $385." The trilateral Russia-Ukraine-EU talks on gas took place on the sidelines of the Asia-Europe Meeting (ASEM) between EU and Asian countries.

Poroshenko, however, acknowledged that Ukraine lacked the funds to cover the cost of gas imports from Russia. "We must solve the question of how we cover the deficit of funds for Naftogaz for gas purchases," Poroshenko said. "We have several different options [including] the International Monetary Fund."

Russian President Vladimir Putin called directly on the EU to foot Ukraine's gas bill. "We expect that our European partners, the European Commission, also can and should offer their shoulder to Ukraine and help resolve this problem with cash deficiencies," Putin said at a post-talks press conference in Milan on October 18. "There are certain tools, such as bridge loans, or the transfer of another IMF loan, or guarantees of a first-class European bank," Putin added, as quoted by Interfax.

Putin also called on Ukraine to introduce "consumer discipline" and to hike domestic prices, a demand that the IMF is also making. "The collection level, say, in Ukraine is very low, it's much lower than in Russia, and the price [for households and utilities] is quite low, too," Putin said, as quoted by Interfax. "Russia will not supply anything on credit anymore," Putin added.

CEO of Russian gas giant Gazprom Alexei Miller, speaking at the press conference, claimed that Ukraine had accepted all of Russia's demands. Besides agreeing to a winter price of $385 per 1,000 cubic meters, he said that Ukraine "has agreed that the first tranche of [payment arrears] $1.45bn must be paid before the beginning of [winter season] supplies," as quoted by Interfax. "It has agreed that the [remaining outstanding] sum of $3.1bn must be cleared by the end of December 2015," rather in first quarter of 2015, Miller also said.

Ukraine's prime minister Arseny Yatsenyuk in comments made on Ukrainian TV on October 19 disputed that the gas agreement was finalised. "It would be premature to be saying that we have reached any agreement. Agreements have relevance when they are signed – by Gazprom and Naftogaz – and when gas starts flowing. Now it's mere talk," he said, as quoted by Interfax. Yatsenyuk said that if Russia turned off gas supplies to Ukraine, Ukraine would turn off gas supplies to the territories of Donetsk and Luhansk regions currently held by Russian-backed rebels.

Ukraine's energy minister Yury Prodan also expressed skepticism over the chances of an agreement being signed at the next trilateral meeting on October 21.

Experts believe that Gazprom and Naftogaz are nonetheless likely to sign an agreement on October 21. "Ukraine needs to start receiving gas in November, in order to get through winter and guarantee uninterrupted transit," said Valentin Zemlyansky, director of the Ukrianian centre of world economy on Facebook.

"The main problem in these talks is Naftogaz’s lack of funds," said director of the Kyiv Institute of Energy Strategy Dmitry Marunich, as quoted by Russian business daily Vedomosti. "If only Naftogaz had money, it would be much easier to agree on price and delivery terms." 

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