situation report

Ukraine, Russia: Governments Reach Natural Gas Agreement

3 MINS READOct 30, 2014 | 23:32 GMT

On Oct. 30, roughly four months after Russia cut off natural gas supplies to Ukraine, Russia's Gazprom and Ukraine's Naftogaz signed a temporary agreement worth $4.6 billion allowing Ukraine to import 4 billion cubic meters of natural gas until the end of March. Russia has agreed to sell Ukraine natural gas for $378 per thousand cubic meters for the fourth quarter of 2014, and $365 per thousand cubic meters for the first quarter of 2015. At the same time, Ukraine committed to paying $3.1 billion by the end of this year, in two tranches — the first $1.45 billion and the second $1.65 billion. As Kiev requested, Ukraine will be allowed to order natural gas at a fixed price as needed, thus avoiding a so-called "take-or-pay" system. Nevertheless, long-term natural gas supplies will be determined at a later date as both sides pursue international arbitration.

EU Energy Commissioner Gunther Oettinger, who served as the chief negotiator in the deal, also announced that Ukraine does have sufficient funds to purchase 4 billion cubic meters this winter using existing funds from international institutions that have already been disbursed. Still, Oettinger highlighted that next year both the European Union and the International Monetary Fund will adopt new aid programs for Ukraine.

For Kiev, signing the interim deal during this quarter was essential because Ukraine would have run out of natural gas by early January without imports from Gazprom. For Moscow, the interim deal comes at a time when Russia is facing significant domestic economic challenges while also contesting the borderlands that form a buffer between Russia and the West. At home, the Kremlin faces a weakening ruble, falling oil prices and plummeting foreign investment levels. Defending the ruble is costly, with the Russian Central Bank using over $20 billion from its foreign currency reserves this past month in an attempt to stabilize the currency. Falling oil prices, moreover, are threatening to cut revenues and undermine the Kremlin's budget plans for a variety of programs, including defense expenditures. These economic problems concern the Russian public, with an estimated 45 percent expressing worries over the strengthening dollar, according to a Levada Center poll. At the same time, Western sanctions are putting pressure on Russia's economy, especially its energy firms, which have turned to the Kremlin for financial assistance.

These issues factored into Russia's deal with Ukraine, as did Moscow's need to maintain economic and political ties with the Europeans, who have been directly involved in the negotiations. By signing an interim natural gas deal with Ukraine, Russia is working to improve its relationship with the European Union to attract investment and pursue an easing of sanctions. Ultimately, energy will remain one of Russia's key levers in Ukraine as the two sides move toward international arbitration over long-term natural gas supplies.

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