WORLD_ UKRAINE_ Russia could cut off Ukraine's gas this week

Russia could cut off Ukraine's gas this week

Date June 1, 2014 - 12:01PM
Michael Birnbaum

The Sydney Morning Herald


Kiev, Ukraine: A new front is swiftly opening in the war over embattled Ukraine's future: energy, with Russia threatening to cut off natural gas to the country as early as Tuesday.

Russian leaders are prepared to stop crucial gas flows and squeeze their struggling neighbour economically even as Russian citizens take an increasingly open role in the violent conflict in Ukraine's east.

Ukrainian President-elect Petro Poroshenko has promised a newly vigorous effort to combat the pro-Russian separatists who have seized buildings and key cities across eastern Ukraine. But the battle over energy may be nearly as important for the country's future, with the power to determine how far Ukraine turns to the West and how firmly it remains in Russia's orbit. The disputed gas debt could be as much as $US5.2 billion ($5.6 billion) through the end of May, and Russia wants at least a partial payment by Monday.

Negotiations have dragged for months. On Friday, Ukraine said that it would make a $US786 million payment toward the debt, but it was not immediately clear whether that would be enough to forestall a cutoff. Negotiations were to continue Monday, even as Ukrainian and Russian energy officials traded barbs about who was at fault in the standoff.

The tangled knot of economic and political dependencies means that any Western effort to loosen Russia's grip on Ukraine may face steep challenges, even if Mr Poroshenko signs an agreement to bring Ukraine's economy closer to Europe's, which he has promised to do as his first act after he takes office in the coming week. In November, then-President Viktor Yanukovych rejected that agreement with the European Union, sparking the pro-European protests in Kiev that ultimately led to his ouster in February.

Mr Poroshenko said in the past week that one of his top priorities was freeing Ukraine from Russia's gas-powered hold over the economy. Ukraine depends on Russia for 60 per cent of its gas, and the European Union imports about 15 per cent of the natural gas that it uses through Ukraine's pipelines.

"We are looking to turn gas from Russia's energy weapon into a commodity" that could be purchased anywhere, Mr Poroshenko said.

Any gas cutoff now would be likely to have fewer serious consequences than if it took place in winter, since it would not immediately spin Europe into a deep freeze. Ukraine also has about two months of gas in storage, analysts and officials say. But stopping the flow of gas still would signal that Russia is willing to use its control over Ukraine's energy supplies.

Ukrainian energy officials have expressed outrage that the Russian energy giant Gazprom in March started demanding $US485 per thousand cubic meters, a standard unit of gas measurement, up from a discounted price of $US269 per unit that Russian President Vladimir Putin offered in December. The new gas price is the highest in Europe, even though the costs for Ukraine ought to be among the lowest because the gas does not have to be piped as far.

What Gazprom is demanding for gas "is not a reasonable economic price," said Igor Didenko, Ukraine's acting deputy energy minister.

Gazprom, meanwhile, blames Ukraine.

"The problem with Ukraine's gas debts is that Ukraine is bankrupt," Gazprom chief executive Alexei Miller told Russia's state-run broadcaster on Saturday.

But even if the gas keeps flowing, wide-ranging US and European efforts to free Ukraine from its dependence on Gazprom could easily be imperiled by Russia's extensive leverage over Ukraine, analysts and officials say.

Ukraine's political stability depends on its economic stability - and the country's industrial heartland in the east is in revolt. The largely outdated heavy manufacturing plants there are deeply dependent on Russia to supply the energy that flows in and to purchase the products that roll out. The factories need cheap gas to be viable, and they need a Russian market for steel and heavy machinery that often would be uncompetitive in Western markets.

"Ukraine can no longer avoid making the basic choice between expensive energy and political sovereignty on the one hand or cheaper energy and political submission to Russia on the other hand," said Pierre Noel, an energy security expert at the International Institute for Strategic Studies. With economic clout, demand for cheap energy and sympathies for Russia in the east, he said, "the political economy is skewed toward division".

Washington Post

Read more: http://www.smh.com.au/world/russia-could-cut-off-ukraines-gas-this-week-20140601-zru79.html#ixzz33NqlIf1m



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