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Gas supply to Ukraine cut by Russia

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Last Updated: Aug 10, 2016

On Monday, Russia cut gas supplies to Ukraine as negotiators failed to reach a consensus on unpaid bills and gas prices making a payment deadline to lapse. Russia had demanded a payment of $1.95 billion for past-due bills by 9 a.m. Kiev time on Monday. But as the deadline lapsed Gazprom issued a statement that it would start demanding payment in advance for any gas to be supplied.

Sergei Kupriyanov, the spokesman for Gazprom Company said that from Monday on the company would demand that Ukraine pays in advance for any future deliveries since they had paid nothing for the gas by then. “Gazprom supplies to Ukraine only the amount that has been paid for, and the amount that has been paid for is zero,” Kupriyanov said. But Andriy Kobolev, the head of Naftogaz in Ukraine said they can manage without Russian gas until December.

Analysts say this decision could disrupt the long-term energy supply to Europe if the issues are not resolved soon, though it may not immediately affect the gas flow to the region.

The pipeline that serves Ukraine also carries gas being delivered to Europe, but Kupriyanov said that the supply to Europe will continue because Ukraine has the obligation to ensure the gas reaches European customers. However, Gazprom notified the European Commission that there could be a disruption in the gas transit if Ukraine decides to siphon off the gas.

It is a very tricky situation. According to Tim Ash, an analyst at Standard Bank PLC, Russia was likely to cut only the gas meant for Ukraine but since the pipeline is one Ukraine could simply take what is wants. This would definitely result in gas shortage in Europe and interfere with the build up of stored gas that is meant for the winter when the demand will be higher.

The cut is therefore unlikely to bring short-term hit to gas supply in Europe, but it will cause problems for the winter unless something is done quickly.

Meanwhile in Brussels, Sabine Berger, an EU spokeswoman said there was no official communication to the effect that there would be changes in gas supply to EU, and therefore as far as she is concerned, the flows remain normal.

Ukraine has been behind on payments for the gas needed to fuel its industries and heat homes. Gazprom says it has tolerated the late payments and adds that Ukraine owes a total of $4.458 billion for gas from last year and this year.

The gas conflict comes at a time when there is severe crisis in relations between the two countries following annexation of Crimea by Russia in March. Ukraine has accused Russia of supporting a separatist insurgency in its eastern regions, an accusation which Russia denies.

Gazprom had offered the previous president, Viktor Yanukovych a discounted price of $268.50 per thousand cubic meters in December, but the price was cancelled April 1 and raised to $485 per thousand cubic meters. Russia has now offered a price of $385 per thousand cubic meters, but Kiev still insists on a lower price.

According to Berger, the EU energy commissioner is still committed to helping broker a deal between Kiev and Moscow.

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