Russia has secured a last minute deal to resume gas exports to Ukraine, thus preventing a potentially catastrophic European energy crisis this winter. The deal, which was signed late in the evening last night in Brussels, will also ensure gas supplies to EU countries via Ukraine are secure.
On June 16, 2014 Moscow stopped gas supplies to Kiev amid a payment dispute that has since been overshadowed by a conflict between Ukraine’s army and pro-Russian militias in the east of the country. Gas supplies were halted over late payments when Russia scrapped subsidies given to Ukraine for importing gas, meaning the price paid by Ukraine rose sharply. However, the backdrop to the row is Russia's conflict with Ukraine and Western sanctions on Moscow. Although the impact of the gas ban has been relatively small, the onset of winter made the need for a deal more urgent. For months, EU-mediated negotiations to restart gas flows have made no progress and European diplomats viewed the end of October as a deadline for a deal. With temperatures in Kiev dropping below freezing, fears have grown that a supply crunch in Ukraine would disrupt energy exports to the rest of Europe.
After 30 hours of negotiations in Brussels, Moscow signed a deal with Kiev to guarantee supplies until March. "There is now no reason for people in Europe to stay cold this winter,” said José Manuel Barroso, president of the European Commission. According to the terms of the accord, Kiev will make prepayments of $1.5bn for 4bn cubic metres over the winter. It will also pay off $3.1bn of debt owed to Gazprom, Russia’s gas export monopoly. "In a crisis situation, a situation where trust had been lost, in such a warlike situation, we were able to act wisely,” said Günther Oettinger, the EU’s energy commissioner. "It is a first glimmer of a thaw between the two countries.”
Much of the negotiation had focused on the price that Kiev would pay. Ultimately, Ukraine agreed to pay $378 per thousand cubic metres until the end of the year, then $365 until March. Russia dropped its demanded price from an original $485. Alexander Novak, Russia’s energy minister, said Moscow had made this "compromise” to show that it was a reliable commercial partner for the EU.
Any disruption of Russian gas into Ukraine this winter would have raised the prospect of supplies failing to reach the EU, as happened in 2006 and 2009. Central and SE European countries including Slovakia, Hungary, Serbia, Bulgaria and Greece had been especially hit by the disruption in 2009 which led to weeks long hardship. About 30 per cent of Europe’s gas comes from Gazprom, half of it flowing through Ukraine. Much without the resumption of Gazprom’s exports to Kiev, Ukraine would have been forced to burn through its own gas reserves, which are only half full. Later, as the winter dragged on, Ukraine would have come under pressure to siphon off gas transiting its territory in pipelines to the EU.
Over the past week, Russia had sought additional guarantees from the EU that Kiev would prove good for its money. Mr Oettinger said the EU was not providing any specific guarantees from the Brussels budget, as Moscow had suggested. However, he added that Moscow had received evidence that Ukraine could pay. The $3.1bn due to Gazprom would come from money already provided to Ukraine as part of an aid package from the International Monetary Fund. Mr Oettinger said Kiev was able to pay for the new gas through its national budget and the cash generated by Naftogaz, its state energy company.
The total package is worth $4.6bn (£2.87bn), with money coming from the International Monetary Fund as well as the EU. The total includes funds from existing accords with the EU and IMF. "Unprecedented levels of EU aid will be disbursed in a timely manner, and the International Monetary Fund has reassured Ukraine that it can use all financial means at its disposal to pay for gas," the EC said in a statement."Further work with the international financial institutions on financial assistance to Ukraine, also in relation to gas supplies, will still continue. But all three sides are reassured that Ukraine will have the necessary financial means."
Ukraine's Prime Minister Arseniy Yatseniuk said that the EU had agreed to serve as guarantor for the gas price Kiev would pay to Russia. Mr Yatseniuk said Kiev was ready to pay off debts for gas immediately after any deal was signed. A total of $1.45bn would be paid immediately, and another $1.65bn by the end of the year, he said. Russia’s energy minister Mr Novak insisted that Ukraine would still have to pay in advance for new deliveries. Mr Oettinger, who steps down as European energy commissioner on Friday, said: "We can say to the citizens of Europe that we can guarantee security of supply over the winter."Meanwhile, the French and German presidents said that they spoke with Russian President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko on Thursday evening. All four "have welcomed the conclusion of negotiations" the European heads said in a joint statement.
While the gas deal offers immediate relief, the IMF is demanding major energy reforms in Ukraine as conditions for its aid package and primarily the gradual lifting at energy subsidies to the domestic and industrial sector. Concerns about European supplies have focused attention on the high level of energy wastage in the country. Ukraine has been paying fuel subsidies equivalent to 7.5 per cent of gross domestic product. Its energy intensity – the ratio of energy used to economic output – is twice that of Russia and 10 times the OECD average. Hence the IMF’s $17bn bailout is contingent on energy reforms and fuel bills will have to rise.
