Russia: Natural Gas Cutoff Puts Pressure on Ukraine

An employee at Uzhgorod natural gas metering station near Chaslivci, Ukraine on May 21.(ALEXANDER ZOBIN/AFP/Getty Images)

Analysis

Following weeks of EU-arbitrated negotiations between Russia and Ukraine, Russian energy company Gazprom cut off natural gas supplies to Ukraine on June 16. Five days earlier, Russian Energy Minister Alexander Novak threatened that Moscow would do so if Kiev did not make a $1.95 billion payment on its natural gas debt. On the same day, both Gazprom and Ukraine's Naftogaz filed lawsuits in an arbitration court in Stockholm; Gazprom is trying to collect $4.5 billion in back payments, though Naftogaz claims it had actually overpaid by $6 billion.

Russia is trying to pressure Ukraine and its European backers into compromising on debt repayment and pricing. The wrangling over debt and natural gas prices will continue, but the current cutoff is likely to be temporary and less detrimental to downstream buyers than previous cutoffs.

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Recently, there have been signs that Gazprom and Naftogaz were nearing a compromise. However, disputes over debt and pricing, not to mention energy assets in Crimea, including oil and natural gas deposits, as well as energy company Chornomornaftogaz, have obstructed any agreement. Naftogaz offered to pay $326 per thousand cubic meters of natural gas, but Russia countered with $385, a compromise on its original demand of $485 per thousand cubic meters. Ukraine paid Gazprom $786.4 million for natural gas delivered in February and March, but Kiev refused to pay the $1.95 billion, which was due June 16.

The Russian cutoff is a direct response to this refusal. It is also part of Russia's negotiating tactics over the future of Ukraine's energy supplies. Notably, Gazprom has cut off only as much natural gas as Ukraine consumes; what it supplies to Europe will continue to flow through Ukraine unabated, at least for now. Even if Russia were to cut off supplies to Europe, there would be little impact in the short term. The German government has said that Germany has enough reserves and natural gas supplies to temporarily meet its demand. Storage volumes remain high across the continent, and the approaching summer means that countries in Central and Eastern Europe will require less natural gas in the coming months, giving European and Ukrainian leadership time to negotiate with Russia before winter. Although it is possible that Russia will impede and delay compromise for the next several months -- a tactic that would force Ukraine to accept the higher price Gazprom demands -- this cutoff is more likely a short-term bargaining ploy to enhance Russia's negotiating position.

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