Russia, Ukraine resume EU-brokered talks as threat of gas cutoff looms

By ELENA MAZNEVA
Bloomberg

Russia and Ukraine resume European Union-brokered energy talks in Brussels on Monday as gas supplies re-emerge as a weapon in the conflict between the two neighbors.

EU energy chief Maros Sefcovic meets Russian Energy Minister Alexander Novak and his Ukrainian counterpart Volodymyr Demchyshyn as an interim deal signed in October to soothe a dispute over debt and gas prices shows signs of imploding.

Ukraine says Russia has been violating that agreement after starting deliveries to rebel-held regions in the east of the country last month.

Should OAO Gazprom halt exports to Ukraine this week when prepayments from NAK Naftogaz Ukrainy are exhausted, there may be a repeat of 2006 and 2009 when EU deliveries were disrupted as Russia stopped shipments to its former Soviet satellite.

While Ukraine cut its reliance on Russian gas to 34% from 51% during the last year, the fuel remains a powerful weapon amid an 11-month insurgency by pro-Moscow rebels.

“We hope that it will not come to extreme measures and that gas deliveries will not be suspended,” Russian President Vladimir Putin said last week. “But this does not depend on us alone.”

Russia’s Gazprom started deliveries to conflict zones in east Ukraine on Feb. 19, saying people are freezing there after state-run Naftogaz halted supplies. The Moscow-based exporter demanded Ukraine pay extra to meet the cost of shipments, while Naftogaz refused and alleged Russia was failing to meet its fuel requests.

Halting Deliveries

Gazprom will ship fuel to the self-proclaimed Luhansk and Donetsk republics directly, without charging Naftogaz, if the Ukrainian side confirms “in writing” its refusal to supply the regions, Novak said in an interview with state television late Friday. Novak reiterated Russia will halt deliveries to Ukraine once the previous advance payment runs out.

Naftogaz will make further prepayments if Gazprom sticks to the contract and meets all the requests, Naftogaz CEO Andriy Kobolyev said on Saturday.

While Novak said Ukraine may siphon the EU-bound gas from transit pipelines if Gazprom stops deliveries, that probably won’t happen if the weather remains warm as the nation won’t want to alienate its allies in western Europe, said Trevor Sikorski, head of gas, coal and carbon at Energy Aspects in London.

Supply Risks

Ukraine can probably get through this heating season “without lifting gas supply meant for western Europe,” Sikorski said. “However, a breakdown of the winter supply deal will probably make the summer call for gas to inject into storage higher, enhancing the supply risks in the following winter.”

The EU relies on Russian gas transported through Ukrainian pipelines for more than 10% of its needs.

Officials may discuss summer deliveries during the talks on Monday, according to Naftogaz CEO Kobolyev, as the interim deal signed in October runs out at the end of this month. To date, there has been little progress as Naftogaz and Gazprom await an arbitration ruling over their main supply contract, which isn’t expected before next year.

During the first 20 days of February, Ukraine cut gas consumption by almost 15% from a year earlier. The country consumed 4.8 billion cubic meters of gas in March last year.

Ukraine may get about 1.6 billion cubic meters of mainly Russian gas via the EU this month and the rest from it’s own resources, including underground storage, which contains about 8 billion cubic meters, Sikorski said.

Russian Goal

“Russia will definitely threaten” countries such as Slovakia, Poland and Hungary that send fuel back to Ukraine, said Alexander Paraschiy, an analyst at Concorde Capital in Kiev. “But it won’t necessarily move from words to deeds as Gazprom also needs money.”

Russia’s goal is to make Ukraine withdraw heavy weapons from the rebel-held regions to achieve greater stability there and increase their economic dependence on Russia, said Vasily Kashin at the Center for the Analysis of Strategies and Technologies in Moscow.

Russia is stressing European transit risks “to involve Germany and France in the dispute to put additional pressure on Ukraine in talks on the future of its eastern regions,” said Kashin.

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