Russia’s game of chicken with Ukraine leaves Europe on the edge
18 Jun 2014
As with the previous Russia-Ukraine gas disputes in 2006 and 2009, how we describe the current stand-off between the two countries is a matter of semantics. Those earlier disputes found solutions based on financial negotiation; this one has an altogether more complex and worrying tone to it.
The bare facts of the dispute look fairly straightforward. Russia’s natural gas exporter Gazprom says that because Ukraine’s Naftogaz has failed to make a down payment on the more than $4 billion debt that is currently outstanding, then under the terms of its contract, Gazprom can insist on prepayment for gas supplies.
As no payments have been made, no gas will be delivered to Ukraine. However deliveries to European customers will continue to transit through Ukraine as required by Gazprom’s contract with Ukrtransgaz, the Ukrainian gas transport monopoly.
In 2009, Russia accused Ukraine of withdrawing gas destined for Europe to meet its own domestic needs, the net result being that gas stopped flowing to Europe. Then, as now, Russia has not stopped making deliveries to Europe but it will take some time before we will know if gas is still flowing through Ukraine to meet European demand. So what should Ukraine do now?
In some ways, you could view Russia’s move as part of a lengthy process of haggling linked to its political priorities for the region.
When Viktor Yanukovych was forced out of power the Kremlin instructed Gazprom to remove the various concessions that had been applied to Ukrainian gas supplies as a reward for turning away from an agreement with the EU. This resulted in a significant price hike from $268.5 per 1,000 cubic metres of gas to $485. Kiev refused to pay this higher price and the gas debt started to grow. The most recent offer made by the Russian president, Vladimir Putin, was that Ukraine should pay a price of $385, achieved by removing export duty and resulting in a price close to the European average, which was $387 in 2013.
Kiev rejected this offer and has taken Gazprom to court to reclaim $6 billion that it claims it has been over-charged by Russia for gas supplies. Gazprom has countered by taking Naftogaz to court to recover the unpaid $4.5 billion. The EU is hoping that it can still broker a compromise price of $385 in winter (when gas prices are always higher) and $300 in the summer months. We must now wait and see if talks will resume.
Ukraine says it has about 14 billion cubic metres (bcm) of gas in storage, enough to keep it going until December. But drawing down on those reserves can only be a short-term solution, as it would leave them vulnerable in the middle of winter. Added to which, Ukraine’s gas storage capacity is important in supplying gas to Europe in the winter months. Europe now has limited reverse-flow capacity from Slovakia and has been sending some gas to Ukraine, but this has an initial flow rate of 2.3 bcm a year and is no alternative to Russian gas given that Ukraine consumes about 55 bcm of gas each year.
If Ukraine does not syphon off gas bound for Europe – and if it uses gas in storage to meet immediate needs – then it will still have time to go back to the negotiating table. Gas storage capacity in Europe is high after a mild winter and this eventuality has been signaled for while. It is also useful that the impasse has arrived as we move into summer, a period of low gas consumption. The problem comes if there is a protracted stand-off that affects the ability of Ukraine and Europe to prepare for the coming winter.
The previous disputes in 2006 and 2009 were largely about payments and price levels – and agreements were eventually reached in a more-or-less business-like fashion. The current situation, which has flared in the wake of Russia’s annexation of Crimea and the on-going conflict in Eastern Ukraine makes it clearer than ever the way in which the Kremlin uses energy exports as a geopolitical lever.
In this context, it is difficult to see how a lasting agreement on gas prices can be brokered without a wider agreement between Ukraine, the EU and Russia on Ukraine’s future and its territorial integrity. The gas dispute is a litmus test of the wider geopolitical crisis and, with no resolution in sight, it promises to be a worrying winter for gas consumers in Europe.
Mike Bradshaw is Professor of Global Energy, Warwick Business School at University of Warwick. Tina receives funding from the UK Energy Research Centre (UKERC).