MOSCOW, May 20 (RIA Novosti), Nadia Koulikova – There is every possibility that Russia will turn off gas flows to Ukraine should the country not pay its outstanding debts, William Powell, senior managing editor for Platts International Gas Report, told RIA Novosti Tuesday.
“To do otherwise would set a dangerous precedent that bills are optional. No other consumer is entitled to not pay having agreed a price,” Powell added.
Russia is prepared to discuss energy discounts after Kiev pays its April 1 bill for Russian natural gas, which Ukraine and the European Commission have confirmed stands at $2.2 billion, Russian Energy Minister Alexander Novak said Monday.
“Ukraine needs to show its readiness, at least partially, to pay its debt,” Novak said.
Commenting on the statement, Powell, who has been reporting on gas markets since 1995, said that it is not clear to him what defense Ukraine has for not paying the bill for the first quarter.
“That gas was sold at a lower price than any other European country paid in that period. It was agreed in December as part of a loan package for political reasons and since then the government in Kiev has changed, but the favorable terms of the contract remained in place for the first quarter,” Powell said.
“If it is refusing to pay even that favorable price, then what is the point in renegotiating other prices for later periods?” he asked.
The next round of trilateral talks on gas between Russia, Ukraine and the European Union is due to be held on May 26.
“There is a contractual mismatch between the three parties at the talks,” Powell said, adding that “Russia needs to reach an agreement with Ukraine. It can argue that it has prepaid for transit and it can argue that there was an agreement for the price of Q1 gas deliveries, and the two issues – gas transit to Europe and Ukraine’s gas bill – should not be turned into one argument.”
Speaking on possible resolutions to the problem, Powell pointed out that one possible solution would be for Gazprom to deliver European gas at the Russia-Ukraine border, leaving EU gas companies to agree with Ukraine on the terms of transit westwards across its territory, which would help ease the situation from the Moscow-Kiev point of view.
“Another radical solution would be to cut Russia out of the equation: the EU could pay Ukraine’s gas bill on its behalf in order to ensure it gets the gas it needs next winter. That would be costly, but perhaps less so than the incremental cost of distressed winter purchases of spot LNG cargoes,” Powell said.
The energy expert added that members of the fugitive Ukrainian government have been accused of embezzling billions of dollars, which could have been used to pay the bill.
“The Ukrainian state prosecutor is trying to recover enough money to pay off several months’ debt from former Naftogaz head Yevhen Bakulin, for example, who allegedly stole over $4 billion from the state coffers,” he said
According to Gazprom estimates, Ukraine’s accumulated gas debt now stands at $3.5 billion and Naftogaz has not paid even part of its arrears to Russia.
Russia has decided to switch to a prepayment scheme due to the outstanding bills, in full accordance with the countries’ contract. Gazprom has prepared an advance bill for Ukraine’s Naftogaz for June deliveries. In case of non-payment, Russia could suspend gas supplies to Ukraine starting June 3.