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Ukraine's dispute with Russia over energy prices has been intensifying, raising fears in Kiev that another natural gas cutoff is possible and prompting the Europeans to intervene.
Ukrainian Energy Minister Yuriy Prodan said April 11 that Ukraine plans to take Russia to court over what it deems as unfair natural gas prices, and EU Energy Commissioner Guenther Oettinger said the bloc would help Ukraine in paying its natural gas bills to Russia. While the Europeans have supported Ukraine rhetorically in the country's standoff with Russia over energy, it is unlikely that they will be able to finance the country sufficiently given the price Russia has set. Russia will use its energy supplies and the threat of a cutoff as a means of getting the West to negotiate on broader political issues in Ukraine -- not just those related to energy.
Energy disputes have long been a feature of Ukraine and Russia's relationship. Political disputes between the two countries led to natural gas cutoffs in 2006 and 2009. During the second cutoff, the Europeans (who received 80 percent of their natural gas supplies from Russia through Ukraine at the time) strongly advocated for Ukraine to resolve the dispute with Russia in order to get energy supplies flowing once again. Ukraine and Russia struck an agreement in 2009, but the pact has been a source of contention between the countries ever since.
The key point under dispute is the pricing formula. Ukraine agreed to a price of nearly $400 per thousand cubic meters, much more than it had paid prior to the cutoff. This formula was also partially tied to the price of oil, which meant that it rose every quarter as the price of oil rose. However, in recent years the price has also fluctuated according to the state of political ties between the Ukrainian and Russian governments. For example, when former President Viktor Yanukovich agreed to extend the Russian Black Sea Fleet's presence in the country in 2010, Russia granted Ukraine a $100 per thousand cubic meters discount on natural gas prices. Prices rose once again to more than $400 per thousand cubic meters as oil prices rose, and then Russia granted a major discount to Ukraine once again to $268.50 per thousand cubic meters after Yanukovich rejected key integration deals with the European Union.
However, since the uprising against the Yanukovich government and the installation of a Western-oriented provisional government in Kiev, Russia has once again raised the price of natural gas for Ukraine. Russia announced April 3 that the price during the second quarter would be nearly $500 per thousand cubic meters, as the agreements made under the previous government were declared void. Given that Ukraine was already under extreme financial and economic duress, this increased price -- combined with threats from Russia that it could cut off supplies if Ukraine fails to pay -- has been of extreme concern to Kiev.
Kiev Looks Westward for Help
Ukraine has responded to Russian pressure by seeking assistance from the Europeans. In addition to threatening arbitration against Gazprom (which probably would be a lengthy process that could not help Ukraine in the short term), Ukraine has asked the Europeans to provide it with financial assistance in order to prevent a default due to high energy prices. Ukraine has also sought the Europeans' help with energy diversification projects; Ukrainian officials have said the country plans to purchase natural gas from German energy firm RWE and French company GDF Suez. Ukraine has also sought to increase reverse gas flow purchases from Central European countries like Hungary and Poland, while continuing to lobby Slovakia to participate in reverse natural gas exports that could provide Ukraine with as much as 10 billion cubic meters of natural gas.
There are several substantial obstacles to Ukraine's efforts, however. The amounts of natural gas that Hungary and Poland can provide are relatively small (less than 1 billion cubic meters, compared to Ukraine's total imports of more than 27 billion cubic meters last year) due to limited infrastructure, while Slovakia has been wary of moving forward with the deal out of concern for damaging its relationship with Russia. Slovak Prime Minister Robert Fico has said he does not want to violate existing contracts with Gazprom and has raised concerns about Ukraine's ability to pay its energy bills, and in the meantime has called for talks between Russia, Ukraine and the EU Commission on the issue. Ultimately, all the Central European countries want to make sure they are not overly provoking Russia and also want to make sure they have support from European heavyweights, particularly Germany, on the matter.
Moreover, while the Europeans have said they would help finance Ukraine's natural gas bills, it is not clear where such financial resources will come from or under which conditions they will be provided. Up to this point, the European Union's financial support of Ukraine has been much more rhetorical than concrete, and the International Monetary Fund has so far provided $3 billion of its $14-18 billion bailout.
Russia's Calculations
From Russia's perspective, the energy issue is a crucial element of its leverage over both Ukraine and the Europeans. Russia has been openly opposed to the new government in Ukraine and does not view it as legitimate, given the way in which it was formed. Russia's core interests necessitate that Ukraine remain at the very least a neutral buffer state. This interest has been compromised by the formation of the Western-oriented government following the February uprising. Therefore, the energy issue is just one aspect of Russia's broader policy toward Ukraine -- but a key one, from Moscow's point of view -- in shaping the Ukrainian government and the broader standoff with the West.
In this context, Russian President Vladimir Putin sent an open letter to the leaders of many European countries and media on April 10 stating that Russia and the European Union need to come to a compromise on the energy and economic questions in Ukraine, or else Europe faces a significant risk of a natural gas cutoff. On April 11, the EU Commission urged Russia to honor its natural gas contracts and reminded Russia that energy exports account for about half of Moscow's revenue. But the key issue here is not that Russia wants to cut off natural gas to Ukraine and Europe (which would be politically and economically painful to all parties involved, including Moscow), but rather that Putin wants Russia's interests to be taken into account on all important financial and political issues related to Ukraine.
This sets the stage for potentially important negotiations to be held next week. Foreign minister-level representatives from the United States, European Union, Russia and Ukraine will meet in Geneva on April 17 to discuss the crisis in Ukraine. While officials have said that the natural gas dispute between Ukraine and Russia will be discussed, energy is just one part of the broader political contention between Russia and the West over Ukraine that Moscow wants to see resolved. Moving forward, the German and U.S. positions -- rather than Ukraine's -- will be the most important in determining how the standoff proceeds. Russia, meanwhile, will keep pressuring the West in order to drive these negotiations.
Courtesy : Stratfor (www.stratfor.com)