One of Russian President Vladimir Putin’s favorite sports is the martial art of judo where performing a chokehold can critically reduce air or in this case gas from passing through the neck of an opponent.
In awidely expected move, Russia and its state gas monopoly Gazprom said on 1 April that it is raising the price of gas exports to Ukraine by more than a third because Kiev has failed to pay its bills.
Gazprom’s action to raise the price it charges Ukraine brings into force a decision that was taken in early March to remove the discount that was agreed in return for ousted Ukrainian President Viktor Yanukovich turning his back on the European Union last year, Julian Lee, senior energy analyst at London’s Centre for Global Energy Studies (CGES) told New Europe on 1 April. The move was widely anticipated and leaves Ukraine paying among the highest prices for Russian gas in Europe, Lee added.
Gazprom CEO Alexei Miller said in a statement on 1 April that Ukraine will now pay a price of $385.5 per 1,000 cubic metres of gas. The new price represents a rise of more than 40% against the $268.5 that Ukraine has been paying since December under the discount agreed by Yanukovich. “The discount will no longer apply,” Miller said. “This is due to the inability of the Ukrainian side to pay for debts from 2013 and realise full payments for current deliveries.”
Miller said that Ukraine’s national oil and gas company Naftogaz current debt to Russia stands at just over $1.7 billion.
Lee told New Europe that “Russia has also raised the issue of the gas price discount to Ukraine that was agreed in return for extending the lease on the Sevastopol naval base, with some arguing that, since Sevastopol is now part of Russia, the rationale for the discount no longer exists”.
For its part, Ukraine is considering hiking the transit fees charged to Gazprom for transit of its gas across Ukrainian territory to Europe.It is also planning to raise internal gas prices in Ukraine by an average of 40% with effect from the beginning of May - one of the conditions imposed by the International Monetary Fund (IMF) to unlock loans to Ukraine, Lee said.
Ukraine’s interim government last week said it will raise gas prices for domestic consumers by 50% to secure the IMF aid package. Ukrainians are accustomed to buying gas at heavily subsidised rates. But the IMF has made subsidy reform a condition its deal worth as much as $18 billion.
Analysts point out that it is now cheaper for Ukraine to buy elsewhere. Ukraine has received gas from smaller pipelines from Hungary and Poland.
But Lee said that while Ukraine can import modest volumes of gas from Poland, Slovakia, Hungary and Romania, “this will depend on potential sellers being prepared to risk similar non-payment risks that Gazprom has endured. Potential suppliers are likely to require some form of payment guarantee before they will be willing to step in”.
Meanwhile, Miller and Naftogaz CEO Andriy Kobolev are set to meet in Moscow this week, Kobolev said at a press conference in Kiev on 1 April. “I am leaving for a meeting with Alexei Borisovich [Miller] this week,” he said. However, Kobolev did not disclose the meeting’s agenda.
Gazprom’s decision to increase the gas price for Ukraine raises the prospect that Gazprom may threaten to cut supplies to Ukraine, which buys about half its gas from Russia, something that’s happened in 2006 and 2009 because of payment disputes.
Gazprom’s decision came as Russia moved to reduce military tensions after its annexation of Crimea, withdrawing some troops from Ukraine’s border. But tensions still remained high and Russia appeared to use Gazprom to put pressure on the Ukrainian economy.
Gazprom is close to the Russian state. “Gazprom’s interests and the Kremlin interests are aligned,” Shane DeBeer, an expert on Russian law atDechert LLP in Moscow told New Europe.