Russia, Ukraine Fail to Agree on Gas Plan as June Cut Looms

May 29, 2014 3:21 pm ET

(Updates with Gazprom comment in ninth paragraph.)

May 29 (Bloomberg) -- Russia and Ukraine are at loggerheads over payments for natural gas as a compromise proposal from the European Union to try to prevent a disruption in fuel supply to the continent as soon as next month failed to elicit support.

Talks between the two sides and European officials tomorrow in Berlin aren’t expected to lead to progress, Ukrainian First Deputy Energy Minister Yuri Zyukov told reporters today in Kiev.

Russia is unfortunately now an “enemy,” Zyukov said in the capital. It “speaks in ultimatums,” he said. The only solution is likely to be arbitration in court, he added.

The battle over billions of dollars of payments for Russian gas from its former Soviet ally threatens deliveries of the fuel bound for the EU, about half of which transits through Ukraine. Similar rows over prices and debt between the two sides held up European supplies during freezing weather in 2006 and 2009.

Under the EU plan announced May 26 after earlier trilateral talks, Ukraine was to pay $2 billion of its gas debt by May 30 and $500 million more by June 7. When OAO Gazprom got the first tranche, Russia’s gas exporter would then maintain deliveries without demanding payment in advance and begin talks on prices. A deadline for yesterday set by the EU passed without agreement.

Talk Ready

Russia is ready to discuss price changes and may withdraw a demand for prepayments once Ukraine starts stumping up for deliveries, the Energy Ministry in Moscow said late yesterday. Ukraine is prepared to pay once Russia lowers prices, according to its Energy Ministry.

“Russia and Ukraine are still far from a compromise given the recent statements,” said Ekaterina Rodina, an oil and gas analyst at VTB Bank in Moscow.

Ukraine’s gas debt will have climbed to $5.2 billion by the June 7 payment deadline for May supplies, according to Alexey Miller, head of Russian state-controlled Gazprom. Russia is also seeking about $1.7 billion in advance payments for June shipments. That’s due by June 2 and, starting from the following day, Ukraine will only get what it pays for, Gazprom said this month.

“We hope the certain agreements will be reached in the next few days and Ukraine will start to pay for Russian gas,” Gazprom’s press office cited Miller as saying today in Athens.

Pay Debt

Ukraine should pay down its debt before further talks are held, Russian President Vladimir Putin said. “This situation cannot continue forever. This is simply not possible and everyone understands this,” he said in Moscow yesterday. “I hope that we won’t reach a situation where we have to move to prepayments.”

Ukraine has refused to cover any of its debt since Russia raised prices 81 percent in April after withdrawing two separate discounts for its neighbor that had been in effect since 2010 and 2013.

“We are ready to pay the market price for gas, but never the political one,” Ukrainian Prime Minister Arseniy Yatsenyuk said late yesterday in Berlin.

Europe is in contact with all sides to ensure trilateral talks scheduled to continue tomorrow go ahead, Sabine Berger, a spokeswoman for the European Commission, said by e-mail.

Russian Energy Minister Alexander Novak said EU proposals were put forward as a compromise in alliance with Russia.

“Moscow and Brussels have become allies, requiring Ukraine to repay at least $2 billion of its overdue debt for Russian gas,” Alexander Kornilov, an oil and gas analyst at Alpha Bank in Moscow, said today in an e-mailed note. “Ukraine’s position indicates that the light at the end of the tunnel in Russia- Ukraine-EU gas discussions is still very far.”

International Arbitration

Ukraine will start paying only after Russia agrees to a temporary price of $268.50 per 1,000 cubic meters, the same as it charged in the first quarter, Energy Minister Yuri Prodan said after Putin’s statement, according to Interfax. That compares with a range of $250 to $350 per 1,000 cubic meters previously cited by Prime Minister Yatsenyuk.

Ukraine has boosted gas imports from Russia since April 17, the day Putin first encouraged Gazprom to demand cash in advance within a month unless its neighbor resumed payments for supply.

Gas imports in May increased fivefold from levels a year earlier as Ukraine built up stocks in underground storage before the looming cutoff, according to data compiled by Bloomberg.

The country’s NAK Naftogaz Ukrainy would seek international arbitration from May 28 if price talks with Gazprom failed, the Kiev-based energy company said this month.

--With assistance from Brian Parkin in Berlin and Anton Doroshev and Olga Tanas in Moscow.