Yves here. Although the Russian move to stop supplying gas to the Ukraine unless it pays upfront is an important, if expected, development, its immediate impact will be blunted by it taking place during the summer. From the Financial Times:
Analysts said an immediate energy crisis was unlikely because both Ukraine and gas buyers in Europe have built up plentiful stocks after a mild winter. Benchmark spot gas prices in Europe, which have dropped by almost 40 per cent this year, rose just 2 per cent on Monday.
Gazprom – which relies on exports to Europe for a large share of its revenues – has stressed that it will continue to deliver gas to European customers, including increasing supplies through routes that bypass Ukraine, if necessary.
Although Ukraine says it has 14 million cubic meters of gas stored, apparently enough to carry the country through December, the relationship between the two sides has become so poisoned that it’s not obvious how a deal could get done before then. And why should Russia make concessions? The FT again:
Those talks ended in the early hours of Monday morning with both sides intransigent.
“In fact we couldn’t really discuss because Ukraine insisted only on one position,” said Alexei Miller, chief executive of Gazprom, referring to several recent rounds of negotiations aimed at resolving the deadlock.
Both sides are also suing each other, with Gazprom demanding $4.5 billion it says is past due, and Ukraine’s Naftogaz countersuing for $6 billion in alleged overcharges since 2010.
More detail from OilPrice:
Russia cut off gas supplies to Ukraine on June 16, saying Kiev had missed a deadline to pay nearly $2 billion of a total debt of more than $4 billion that it owes for past gas deliveries. Now, Moscow says, Ukraine must pay in advance for any gas it receives.
During the talks in Kiev, each side clung to its negotiating position. Moscow’s has been to keep the price of gas at the original level set in a 2009 contract of $485 per 1,000 cubic meters, but at the same time to waive an export tax that would reduce the price to $385.
Kiev’s position has been that the tax waiver was simply a way for Moscow to exert leverage on its smaller neighbor because it could always restore the duty.
During a meeting in Gorki, outside Moscow, Gazprom CEO Alexei Miller told Russian Prime Minister Dmitry Medvedev, “Thanks to the unconstructive position of the Ukrainian government, today a prepayment system was introduced.”…
Ukraine’s pipeline from Russia also carries gas to EU countries, but Gazprom spokesman Sergei Kupriyanov said Ukraine was obliged not to siphon any of it for its own use. Nevertheless, Gazprom has notified the European Commission of a “possible disruption” of the gas flow if Kiev doesn’t meet this obligation.
Tim Ash, an energy analyst at Standard Bank PLC, told the Associated Press that Kiev could theoretically tap some gas meant for the EU, which wouldn’t hurt European customers now, but could make it harder for them to stockpile gas for the winter.
While a lot can happen between now and December, there’s nothing here that gives reason to think either side will budge. The Ukraine may hope that it can stick to its guns and that if it gets to the late fall and Russia has not budged, the West will provide some combination of pressure, cash, and other inducements to get Russian gas supplies restored, given that Ukraine can simply steal gas from Europe and use a humanitarian crisis as an excuse. This may prove to be optimistic thinking. And if the Ukraine pinches more than a little bit of gas bound for Europe, it’s going to become politically even more difficult for Europe to provide active support to the Ukraine.