Russia Gas Threat Shows Putin Using Pipes To Press Ukraine

  • Date: 03/03/14
  • Elena Mazneva and Stephen Bierman, Bloomberg

Gazprom’s threat to end natural gas discounts for Ukraine adds to the financial burden on the near-bankrupt government in Kiev and makes Europe’s energy supply part of the escalating crisis.

A section of the Bratstvo gas pipeline crosses a river near Ivano-Frankvisk, Ukraine. Photographer: Vincent Mundy/Bloomberg

Russia’s gas-export monopoly said on March 1 it may end last year’s agreement to supply Ukraine at a cheaper rate unless it’s paid $1.55 billion owed for fuel. It’s the first time since the overthrow of pro-Moscow president Viktor Yanukovych last month that Russia has directly used its position as Ukraine’s dominant energy supplier to pressure the new regime.

Vladimir Putin, who has permission from lawmakers to deploy troops to Ukraine, has repeatedly used gas to strong-arm his western neighbor, cutting off supplies twice since 2006 over payment disputes. Because Ukraine hosts a network of Soviet-era pipelines that carry more than half of Russia’s gas exports to the European Union, any disruption of supply puts the region’s energy security at risk.

Gas debt “is a traditional Russian move to pressure Ukraine,” said Mikhail Korchemkin, head of Malvern, Pennsylvania-based East European Gas Analysis. “In the past decade the Kremlin used the gas tap as a tool of political pressure on the former Soviet republics.”

Gazprom shares fell as much as 13 percent to 121.82 rubles in Moscow, the most since 2008, as investors sold Russian stocks and currency is response to Putin’s actions in Ukraine. The stock traded 123.29 rubles at 11:02 a.m. local time.

Interim Government

Ukraine’s interim government led by Arseniy Yatsenyuk can little afford to meet Gazprom’s demand for back payment as it tries to negotiate a $15 billion bailout with the International Monetary Fund. Ukraine, which uses more natural gas than France, gets more than half its supply from Russia.

Ukraine has an agreement, negotiated last year by Yanukovych’s government, to buy gas at a discounted rate until the end of March. In the days after the government fell, Russia’s prime minister said the deal could be honored under a new regime. That’s now changed.

Ukrainian Energy Minister Yuriy Prodan told reporters in Kiev on March 1 that he’s unsure when payments to Moscow-based Gazprom can be made.

“It seems without payments for gas and fulfillment of commitments, Ukraine may not keep its current gas price discount,” Gazprom spokesman Sergei Kurpriyanov said by phone.

Russia’s Energy Ministry sees no reason to renew the agreement to reduce gas prices in the second quarter, Interfax reported, citing an official it didn’t name.

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