Global Insight Perspective | |
Significance | The Ukrainian prime minister has told her Russian counterpart at a meeting that Ukraine has transferred the last tranche of its arrears to Gazprom, which only last month had cut gas supplies to Ukraine over the country's mounting debts. |
Implications | Clearing Ukraine's gas debts to Gazprom will remove another obstacle to improved relations between Russia and Ukraine in the gas sphere and could lead to a new, more co-operative relationship that would enhance European energy security. |
Outlook | The elimination of the debt issue will open the door to talks on a long-term gas supply and transit deal, but negotiations are likely to be protracted and difficult as Gazprom seeks to move Ukraine over to "market" prices for its gas supplies. |
Another Hurdle Cleared
In the first week of March, relations between Ukraine and Russia in the gas sphere could hardly have been worse, with Russia's Gazprom moving to cut gas supplies to Ukraine by one-quarter over the latter's mounting gas debts. Yet, merely eight weeks later, Ukraine and Russia have patched up their relationship, solved many of their differences, and are now looking beyond their previous quarrels towards a more co-operative future. Yesterday, Ukrainian Prime Minister Yulia Tymoshenko sought to close the book on the recent ugliness, telling her Russian counterpart, Viktor Zubkov, that Ukraine had transferred the last of its arrears to Gazprom, thus fully resolving its debt.
Neither Tymoshenko nor Zubkov said what Ukraine's debt amounted to in total, and Gazprom has not yet confirmed that Ukraine is fully in the clear, so there remains a risk that the problem is not yet resolved. Indeed, just a few weeks back Tymoshenko and her nominal boss and frequent sparring partner, President Viktor Yushchenko, had publicly disagreed on the size of Ukraine's debts, with Yushchenko arguing that Ukraine owed US$2 billion while Tymoshenko said it was only US$900 million. Nevertheless, earlier questions over the size of the debt, how it was to be paid, and whether Ukraine's state-owned Naftogaz was ultimately responsible for paying it (given the confusing intermediary supply scheme that is in place—and, ironically, contributed to the accumulation of Ukraine's debt in the first place) have now apparently been resolved. The fact that Zubkov did not dispute Tymoshenko's claim that the debt had been paid off is certainly a positive signal.
In fact, Zubkov, in the Ukrainian capital of Kiev for a meeting of the Russian-Ukrainian Committee on Economic Cooperation, and Tymoshenko shared a toast afterwards—surely a sign of the improving relations between the two countries. Zubkov said that settling Ukraine's gas debts now opens the door for talks on a long-term gas supply and transit contract, previously unthinkable in the context of mutual distrust and repeated disagreements. As both sides have implemented the 13 March agreement to resolve the debt and clarify the gas supply scheme for the remainder of this year, Zubkov told journalists after the meeting that "we would like to build transparent, specific and clear relations in this sector for years to come, maybe even for a decade, formalising all aspects of gas supplies and transit…With more effort and political will all questions will be solved.”
Big Hurdle Upcoming
Moving towards a long-term supply and transit contract—and away from the one-year, all-or-nothing price negotiations that have caused friction in the past three years as Gazprom seeks to increase prices for Ukraine—would certainly prove beneficial for both sides for planning purposes, as well as bolster European energy security. Indeed, with Gazprom looking to move the former Soviet states towards paying "European" prices for gas supplies, the annual gas price negotiations between Russia and Ukraine (through which 80% of Russian gas supplies to Europe flow) have become reason for trepidation among European policymakers over the potential for a repeat of the 2006 "gas war" that disrupted gas supplies to Europe. A longer-term deal would eliminate the yearly risk of another dispute that jeopardises Europe's gas imports (and, from Russia's perspective, its stable supply of gas to Europe).
Despite suggestions that Gazprom is oblivious to Europe's calls for more stable gas supplies, the company certainly has an interest in a more co-operative approach with Ukraine, thereby reducing (if not eliminating) talk in Europe that Russian gas exports are unreliable. At the same time, however, Gazprom is determined to stop subsidising former Soviet states with cheap gas. Ukraine's importance as a transit state for Russian gas to Europe, of course, gives it substantial leverage in price negotiations with Gazprom, so in order to secure stable transit services via Ukraine but also appease Ukraine's desire for a slower increase in the price of its own gas imports, over the course of the past two years Gazprom (via its 50% stake in intermediary RosUkrEnergo) has predominantly supplied Ukraine with cheaper Central Asian gas. Gazprom's use of its own, more expensive, Russian-produced gas to supplement a drop in Central Asian gas supplied to Ukraine earlier this year was a contributing factor in the Russia-Ukraine dispute, although Gazprom ultimately agreed to charge the same US$179.5 per 1,000 cm price as RosUkrEnergo is contracted to supply to Ukraine for in 2008.
Although Tymoshenko relented to the continued use of RosUkrEnergo as an intermediary in the supply of Central Asian gas to Ukraine for the remainder of this year, the Ukrainian side's determination to ditch the intermediary from next year will complicate talks on a long-term gas supply deal. Removal of RosUkrEnergo is geared to streamline and simplify the Russia-Ukraine gas trade, but it will also mean that Ukraine will be exposed to the full brunt of higher import prices. With Gazprom agreeing to import gas from Central Asia next year at "European prices", the Russian gas giant will hardly agree to any price deal that sees Ukraine pay less than what Gazprom will pay. Thus, regardless of whether Gazprom supplies Central Asian or Russian gas to Ukraine next year, Ukraine is going to face higher prices. Central Asian-sourced gas will likely be cheaper for Ukraine than Russian-sourced gas, but with Gazprom (or a Gazprom-Naftogaz joint venture) replacing RosUkrEnergo as transit operator, Ukraine will surely face a price increase that could see it pay upwards of US$300 per 1,000 cm for gas supplies next year.
Outlook and Implications
While a long-term gas supply and transit deal between Ukraine and Russia will be a major boon to European energy security, the countries must first take steps to reach an agreement on 2009 gas prices, supplies, and transit services. Finding a happy medium that moves Ukraine towards "market" prices but also ensures stable transit volumes of Russian gas via Ukraine will not be easy. Despite the champagne toast by Tymoshenko and Zubkov, Russian-Ukrainian gas-sector relations, while certainly improved over two months ago, still have obstacles to overcome. This sobering thought—as well as news of a tragic accident in which a helicopter crashed on an offshore Naftogaz oil platform in the Black Sea yesterday, killing all 20 people on board—should keep optimism in check for the moment.
Still, the fact that Ukraine and Russia are now even considering a long-term gas supply and transit deal is evidence of the progress that they have made in the past eight weeks to resolve their differences. Not only has Ukraine (apparently) paid off its gas debts to Russia in full, but the two countries have clarified the gas supply scheme covering their gas trade to safeguard against any additional disruptions in gas supplies to Ukraine (and thus Russian gas exports to Europe via Ukraine) for the remainder of 2008. Moving on to negotiations on gas supply and transit for 2009—and beyond—when it is only April is surely a sign that both countries are serious about ensuring stable gas supplies to Europe and avoiding a new dispute in January.
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