Gazprom Increases Cutoff to Ukraine

ReutersGazprom spokesman Sergei Kupriyanov speaking on Tuesday. Supplies to Ukraine were cut by another 25 percent.
The gas standoff between Russia and Ukraine worsened Tuesday as Gazprom reduced supplies to Ukraine by another quarter, bringing its cutoff to 50 percent.

Gazprom cited a "lack of progress" in debt talks as the reason for the cut, which started at 8 p.m. Tuesday's reduction followed a 25 percent cut Monday.

Ukraine's state energy company, Naftogaz Ukrainy, slammed Gazprom's actions, saying the cuts could undermine the flow of gas to Europe in two weeks.

Naftogaz said that thanks to its reserves, its ability to raise domestic production and the warm weather, it would not feel the pinch for two weeks. After that, the Ukrainian firm said it could tap into the deliveries that Gazprom sends through Ukraine to Europe.

"Naftogaz states that it can guarantee uninterrupted transit to European consumers so long as it doesn't threaten Ukraine's energy security," the company said in a statement.

President Vladimir Putin and his Ukrainian counterpart, Viktor Yushchenko, agreed last month to settle the debts and move toward replacing the two intermediaries in the countries' gas trade with two new companies.

President-elect and Gazprom chairman Dmitry Medvedev told Yushchenko by telephone Tuesday that Russia expected Ukraine to meet all the commitments that Yushchenko made to Putin in Moscow last month, RIA-Novosti reported, citing an unidentified official in Medvedev's office.

Speaking on Vesti-24 state television after Naftogaz warned of possible transit disruptions, Gazprom spokesman Sergei Kupriyanov urged Ukraine to fulfill its transit contracts regardless of its own supply problems.

Gazprom said it was cutting Ukrainian supplies further because of a "lack of progress" in the talks, which have focused on payment by Naftogaz for the deliveries so far this year and the rearrangement of relations between the companies.

Under last month's deal, Gazprom would increase its access to end-consumers in Ukraine through one of the new intermediary companies and keep the current selling price for Ukraine at $179.50. But Ukrainian Prime Minister Yulia Tymoshenko has resisted having any intermediaries in the gas trade between the countries, a step that may have stalled the talks.

Gazprom and Naftogaz have declined to specify their disagreements. Adding uncertainty to the situation, neither firm has specified the exact amount of outstanding debt.

Gazprom said Ukraine had not paid for any of the gas it imported this year. Naftogaz admitted that it owed money but said intermediary gas traders had not supplied the company with proper contracts. The intermediaries, RosUkrEnergo -- owned equally by Gazprom and two Ukrainian businessmen -- and UkrGazEnergo, owned equally by RosUkrEnergo and Naftogaz, have denied acting improperly.

Vitaly Kisel, a spokesman for UkrGazEnergo, the gas trader that sells gas to Ukrainian industrial consumers, said the bigger cutoff would not affect its business.

Geoffrey Smith, deputy head of Ukrainian research at Renaissance Capital in Kiev, said the falling-out between Gazprom and Naftogaz was over the division of profits from supplying the Ukrainian market once the current gas traders are gone, rather than the purported nonpayment.

Shutting some of the valves Monday, Gazprom probably didn't expect much further resistance from Ukraine, Smith said. "It may be that Gazprom was surprised by the intransigence on the Ukrainian side," he said. "On past experience Gazprom probably expected the pressure to result in a positive solution almost immediately."

Instead, Ukrainian First Deputy Prime Minister Oleksandr Turchinov accused Gazprom of not paying for the transit of its gas to Europe on Ukrainian television last night. Naftogaz said Monday it had enough resources to hold out for a month despite the reduced imports.

"Generally, when you have two sides playing that [kind of] brinkmanship, both have a very good idea where the brink is and both know when it's time to step away from it," Smith said. "And I still believe that's what will be the most likely outcome."