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Feb 7, 2009 | 15:04 GMT

4 mins read

Russia, Ukraine: The New Natural Gas Deal's First Test

Midnight Moscow time Feb. 7 is the first deadline for Ukraine to pay Russia under the countries' new natural gas agreement. The new plan does not give Kiev any room for mistakes; one late payment and Ukraine will have to start paying for natural gas shipments in advance. Furthermore, a late payment would give Russia grounds for nullifying the agreement and cutting off natural gas supplies again, restarting the natural gas crisis that began at the start of 2009.
Midnight Moscow time Feb. 7 is the first deadline for Ukraine to make a payment to Russia under the new natural gas deal reached after the tumultuous energy crisis at the start of 2009. The new agreement does not give Ukraine much leeway in making payments and receiving supplies; one slip and Russia, Ukraine and Europe will be back in crisis mode. Russia and Ukraine continued blaming each other for the most recent natural gas crisis even after the Jan. 19 agreement between the two sides allowed Russia to restart natural gas shipments to Ukraine (which also run to Europe). Some 70 percent of Ukraine's — and 25 percent of Europe's — natural gas supplies come from Russia. Of all the natural gas Russia exports, 80 percent transits Ukraine, making that country critical within the supply chain. (click image to enlarge) Ukraine has long paid a subsidized price for its Russian natural gas supplies, paying $179 per thousand cubic meters (tcm) while Russia's European customers pay more than $400 per tcm. But even at this subsidized price, Kiev continually racks up billions of dollars per year in debt to Russia. Non-payment is what prompted Russia to cut off natural gas to Ukraine in both 2006 and 2009. According to the agreement that ended the most recent natural gas crisis, Ukraine will be paying $360 per tcm for the first quarter of 2009, and each quarter will be renegotiated depending on global energy prices. This is a large price jump for Ukraine, which is already facing a financial crisis and steep recession. Furthermore, to keep Ukraine from falling into much larger debts (as it has in the past), the agreement stipulates that Ukraine must pay for its natural gas supplies for any given month by the seventh day of the following month. If Ukraine is late just once on its payments, the agreement changes so that Kiev will have to pay for its natural gas supplies in advance instead. Also, Russia will have the grounds to nullify the agreement and possibly cut supplies once again, restarting the natural gas crisis. There is another sticking point on this first payment. Russia says that Ukraine still owes it $600 million for natural gas taxes that went unpaid during the energy dispute — something that could add to the already hefty bill. The European Union is attempting to prevent another crisis from erupting by sending EU Commission President Jose Manuel Barroso to Moscow to meet with Russian President Dmitri Medvedev, Russian Prime Minister Vladimir Putin and delegations from Russia's natural gas behemoth, Gazprom. But at the moment, the situation is not about Europe and Russia; It is about Ukraine and Russia, and Moscow wants to make sure Europe knows to stay out of its business concerning Kiev. Gazprom has said that it is willing to work out a deal with Ukraine if it can not pay each month, either by financing a loan to the country or by working out some sort of exchange — which means either that Gazprom would pick up Ukrainian energy assets or that a larger political deal between Moscow and Kiev would be reached. From Russia's viewpoint, this would be the ideal situation into which to push Kiev. Moscow is looking for a way to shape the political situation inside of Ukraine. It has already had some success in this area — during the natural gas crisis, the popularity of Ukraine's pro-Western President Viktor Yushchenko plummeted nearly into nonexistence. But Russia is looking for a more solid deal to remove all pro-Western politicians from power and turn Ukraine into a much more Kremlin-friendly neighbor.

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