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Ukraine, Russia: Signs of Compromise in the Energy Standoff



A valve is tightened at eastern Ukraine's Bilche-Volytsko-Uherske underground natural gas storage facility May 21.(ALEXANDER ZOBIN/AFP/Getty Images)

Analysis


It appears as though Ukraine and Russia are willing to compromise on energy deliveries despite concerns that they would not. On June 2, Gazprom CEO Alexei Miller announced that his company received payments from Ukraine for February and March natural gas deliveries, worth a total of $786 million. In response, Gazprom agreed to postpone the deadline by which Ukraine would fully repay its debts and begin pre-payments for future deliveries from June 2 to June 9. Gazprom has also indicated that it would be willing to lower the natural gas price from its initial offer of $485 per thousand cubic meters, or mcm, of gas to $385.50 per mcm if Kiev repaid its debts.

That is not to say the situation is resolved entirely. The price tag for natural gas is still much higher than Ukraine initially demanded ($268.50 per mcm), and the amount of money Ukraine's Naftogaz owes Gazprom is still disputed. But Russia and Ukraine clearly are working to avoid any disruptions to Ukrainian energy imports and thus natural gas cutoffs to European countries further downstream -- a prospect neither country would benefit from. For Russia, cutoffs would further degrade business relations with its major European partners, and as Ukraine faces new International Monetary Fund-imposed austerity measures and energy price increases, any disruption would drive up prices for consumers.

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Notably, the Kremlin has also proved willing to compromise on related political issues. Over the past few days, it has withdrawn thousands of troops from its border with Ukraine, though pro-Russia separatists still control parts of eastern Ukraine. In fact, unidentified militants attacked a border post in Luhansk Oblast earlier today. A Russian delegation submitted a draft resolution to the U.N. Security Council that would create corridors for safe passage to those who wish to leave eastern Ukraine. With the proposal, Moscow is trying to expose the West's alleged disregard of eastern Ukrainians, though its motives are not entirely altruistic: Eastern separatists increasingly are surrounded by Ukrainian security forces, which disrupt Russia's supply lines into the country.

As talks over the future of Ukraine's energy continue, it will become more evident that Moscow holds more leverage than Kiev. Russia is Ukraine's most significant natural gas supplier, and Moscow controls the eastern separatists, albeit indirectly. Moreover, Russia recently warned that it may introduce protective tariffs and restrictions on cheese imports, a clear signal that the Kremlin may use trade restrictions in order to pressure Kiev.

For its part, the government in Kiev has tried to get some leverage of its own. Ukrainian Prime Minister Arseniy Yatsenyuk said that if Gazprom did not agree on a natural gas price that was acceptable to Ukraine, Ukraine would seek legal recourse. So despite Gazprom's decision to extend its payment deadline, Kiev will maintain the threat of pursuing arbitration as a lever as talks with Gazprom continue.



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