Monday, June 16, 2014

Global Impact: Russia Cuts Gas Off to Ukraine on Monday, Potential Disruption to Entirety of EU

According to Reuters, Russia cut off gas to Ukraine on Monday (June 16) in a dispute over unpaid bills that could disrupt supplies to the rest of Europe and set back hopes for peace. 

After the weekend loss of 49 troops when pro-Russian rebels shot down a military transport plane, Ukraine's new president ordered his forces to retake full control of their border with Russia.

Calling time on weeks of wrangling in talks over natural gas supplies, Russia said Kiev had missed a Monday morning deadline to repay US$1.95 billion owed for previous purchases and announced Ukraine would now only get gas it has paid for in advance. 

At the same time, Moscow insisted that Ukraine must let Russian gas flow across the country through international pipelines to Russia's clients in the European Union, noting a temptation for Kiev to tap into those supplies in transit.

Western-backed Ukrainian President Petro Poroshenko, elected last month to replace the Kremlin-friendly leader ousted in February, said on Monday he wanted troops to regain full control of the border with Russia this week.

His remarks underlined his concern that Russia is supporting the rebels by sending in tanks, guns and troops. Hopes of a lowering of tension had already been dented before the gas talks failed by the downing of the plane near the eastern frontier, an attack on Russia's Embassy in Kiev and new accusations from NATO that Russia is arming the Ukrainian rebels.

COMMENT: At a news conference, President Poroshenko  said it would no longer be sufficient for Kiev to pay part of its debt for supply to resume. That would now happen only once Ukraine paid off the $4.5 billion and paid up-front for a month's deliveries, he emphasized.

Ukraine has at least 12 billion cubic meters of gas in storage, enough to meet its and the EU's needs over the summer.

The EU's energy commissioner, Guenther Oettinger, who has been brokering the gas talks, said in Vienna that the EU should top up its storage or could face problems in winter. He urged Russia to reconsider a compromise and held out the prospect of new talks before officials break for summer. 

The gas talks broke down with both sides unable to reach agreement on price and on changes to a 2009 contract that had locked Ukraine into paying the highest price in Europe. 

Oettinger said Moscow had declined a compromise under which Kiev would pay $1 billion immediately and then make monthly repayments to Gazprom. It would also pay $385 per 1,000 cubic meters in winter and about $300 in the summer.