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Aug 27, 2014 | 19:47 GMT

3 mins read

Russia and Ukraine Seek a Temporary Energy Deal

Russia and Ukraine Seek a Temporary Energy Deal
(KIRILL KUDRYAVTSEV/AFP/Getty Images)
Summary

A political solution to the ongoing crisis in Ukraine will not be reached in the near term. However, Ukraine and Russia are likely to reach a temporary energy deal in the coming weeks to avert a natural gas shortage in Ukraine and a larger energy crisis in Europe.

On Aug. 29, Russian officials will meet with an EU energy delegation in Moscow. On Sept. 6, delegations from Ukraine, Russia and the European Union will discuss the ongoing natural gas dispute between Kiev and Moscow. These negotiations come after Russian President Vladimir Putin, following a meeting with Ukrainian President Petro Poroshenko in Minsk, said that he and Poroshenko are committed to breaking the deadlock and renewing their countries' dialogue on energy. At the same time, the European Union's energy commissioner, Gunther Oettinger — who was also present at the Minsk talks — renewed his call for an interim natural gas agreement to ensure that Russian supplies flow to both Ukrainian and European customers throughout the winter.

Talks between Russian energy giant Gazprom and Ukrainian energy firm Naftogaz were deadlocked after Russia's June 16 decision to cut off natural gas supplies to Ukraine. For Russia, the cutoff is a way to manipulate the government in Kiev. The Ukrainian government has been able to avoid granting Gazprom concessions in negotiations throughout the summer, arguing that reverse flows from EU countries and Ukraine's own storage facilities could help mitigate the country's reliance on Russian imports. However, as the seasons change, Kiev has failed to secure sufficient alternative sources of natural gas, leaving Ukraine to choose between wintertime natural gas shortages or providing sufficient concessions to reach a deal with Gazprom.

Ukraine: Russian Natural Gas Cutoff Mounts Pressure on Kiev

Russian-European Natural Gas Networks

Since June, Ukraine has relied on its storage facilities and natural gas imports from Poland and Hungary to meet demands. Moreover, Ukraine has used the summer months to pump natural gas into its storage facilities. Nevertheless, Ukraine only has 15.5 billion cubic meters of natural gas currently in storage. To ensure an uninterrupted flow of natural gas from Russia to Europe and a guaranteed supply of natural gas for Ukrainian customers through the winter season, Ukraine will need between 22 billion and 25 billion cubic meters. Ukraine is scheduled to begin importing 3 billion cubic meters annually — about 250 million cubic meters per month — from Slovakia in September, but these Slovakian reverse flows will not completely replace Russian natural gas imports. Some new attempts to conserve energy — such as cutting off hot water to some Soviet-era buildings in Kiev — have done little to mitigate Ukraine's need of Russian natural gas imports.

Besides the military's operations against separatists in eastern Ukraine, Kiev is also facing a wide array of domestic challenges. The mobilization of thousands of men, as well as difficult conditions on the front lines, has led to a flurry of small-scale protests in western and central Ukraine. These demonstrations could grow in size and frequency, should current military conditions continue. Moreover, Ukraine's agreement with the International Monetary Fund, coupled with the need to increase military spending, has led to an increase in taxes and budgetary cuts from non-military areas. A natural gas shortage during the cold season would add to these ongoing challenges and likely spur more protests.

As the Ukrainian delegation prepares for its upcoming talks with Russian and EU energy officials, Kiev is aware that reaching a temporary deal with Gazprom in the coming weeks is the only way Ukraine can avoid a domestic natural gas shortage this winter. While Ukraine will have the option of diversifying away from Russian natural gas in the coming years by increasing the volume of reverse natural gas flows from countries such as Slovakia, in the short term Ukraine will be unable to meet its domestic demand without at least some Russian natural gas imports. Despite the current crisis in eastern Ukraine and Kiev's difficult relationship with the Kremlin, Ukraine will likely agree to a temporary natural gas deal with Gazprom soon.

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