Ukraine: Living On Borrowed Time And Russian Gas

KIEV, Ukraine -- Ukraine paid its May gas bill to Russian gas giant Gazprom in full, avoiding a new gas crisis, for now.

Ukrainian Prime Minister Yulia Tymoshenko gives a news conference in Kiev, Ukraine, June 9, 2009. The Russian government appears to have the Ukrainian election in mind in some form or another so it could it well be that Russia is pushing the gas situation to the brink and then negotiate a solution with its favourite candidate.

Moscow had expressed concern repeatedly that Ukraine would have trouble paying its bills and had warned it might seek full payment from Kiev in advance. “This could very well be a monthly or a more frequent event,” Chris Weafer, chief strategist at Moscow’s UralSib bank, told New Europe, reminding that Ukraine is in a dire economic situation.

But the most important issue, apart from paying the monthly bill, is that Ukraine needs to find the cash to rebuild its gas storage before the winter because Ukraine’s Naftogaz used pretty much the entire storage of gas for Ukraine during the first quarter of 2009, Weafer said.

Robert Shetler-Jones, chief executive of Group DF that holds Ukrainian billionaire Dmitry Firtash’s business assets, agreed. “The actual issue of paying for gas used now is not as big a problem as the fact that they do not have sufficient funds to buy additional gas that needs to be put in storage,” he said.

Russia has urged Brussels to loan Ukraine money to pay for gas deliveries in order to avoid possible cutoffs, hopping the EU will consider the proposal at a summit on June 18. The EU Commission last week sent a fact-finding mission to Moscow and Kiev to shed light on their gas payment dispute.

Russia is making a point in that if there is no gas in storage it will affect Europe. But Shetler-Jones said it would affect the EU only indirectly. The gas that is sent to Europe is different gas designated for export that transits Ukraine. “Assuming the Russians keep pumping that, there is no reason why that gas should not flow. However, what Russia does seem to be worried about is that the pipeline capacity will not be able to handle on one side their exports of gas to Europe and on the other side the increased demand Ukraine will have,” he said.

But for now, Ukraine appears more preoccupied by meeting in monthly payments, which are higher than previous years following the January contact agreed between Russian Prime Minister Vladimir Putin and Ukrainian counterpart Yulia Tymoshenko.

Ukraine pins its hopes on the IMF. “They are talking a huge gamble in printing money in order to pay the May bill. They can’t do that two months in a row without pushing the economy absolutely over the brink,” Weafer said.

And, at this point, Russia is all too willing to push them over the edge, threatening Ukraine as every payment deadline nears. The Russian government appears to have the Ukrainian election in mind in some form or another. “Elections are coming up in autumn in Ukraine and certainly the Russian government would very much like to have either (Viktor) Yanukovych or Tymoshenko as the next president. They are easier for them to deal with. So it could it well be that Russia is pushing the gas situation to the brink and then negotiate a solution with its favourite candidate,” Weafer said.

Russia would also like the EU to become involved in some sort guarantor role. It would make Russia’s life a lot easier and then would bring the EU into the process. “Every month they do this it must make Brussels that bit more nervous and therefore they may try to be part of the solution,” Weafer said.

But above all, Gazprom would still like to get greater control of gas assets in Ukraine, ideally to have some equity involved in the pipeline that crosses Ukraine’s territory. “That option is on the table,” Weafer said. “Every time Ukraine can’t pay I’m sure someone from Gazprom is saying: ‘Well, look, give us some assets and we’ll convert the debt into that.’”

Source: New Europe

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