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. Last Updated: 07/27/2016

Gazprom Threatens to Cut Off Ukraine

ReutersA worker walking near gas containers at a compressor station outside Kiev. Yushchenko on Thursday balked at paying more than $1 billion of Kiev's gas debt.
A statement by Ukrainian President Viktor Yushchenko on Thursday drew a new warning from Gazprom that deliveries to Ukraine would be halted in January if it didn't cover all of its gas debts.

Yushchenko said Ukraine was drawing the line after paying just a fraction of what it owes, setting the scene for what has become an annual tug-of-war between the two sides over gas deliveries.

He said that Ukraine, whose economy and currency are in a tailspin, paid $800 million on Wednesday for past supplies and would come up with another payment of $200 million in the "near future."

"And we can draw the line there as of today," Yushchenko said, Interfax reported.

Gazprom spokesman Sergei Kupriyanov said the $800 million payment would only cover gas supplied to Ukraine through the end of October, and that the country still owed $2 billion for November and December deliveries, including penalties.

State-owned Gazprom would not sign a contract to supply Ukraine with gas next year or agree to remove intermediaries in the bilateral gas trade, as Ukraine has demanded, unless Kiev pays up or offers other solutions, Kupriyanov said.

"We will be unable to sign a new contract, and this will mean that we will have no legal grounds to supply gas to Ukrainian consumers as of Jan. 1," he said at a news conference.

Ukrainian Fuel and Energy Minister Yury Prodan said Thursday that he was unaware the country was going to halt debt payments, Interfax reported. He said Ukraine intended to continue talks over the debt.

The European Union, which receives 80 percent of its Russian gas via Ukraine, said Thursday that it found the course of the current talks unsettling. Supplies to the EU dipped briefly when Russia cut deliveries to Ukraine in 2006 in a pricing dispute.

"The current gas disagreements between Russia and Ukraine concerning gas prices deeply concern [EU Energy] Commissioner [Andris] Piebalgs," the commissioner's spokesman, Ferran Tarradellas, said in an e-mailed statement. The situation is "certainly affecting the reputation of Russia as a reliable gas supplier and Ukraine as a reliable transit country."

Piebalgs was to meet Oleh Dubyna, chief of Ukraine's national gas company, Naftogaz Ukrainy, and Russian representatives for a discussion in London of the situation.

"Piebalgs has recently intensified contacts with Russian and Ukrainian authorities to get detailed information on the development of the negotiations," Tarradellas said. "The delegations of the commission in Moscow and Kiev are also in intense talks with the authorities in both capitals."

A cut in deliveries by Gazprom would not cause immediate problems in Ukraine or the EU, because both have accumulated reserves in underground storage facilities, Tarradellas said separately, Interfax reported.

In Britain, gas prices for the first quarter jumped on Thursday after Gazprom issued the warning.

Gazprom deputy chief executive Alexander Medvedev, speaking at the same news conference, said the company's transit contract with Ukraine was separate from the supply contract, unlike in 2006, when Gazprom first cut deliveries to the country.

Gazprom executives toured European capitals recently to present their position in the talks with Ukraine, Kupriyanov said. Gazprom chief Alexei Miller was going to send letters to European partner companies Thursday to explain the possibility of cuts to Ukraine, Kupriyanov said.

Ukraine's debts are owed to RosUkrEnergo, the joint venture between Gazprom and two Ukrainian businessmen that acts as the intermediary in the trade.

Gazprom has refused to specify what portion of the money owed to RosUkrEnergo it is expecting to receive.

The signing of a supply contract for this year also turned into a tug-of-war, with Gazprom reducing supplies to Ukraine for three days in March before a formal agreement was reached. EU supplies were not affected.

Medvedev also said Thursday that the average price Gazprom will charge Europe next year will be from $260 to $300 per 1,000 cubic meters of gas. That figure topped $500 in October and will stay above the mark through the end of the year.

Ukraine has been paying $179.5 this year.

Prime Minister Vladimir Putin agreed in October to spread Ukraine's transition to market prices over three years, but the proposal is conditional on Ukraine's paying its current bills.

Ukraine imports gas that Gazprom buys from Central Asia, whose gas suppliers have also been demanding a shift to "market prices" starting next year.

Medvedev declined Thursday to explain how Gazprom would cover losses if it were to provide the gas to Ukraine at a discount over the next three years.