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Russia's Gazprom has given Ukraine an extra week to resolve a gas price dispute at the heart of the two countries' confrontation. As Sonia Legg reports the delay will take the pressure off President Putin as he prepares to attend D-Day events with other world leaders later this week. (Reuters)
Russia's Gazprom has given Ukraine an extra week to resolve a gas price dispute at the heart of the two countries' confrontation. As Sonia Legg reports the delay will take the pressure off President Putin as he prepares to attend D-Day events with other world leaders later this week. (Reuters)

Russia's Gazprom cuts off natural gas to Ukraine Add to ...

Russia raised the spectre on Monday of Europe-wide energy shortages by abruptly cutting off natural gas supplies to Ukraine, whose pipelines deliver a big portion of the gas consumed by Germany, Poland and their neighbours.

While Russia insisted that gas supplies to the West would not be interrupted, the European Union fears a repeat of the winter of 2009, when 18 EU countries experienced severe gas shortages after Russia turned off the tap to Ukraine. Russia supplies almost 30 per cent of the EU’s gas and half of it travels through Ukrainian pipelines.

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Well aware that a simple twist of the valve can trigger economic havoc in the Ukraine and the EU, the European Commission had been trying to broker a gas-contract settlement between Russia and Ukraine. After the effort failed on Monday, the Ukraine government announced that Russian energy giant OAO Gazprom, which is controlled by the Kremlin, retaliated. “Gas supplies to Ukraine have been reduced to zero,” Ukraine Energy Minister Yuriy Prodan said.

Gazprom, the world’s biggest gas exporter and Russia’s top stock-market company, said the gas shut-off was owing to unpaid bills worth $4-billion (U.S.). The Ukraine government argued that Russia was simply applying political and economic strong-arm tactics as tensions between the two countries reach a record high. Gazprom’s move came as clashes between pro-Russian separatists in Eastern Ukraine and Ukraine government forces turned bloodier. On Saturday, rebels shot down a Ukrainian military plane as it approached an airport in Luhansk, killing all 49 on board.

At a cabinet meeting on Monday morning, Ukrainian Prime Minister Arseniy Yatsenyuk said, “This is not about gas. … This is part of the general plan of Russia to destroy Ukraine. We will not subsidize Russia’s Gazprom. … Ukrainians will not pull $5-billion out of their pockets a year so that Russia can use the money to buy arms, tanks and planes and bomb Ukrainian territory.”

The new gas war erupted just as Russia was flexing its energy muscles as host of the World Petroleum Congress in Moscow. The conference, which was boycotted by Alberta, home of the oil sands, the world’s second-largest oil resource, started Monday and is being attended by the top executives of the world’s leading energy companies, including Exxon Mobil Corp. and BP PLC. The opening ceremony was held at the State Kremlin Palace.

The conference will take on special significance this year as the civil war in Syria and the seizure of territory in Iraq, a major oil producer, by the Islamic State of Iraq and the Levant rattle the energy markets. It was not known whether Russian President Vladimir Putin, who is due to address the conference, would mention the gas dispute with Ukraine.

Nicholas Spiro, managing director of Spiro Sovereign Strategy, an investment consultancy in London, said Russia is using Gazprom to pull Ukraine’s political and economic levers in a brutal but effective way. “The gas shut-off is a useful tool for Russia,” he said. “It’s a lever to force Kiev to the negotiating table on a wide range of issues from federalization to geopolitical orientation. But this also raises the spectre of a Europe-wide gas war,” he said.

The European Commission, the EU’s executive arm, had proposed a compromise that would have seen Ukraine pay off $1-billion in arrears to Gazprom immediately. Another proposal floated by the EC’s Energy Commissioner, Gunther Oettinger, would see Ukraine pay a relatively high price for gas in winter, offset by a lower price in the summer. Mr. Oettinger on Monday said that Gazprom had “for the moment” rejected the proposals. But he held out hope that the two sides could reach a price settlement.

Gazprom said it had filed a lawsuit at a Stockholm arbitration court to try to recover the debt. Ukraine’s state oil and gas company, Naftogaz, said it was filing a suit at the same court to recover $6-billion in alleged overpayments.

The Russia-Ukraine gas dispute first erupted in 2006, when Gazprom cut supplies to Ukraine for three winter days. The second cut-off three years later, when Gazprom accused Ukraine of siphoning supplies that were destined for Western Europe, made Europe realize that it was overreliant on Russian energy. Since then, Europe has built more gas storage capacity and expanded pipeline networks but not to the point where it can do without Russian gas.

The gas shut-off is not expected to cause major disruptions to Ukraine, at least not in the short term. Andriy Kobolyev, the head of Naftogaz, said Ukraine has enough gas in underground chambers to last until December. Demand for gas in the summer months is at its lowest. If supplies do run short in a few months, Ukraine should be able to import some gas from Europe by reversing pipeline flows. The EC has urged Ukraine to top up the gas in its storage system.

Aware that another gas war with Russia was inevitable, Ukraine recently struck a deal with Slovakia that would allow Russian gas to be pumped from Slovakia to Ukraine. Slovakia would allow an initial flow rate of 3.2 billion cubic metres a year, rising to as much as 10 billion cubic metres by 2015. That would be enough to meet almost 20 per cent of Ukraine’s gas needs.

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