Russia cuts tap on Ukraine's gas supply

MICHAEL BIRNBAUM AND CAROL MORELLO
Last updated 12:01 17/06/2014

Russian gas exporter Gazprom has cut supplies to Ukraine after Kiev failed to meet a deadline to pay off its gas debts. As David Pollard reports, the dispute raises worries that supplies to the rest of Europe could be disrupted.

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Russia cut off gas supplies to Ukraine on Monday, a move that will inflict immediate pain on its turbulent neighbour and could eventually affect other gas-dependent European nations.

The cutoff intensifies pressure on Ukraine, which is contending with an increasingly violent pro-Russian insurgency in its east and with economic challenges that were crippling even before the upheaval sparked by the ouster of Kremlin-friendly President Viktor Yanukovych in February.

And if the gas flow is halted for a long time, winter stockpiles across Europe could be depleted, causing problems across the continent, particularly in eastern European countries that depend solely on Russia for their gas.

Russia's giant gas company, Gazprom, said on Monday that it had notified the European Commission of possible shortfalls following the cutoff. About 15 per cent of Europe's natural gas supplies cross Ukrainian territory.

The two sides appeared to be readying for a protracted battle. The head of Ukraine's state-owned natural gas company said it could go without new supplies until December, if necessary.

"We will supply gas only in the amount paid for," Gazprom spokesman Sergey Kupriyanov said. "They paid zero; correspondingly it's zero."

Russian Prime Minister Dmitry Medvedev, meanwhile, called the Ukrainian refusal to pay its gas debts in full "blackmail".

Ukrainian Prime Minister Arseny Yatsenyuk said on Monday he was not interested in accepting higher prices for Russian energy only to allow Russia to "spend this money on weapons, tanks and planes to bomb Ukrainian territory", a charge the Kremlin has denied.

Russia also halted the import of Ukrainian potatoes on Monday, saying they had been found to be contaminated - an action that will hurt Ukraine's agricultural sector. Russia has frequently restricted food imports from countries with which it is having political disputes.

The cutoff came on a day when Ukrainian President Petro Poroshenko proposed a cease-fire with the pro-Russian separatists but said that the army must first regain control of the porous border with Russia, which he hoped could be done in a week.

In a meeting with his security team, Poroshenko said government troops have already reestablished control of stretches of the border where fighters and equipment have slipped across from Russia.

Poroshenko first proposed a truce in his inaugural address when he assumed office on June 7, but rebels rebuffed his call. He also said on Monday that he plans to introduce within days constitutional amendments that would give more powers to Ukraine's regions, a key demand of the pro-Russian separatists, as well as Russia.

Andriy Parubiy, the head of Ukraine's National Security and Defense Council, estimated that 15,000 to 20,000 "armed terrorists" are in Ukraine's east - a vast number, if accurate.

He also said that a significant force of well-equipped soldiers has been redeployed close to territories bordering Ukraine in the past day or two. The force's assets include personnel and transport planes used by the Russian air assault division, he said. There was no immediate response from Russia.

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Fierce fighting persisted in Ukraine's east on Monday. In Donetsk, gunmen took over several buildings in the city, including the regional treasury, the national bank and the tax administration. Serhiy Taruta, the governor of Donetsk, said the takeover means the state may have to stop paying salaries and pensions.

The Organization for Security and Cooperation in Europe said as many as 4 million people in the Donetsk region risk losing water because the pumping station and pipeline have been damaged in fighting. The OSCE said city crews started making repairs but stopped because of gunfire nearby. An adviser to Taruta said water could run out within days.

Tensions between Ukraine and Russia are higher than ever after pro-Moscow rebels in eastern Ukraine shot down a Ukrainian military transport plane early Saturday, killing all 49 people on board. Ukrainian officials accused Russia of supplying the heavy weapons used to shoot down the aircraft.

Protesters in Kiev later attacked Russia's embassy, overturning cars with diplomatic plates and breaking every window on the front of the building.

Ukrainian and Russian officials have been fighting about gas pricing since Yanukovych was ousted in February. After Russia annexed the Crimean Peninsula, it hiked gas prices for Ukraine 81 per cent, from US$269 ($311) per 1000 cubic metres of gas to US$485. That price was the highest in Europe, and Ukrainian officials refused to pay, calling it politically motivated retaliation.

Gazprom has since lowered its price demand to US$385, broadly in line with prices for other European countries. Ukrainian officials have sought to pay less and have said the way Russia was structuring the deal meant they would remain vulnerable to price hikes if they ever did anything to displease the Kremlin.

"Any price they offer is in the form of a discount that can be undone at any time," said Pierre Noel, an energy security expert at the International Institute for Strategic Studies.

The cutoff is the third in recent years, after previous ones in 2006 and 2009, which also came during disputes over gas payments that Ukrainian and European officials have said were politically motivated.

Ukraine is seeking to soften the blow by buying gas from its neighbours, reversing the flow of pipelines that usually carry Russian gas out of its territory. But any such supplies are unlikely to satisfy Ukraine's gas needs - and the gas would still be coming from Russia.

Underscoring the unlikeliness of a quick resolution, Gazprom and Naftogaz Ukraine filed competing claims on Monday in an arbitration court in Stockholm. Gazprom filed to recover a claimed US$4.5 billion debt for gas shipments since December.

Naftogaz said it has been paying higher than the market rate for gas since 2010 and argued that it was owed US$6b as a result.

- Washington Post/Bloomberg

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