Ukraine

• depends on Russia for half of its gas consumption
• has been seeking to renegotiate a 2009 gas contract since before unrest began in Ukraine’s capital in November.
• hasn’t paid for 9.42 billion cubic meters of Russian fuel, which is equivalent to Poland’s annual consumption from Gazprom
• owes $3.51 billion for fuel delivered in 2013 and through April this year

Russia

• is moving Ukraine to prepayments
• has threatened to stop supplying gas to Ukraine on June 3 unless the country starts paying for the fuel in advance
• in case of partial prepayment, will only supply what Ukraine pays for.

Dispute

“Ukraine refuses to prepay for Russian gas and is ready to settle the debt if Gazprom returns an “honest, market price” for gas” — Ukrainian Energy Minister Yuri Prodan

Ukraine had received the first $3.2 billion of International Monetary Fund (IMF) aid package last week and is to receive the first EU package of 600 million euros ($823 million) of a total 1.6 billion euros of macro-financial assistance very soon. Despite its potential to pay for what it owes and also for the future consumption, Ukraine is unwilling to pay precisely because Gazprom had raised the price it charges Ukraine for gas by 81 percent in April, to $485 per 1,000 cubic meters, more than any EU member pays. NAK Naftogaz Ukrainy [the state-owned oil and gas company of Ukraine] will seek international arbitration on May 28 if talks with Gazprom fail.

“Russia will consider a compromise on natural gas prices with Ukraine only after its neighbor pays its debt for previous supplies. Moving Ukraine to prepayments will probably lead to problems supplying Ukraine. That in turn may create risks for transit and EU countries may suffer during the winter unless Ukraine has filled its underground storage facilities” — Russian Deputy Energy Minister Anatoly Yanovsky, Moscow

Implications

On Europe: The analysts believe that over the short run, an impact that stopping shipments to Ukraine imposed on the Europe region would be very insignificant for two reasons.

1. The gas traveling through the Ukraine, accounts for only half (or 15 percent) of total 30 percent of what EU needs. Currently, the Nord Stream pipeline, a direct link under the Baltic Sea from Russia to Germany that opened in 2011, can alleviate part of any gas supply disruption linked to a Ukrainian cut.
2. Also, due to relatively high inventories that Europe enjoys and lack of demand, the EU can cope with a Ukrainian supply disruption. One consultant suggests that the EU can cope for about 90 days provided that the cooperation between member states and normal flows of Russian gas through routes other than Ukraine.

“Storage in the EU was 55 percent full as of yesterday, the highest level for the time of year since at least 2007” — Gas Infrastructure Europe (a lobby group in Brussels)

“The European gas market is currently in a comfortable position, with ample stocks and little heating-related demand” — Lysu Paez-Cortez, an analyst at Natixis SA in Paris.

On Russia: IMF claims that Russia has already entered a recession while the European natural gas traders are betting that Russia’s economy can’t afford to lose more than $100 billion if the crisis in Ukraine escalates. As its ties with the U.S. and the EU deteriorate, it is indeed struggling to raise investments to stimulate growth, sparking capital flight and a selloff of ruble assets.

“An escalation of the conflict with Ukraine could cost Russia $115 billion on average in 2015, or more than 3 percent of its gross domestic product. The conflict could also cut European economic growth by 0.15 percent” — IHS Inc.

• On Gazprom: Russia’s state-controlled company is not experiencing any major change yet with its shares closed almost unchanged at 135.71 rubles as of May 13. Due to an uncertainty arose with Ukraine over its gas supply, Gazprom is already preparing a supply contract with China, to be signed when President Vladimir Putin visits the Asian nation next week according to the Deputy Energy Minister Anatoly Yanovsky.

Three important questions I am curious about are as followed:

1. How would the contract between Ukraine and Russia turn out, given the escalated confrontation on the grounds between Ukraine and Russian-speaking regions of Ukraine?
2. Will Russia really cut off the gas to the Ukraine and thereby also to the Europe if the deal doesn’t go through after the deadline?
3. How the decisions and actions of Ukraine, Russia and the Europe will affect the rest of the world and the global economy?

Note: This blog entry makes use of Bloomberg’s May 12 article by Anton Doroshev and Elena Maznev and May 14 article by Isis Almeida.

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