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    Ukraine-Russia Gas Crisis Looms Because Europe Refuses to Face Reality

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    Alexander Mercouris
    Russia-Ukraine Gas Conflict (292)
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    Predictions of a written agreement in the Russia-Ukraine-EU gas dispute from talks held on October 21, 2014, have so far failed to materialize.

    LONDON, October 22 (RIA Novosti) – Predictions of a written agreement in the Russia-Ukraine-EU gas dispute from talks held on October 21, 2014, have so far failed to materialize. This was anticipated because of the vast gulf of understanding that exists between the three parties involved. Though some temporary agreement may eventually emerge, this gulf is so wide that it is likely to unravel quickly.

    To understand the dispute it is necessary to look first at the positions and objectives of each party.

    The Russian position is the most straightforward. The Russians are charging Ukraine $485 per 1,000 cubic meters of gas in accordance with a price formula agreed by Putin and Tymoshenko in 2009. Since Ukraine has accumulated $5.5 billion in unpaid gas debts, Russia refuses to supply Ukraine with gas on credit and in June put Ukraine on a prepayment system whereby Ukraine must pay in advance for any gas supplied. Concurrently, in June the Russians offered Ukraine a discount of $100/1,000m³ on the contract price, decreasing the actual price to $385/1,000m³. Ukraine refused this offer and has made no prepayments for gas.  As a result the Russians have stopped supply Ukraine with gas since June.

    The Ukrainian position until recently was that they would only pay for gas at what they say is the “correct” price, which they put at $269/1,000m³. They insist that their gas debts be recalculated and reduced according to this price. They have said that they will only pay their debt when this is done. 

    The Ukrainians have not really explained why they think the price of $269/1,000m³ is the “correct” price and not the $485/1,000m³, which is the contract price.  There seems to be some suggestion that the price of $485/1,000m³ is too high, or higher than the price the Russians charge their other European customers.  However, the price of $485/1,000m³ is determined by a formula agreed in negotiations by Putin and Tymoshenko in which Prodan, Ukraine’s present energy minister, was involved. Since the price the Russians charge other European customers is confidential, it is not actually possible to say with any certainty that the price of $485/1,000m³ is higher than the price other nation’s pay.  There are suggestions that in some cases at least it may actually be lower.

    The figure of $269/1,000m³, which Ukraine says is the “correct” price, actually comes from an agreement reached by President Putin with the previous Ukrainian President Viktor Yanukovych in December 2013, shortly before the February coup, whereby, in order to help Ukraine out of its economic difficulties, Russia agreed to grant Ukraine a £15 billion loan and a discount on the contractual price for its gas, bringing the initial price down to $269/1,000m³.  

    That agreement was however conditional upon Ukraine paying off its gas debt, something Ukraine has never been able, or willing to do. On the contrary, following the December 2013 agreement, Ukraine’s gas debt actually increased, with such payments as were made being insufficient to clear the debt.
    It seems the Ukrainians have nonetheless somehow convinced themselves that they are entitled to the benefits of the December 2013 agreement without taking on its corresponding burdens.

    The EU position is different in that the EU is not a party to the gas agreements between Ukraine and Russia.  The EU however has an interest in the outcome of the negotiations because of concerns that if Ukraine continues to be cut-off from Russian gas it may, as it did in 2006 and 2009, steal Russian gas that crosses its territory on the way to Russia’s European customers in order to get through the winter. 

    When that happened in 2009 Russia stopped all transit of Russian gas across Ukraine, causing severe gas shortages in eastern and southern Europe.  The Russians have recently warned that if Ukraine does the same thing they will do the same thing again.

    The EU position is however complicated due to its support of the present Ukrainian government, which seized power in February and which the EU currently sponsors. 

    The EU’s problem is that since the February coup, Ukraine’s economy has collapsed putting its ability to pay for gas at any price in doubt. Since the EU does not want to take on what could easily prove to be an open-ended commitment to pay Ukraine’s gas, the EU, in order to safeguard its own supplies and to support its ally in Kiev, basically wants Russia to resume its gas supplies to Ukraine on credit.

    In other words, the EU wants Ukraine to pursue pro-Western, anti-Russian policies and expects the Russians to support it in this endeavour.
    This is the same illogical, even contradictory policy, the EU had followed throughout the Ukrainian crisis and even before, extending in fact all the way back to the Orange Revolution of 2003. When the Russians predictably say no, the EU comes away baffled.
    This set the scene for the fiasco in Milan.

    Having wrongly expected the Russians to retreat on the political front, (apparently the hope was that they would agree to pressure the rebel authorities in Donetsk and Lugansk to postpone the elections that are due there on November 2, 2014), the EU leaders also presumed that they could pressure the Russians to restart supplying Ukraine with gas. 

    Though details are still sketchy, it seems that the EU drew up a preliminary gas agreement whereby Russia would resume gas supplies to Ukraine upon Ukraine agreeing to pay an “interim price” of $325/1,000m³ for gas supplied in summer and $385/1000m³ for gas supplied in winter.  Ukraine would in return commit itself to paying the bulk of its gas debt before the end of the year, though where it would find the money to do so was not explained. 

    What seems clear however is that the resumption of gas supplies was to take place immediately on the signing of the agreement and would not depend either on prepayment for the gas or on payment by Ukraine of its debt. In other words, the agreement required the Russians once again to supply gas to the Ukrainians on credit.

    Predictably, but to the EU leaders’ astonishment, the Russians said no. They flatly refused to sign the written agreement. They rejected the proposed price of $325/1,000m³ for the summer.  They agreed to the $385/1,000m³ for the winter, which is not surprising since this is the discounted price they have been offering Ukraine since June. They agreed that Ukraine should pay off the bulk of its debt by instalments before the end of the year, and as a “concession” agreed to recalculate this debt at the price of $385/1,000m³, shaving off around $1 billion reducing the debt from $5.5 billion to $4.5 billion. 

    Crucially however, the Russians categorically refused to supply any gas to Ukraine on credit. In President Putin’s words, Russia will not supply gas on credit “and that’s final”. 

    The situation therefore remains in deadlock. 

    It is far from clear that any real progress has been made. Ukraine remains unable to pay for its gas. The Russians refuse to provide Ukraine with gas unless it pays for it. The Europeans (resisting suggestions from Moscow) remain unwilling to pay for Ukraine’s gas.  Instead they persist in coming up with intricate schemes to get Russia to supply Ukraine with gas on credit.  One such scheme is that Russia supplies gas on credit to a European company, which then redirects the gas to Ukraine.  Another is that Russia makes an advance payment to Ukraine on its gas transit fees (in effect loans Ukraine the amount of future transit fees), which Ukraine then uses to pay for its gas. The Russians unsurprisingly and predictably outright deny the proposals.

    In the meantime Ukraine continues to be cut-off from Russian gas. Winter is now approaching. With insufficient gas stored in reserves and with Ukraine having now lost access to Donbas coal because of ongoing conflict, the situation is becoming critical. 

    Unless there is a sudden breakthrough it is unclear how Ukraine will get through the winter economically. The problem is that the gulf in objectives and perceptions between the parties is so wide that it is difficult to determine how such a breakthrough can come about.  Even if some sort of interim arrangement is cobbled together to get Ukraine through the winter, the objectives of the parties are so divergent that it is a virtual certainty that it will quickly fall apart.

    It should by now be obvious that without Russia’s help Ukraine’s economy cannot be stabilized. The Europeans seem to understand this but refuse to accept its implications. Instead they persist in the fantasy that the Russians can somehow be bribed or bullied into paying the escalating costs of their Ukrainian adventure for them even though doing so is contrary to the Russians’ own interests.  The Europeans then come away baffled and angry when the Russians say no.

    It is understandable that the Europeans are unwilling to pay Ukraine’s gas bills. Given Ukraine’s catastrophic economic situation it is easy to see how such a commitment could become open-ended. Given the deepening economic crisis in Europe and the severe pressure on European budgets, it is politically impossible for the Europeans to afford such a commitment.

    The EU’s political objectives in Ukraine are thus unattainable because their economic cost of pursuing them is too high. That is the reality both the Europeans and the Ukrainians need to grasp. For the moment they refuse to do so. Until they make the kind of political compromises that are necessarily, the situation in Ukraine will continue to deteriorate. It is Ukrainians and possibly European citizens, who are now at risk from gas shortages during winter.

    Topic:
    Russia-Ukraine Gas Conflict (292)
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    European Union, gas