For Ukraine, cheap Russian gas may cost too much

Author Vladislav Golovin, Senior Reporter

Naftogaz is wary of giving too much away in gas transit and supply negotiations with Gazprom.

After the most recent trilateral talks between Russia, Ukraine and the European Commission ended without agreement, Ukrainian Naftogaz’s decision to pursue a new compensation claim against Russia’s Gazprom – $11.8bn for lower transit volumes and uncompetitive pricing in 2014-18 – seemed to have been a serious misstep. The Kremlin has made clear that no transit deal can be signed until these legal disputes are settled. If gas transit is as crucial to Ukraine’s economy as officials in Kyiv maintain, why have they opted to antagonise their Russian counterparts? If Naftogaz truly wants a deal, why give Gazprom a ready excuse to walk away?

Of course, both sides have been angling for advantage in the run-up to the resumption of the trilateral talks, which EU officials — mindful of the vulnerability of citizens in southeast Europe to any supply disruption — are keen to see succeed. But in Kyiv there is little appetite to take the Russians at face value, particularly after the annexation of Crimea and Moscow’s continued support for separatists in eastern Ukraine’s Donbass region. 

In private, Naftogaz officials say that there is little hope in Kyiv that the Russian side will agree to anything — Moscow is only going through the motions, they argue, to preserve its image as a reliable supplier of gas to Europe. Gazprom’s offers to sell gas to Ukraine at a 25pc discount are meaningless without defining the starting price. 

And actions may speak louder than words. After all, Gazprom chief executive Alexei Miller had already told the St Petersburg Economic Forum in 2016 that his firm would dismantle 4,300km of the pipelines leading to Ukraine by 2020, and 10,700km by 2030. And in September this year, Miller said Gazprom would store 11.4bn m³ of gas in European facilities by the end of this year, three times the normal amount — a sign, to those watching from Kyiv — that the firm does not expect to reach a deal.

Naftogaz chief executive Andriy Kobolyev puts it pithily: “Nothing is more expensive for Ukraine than cheap Russia gas.” In 2013, when Naftogaz had a discount for hosting the Russian fleet in Crimea, Ukraine paid over $5bn for gas it bought from Russia – and received just $3bn for transit. “Negative difference for us — nearly $2bn,” Kobolyev says. Contrast this with 2018. Free from the obligation to buy from Russia, Naftogaz spent $2.1bn buying gas from Europe, and received $2.7bn from Gazprom in payment for transit. “Positive difference for us — nearly $600mn,” notes Kobolyev. 

And there is the longer term to consider. While Kyiv would like to maintain Russian transit and the revenue that it brings, it is increasingly resigned to the prospect of it ending — particularly after Denmark issued the final permits outstanding for the completion of the Nord Stream 2 pipeline from Russia to Germany that will make Ukrainian transit redundant. Why forfeit the billions that Naftogaz has won at arbitration for a compromise deal that will last six months at best?

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