Ukraine's Energy Dispute with Russia

Unnamed sources within Gazprom said Oct. 9 that the Russian energy giant would supply natural gas at a discounted rate to Ostchem Holding, a firm run by influential Ukrainian oligarch Dmytro Firtash. Key to the announcement is the exclusion of Ukrainian state energy firm Naftogaz, which has been embroiled in a yearslong dispute with Gazprom over energy supplies and pricing. The pricing dispute, which began as a result of a contract signed by former Ukrainian Prime Minister Yulia Timoshenko viewed as unfavorable to Ukraine, has remained a dominant feature of Ukrainian-Russian relations for years. Russia has said it would provide Naftogaz with lower prices only if Ukraine joins Russia's Customs Union and if Russia can increase its stakes in Ukraine's energy industry, preferably in a merger between Naftogaz and Gazprom.

Ukrainian President Viktor Yanukovich has so far refused, knowing that such outcomes would significantly undermine the sovereignty of the country in the long term, despite offering short-term price breaks and a financial reprieve to the struggling country. Instead, Yanukovich has pursued further integration with the European Union and has sought to get Brussels involved in any sort of restructuring of Ukraine's energy industry and regulations. This has unnerved Russia, which responded to Ukraine's move to sign free trade and association agreements with the European Union in November with trade restrictions. Kiev has not yet reversed its course, so Moscow has been ramping up the pressure on the energy front.

The latest announcement regarding a significant price discount for Ostchem is thus significant for two reasons. First, it contrasts starkly with deadlocked pricing negotiations between Gazprom and Naftogaz and reveals a Russian strategy to resurrect its own allies in Ukraine if the current leadership continues to resist. Second, it will allow for the pumping of natural gas into underground Ukrainian storage facilities, which are crucial to ensuring the flow of energy during the winter period. This means that European countries further downstream -- countries that distinctly remember being cut off as a result of previous disputes between Ukraine and Russia -- will have an adequate supply of natural gas and are unlikely to see major disruptions in the coming winter. But in the meantime, Ukraine and Russia will be more entrenched in their dispute over what the future of their energy relationship should look like.

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