Russian gas for Ukraine: new confrontation or cooperation? / News / News agency Inforos
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Russian gas for Ukraine: new confrontation or cooperation?

Discussion of Gazprom-Naftogaz cooperation is so far taking place in absentia

Russian gas for Ukraine: new confrontation or cooperation?
Context:

The "big" Ukrainian gas issue got another twist early this summer. Gazprom CEO Alexei Miller met with Yuriy Boiko and Viktor Medvedchuk, the leaders of Ukraine's party Opposition Platform – For Life on the sidelines of the St. Petersburg International Economic Forum on June 6. At the first glance the meeting saw some progress, it resulted in the readiness to begin talks on Russian gas deliveries to Ukraine at a reduced price. "We are ready to begin talks on preparing an agreement on Russian gas deliveries that would ensure a price level lower by 25% for an end consumer," Miller said.

However, in reality this message is rather declarative. The two Ukrainian politicians who met with Miller isn't authorized to conduct gas negotiations. All concrete decisions will in any way be made by Naftogaz Ukrainy and the government of "independent" Ukraine.

The retinue of President of Ukraine Volodymyr Zelensky commented on the talks in a style of out-of-place improvisation. Andriy Gerus, the representative of the Ukrainian president in the government, said on the air of one of the national TV channels that in order to buy gas Boiko and Medvedchuk "don't need neither power, nor new president, nor previous president, what they need is to buy gas, bring it to Ukraine and sell. And we will all applaud and say thank you. If they agree on some gas price, they need to immediately formalize the agreement and sign it." Gerus explained that Boiko and Medvedchuk "just" need to found their own private company that will be able to sign an agreement with Gazprom and deliver gas to Ukraine. Apparently, this Gerus's message isn't serious. The official is just playing the card of gas disagreements with Russia on the domestic arena, in the fight against the parliamentary opposition.

However, the possible discount voiced by the Gazprom CEO is a clear signal to Naftogaz that the Russian side is ready for certain compromises as part of discussing gas transit terms after 2019. There is even the positive response from the Naftogaz top management provided that the European Commission acts as a mediator, although Gazprom didn't put forth this condition. Initially, all discussions are held within the well-known Moscow – Brussels – Kyiv "triangle."

On June 13, Russian Minister of Energy Alexander Novak met with European Commission Vice-President for the Energy Union Maros Sefcovic to discuss prospects of continuing dialogue on Russian gas transit to Europe in the Russia-EU-Ukraine format.

According to Novak, negotiations on this issue will supposedly take place in late September, which means there will be at least three-month backlog before current contracts expire. Novak believes that the best-case scenario is to extend them updating some of their provisions.

Moreover, Novak said in the wake of talks with Sefcovic that Russia is ready to resume gas deliveries to Ukraine that were interrupted in 2015 with a huge discount of 25%. He also underscored that Gazprom proposed Naftogaz to sign an amicable agreement in arbitration dispute on the gas contracts that expire on December 31, 2019. However, the Naftogaz top management called the amicable agreement proposal "absurd."

In fact, the Russian side proposes to exchange the gas discount to annulling Naftogaz claims in the resolution of the Arbitration Institute of the Stockholm Chamber of Commerce that obliged the Russian state-run company to pay $2.56 billion to the Ukrainian company. Back in spring, Gazprom appealed the Arbitration Institute decision seeking its complete reversal.

It's likely that Naftogaz management fears welcoming possible direct gas purchases from Gazprom for political reasons. And this is the reason for public criticism of the Russian company's proposals.

And Naftogaz is now very interested in a gas discount. The company acutely needs floating assets so that to fill its underground gas storage facilities before the winter season. Naftogaz CEO Andriy Kobolev said on Facebook that this would require $1 billion. However, it seems to be a futile business to pin hopes on creditors when the government forces the company to pay high dividends and debts for gas shipped to consumers have a trend of stockpiling. Gazprom's discount would enable to save about $250 million on filling underground gas storage facilities.

Financial situation of the Naftogaz's subsidiary, Ukrtransgaz that operates the Ukrainian gas transportation system, is even worse, it's nearing a disaster. In mid-June the company warned of a shortage of assets for buying fuel consumed by gas pumping facilities. "Due to an acute shortage of assets, Ukrtransgaz is unable to make payments under gas contracts for its own technological needs on time. The company's debts to gas suppliers exceeded $150 million in March-April. That is why gas suppliers refuse to further provide gas volumes stipulated by the current contracts," the company said in a statement.

It seems that the discussion of prospects of resuming cooperation between Gazprom and Naftogaz is taking place in absentia, in the "trade-session" mode. That is why it's too early to make certain conclusions as "in person" talks are to begin only in autumn.

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