Ukrainian Gas Cut-Off Nears as Russia Protests Border Breach

Jun 13, 2014 6:18 pm ET

(Updates with U.S. State Department comment above ‘Heavy Losses’ subheadline. For more on the Ukraine crisis, see EXT2.)

June 14 (Bloomberg) -- Ukraine is bracing for a halt in natural gas flows after one of its army vehicles crossed into Russia during clashes with rebels, raising tensions between the countries and prompting a protest from President Vladimir Putin.

Ukrainian Prime Minister Arseniy Yatsenyuk yesterday instructed authorities to prepare for a gas cut-off after a deadline set by OAO Gazprom for Ukraine’s past payments for the fuel expires on June 16. An armored personnel carrier crossed 100 meters (330 feet) to 150 meters into Russian territory as government troops were chasing insurgents, Serhiy Astakhov, an aide to the head of Ukraine’s border service, said by phone.

The showdown over gas shipments heaps pressure on Ukraine’s new president, Petro Poroshenko, who’s struggling to fulfill a pledge to halt the unrest during his first week in office after peace negotiations that include Russia so far failed to yield a cease-fire. The European Union, dependent on Russian gas piped through Ukraine for about 15 percent of its supplies, is trying to broker a deal to avoid interruptions seen during comparable disputes in 2006 and 2009.

“Although de-escalation looks increasingly likely, we still see risks of tensions rising again as a result of ongoing conflict or diplomatic differences,” Alina Slyusarchuk and Jacob Nell, analysts at Morgan Stanley, said in an e-mailed report. “We see gas talks as derivative of the wider dispute between Russia and Ukraine over Crimea, the Ukrainian constitution and Russia’s involvement in Ukraine.”

Discount Scrapped

Gazprom rescinded a price discount granted to Ukraine in December citing its mounting debt, while Russia stripped its neighbor of a 2010 export-duty break that it exchanged for a lease on its Black Sea fleet’s port in Crimea, which Putin annexed in March.

The deadline for Ukraine to pay $1.95 billion for past supplies or be moved to prepayment is June 16, according to Gazprom CEO Alexey Miller. Ukraine refused to pay after Russia raised the gas price by 81 percent in April.

Russia turned down proposals from Ukraine backed by the EU, according to a statement on the Ukrainian government’s website. The EU suggested an interim price of $326 per 1,000 cubic meters, which Ukraine would accept, Andriy Kobolyev, chief executive officer of national energy company NAK Naftogaz Ukrainy, told reporters in Kiev. Gazprom’s final price offer for Ukraine is $385, the Moscow-based company said in a statement.

Two Days

“We are preparing for the worst-case scenario, when gas would not be supplied to Ukraine at all,” Kobolyev said in televised comments. “But we still hope to find a compromise, as we have two days.”

Ukraine’s hryvnia, this year’s worst-performing currency against the dollar with a 30 percent plunge, strengthened 0.8 percent yesterday in Kiev, the capital, data compiled by Bloomberg showed. The ruble was 0.1 percent weaker.

Yatsenyuk ordered Ukraine’s Foreign Ministry and Energy Ministry to inform EU countries and the U.S. that Russia “deliberately” undermined the talks on gas supplies and rejected constructive proposals. The premier also instructed Naftogaz to file for international arbitration against Gazprom and called for an “economically justified” rate for fuel transit to Europe, according to the government statement.

‘No Willingness’

Russia rejects Ukraine’s accusations that it’s disrupting the talks and is “seeing no willingness on the part of our Ukrainian colleagues to reach an agreement,” Putin’s spokesman, Dmitry Peskov, said on the Echo Moskvy radio station.

With the two countries locked in the dispute over gas prices, tensions spilled over their border as clashes continued in Ukraine’s easternmost regions.

Putin instructed the Foreign Ministry to hand a formal diplomatic complaint to Ukraine over its border incursion, Interfax cites Peskov as saying. It’s a “gross violation of the fundamental rules of international law,” the ministry in Moscow said in a statement, demanding an “end to such provocations” and adding that a note of protest is being sent to Ukraine.

The breach happened as Ukraine intensified an offensive against insurgents as it battled a rebel convoy of armored vehicles, including the first reported separatist tanks. NATO warned that reports of an armored column entering from Russia would mark a “serious escalation” in the months-long conflict.

The separatists acquired heavy weapons and military equipment from Russia, including Russian tanks and multiple rocket launchers, Maria Harf, a spokeswoman for the U.S. State Department, said in an e-mailed statement.

‘Heavy Losses’

Insurgents in the Donetsk region city of Mariupol suffered “heavy losses” and two government troops were injured as a planned operation against militants began at 4:50 a.m. yesterday, Interior Minister Arsen Avakov said on Facebook.

“I continue to urge Russia to complete the withdrawal of its military forces on the border with Ukraine, to stop the flow of weapons and fighters across the border, and to exercise its influence among armed separatists to lay down their weapons and renounce violence,” NATO Secretary General Anders Fogh Rasmussen said in an e-mailed statement yesterday.

The operation in the Sea of Azov port city of Mariupol was “successful,” with Ukrainian forces taking control of all the separatists’ strongholds, according to Avakov, who said 11 people were detained, two mines neutralized and Donetsk-bound vehicle containing weapons was detained at a road block.

The offensive ended with 40 militants detained, Semen Semenchenko, a military commander, said on Facebook. Three people were hospitalized with injuries, according to the Donetsk governor’s office.

‘Not Acceptable’

Former U.S. Secretary of State Hillary Clinton accused Russia of continuing to unsettle its neighbor and said Putin is seeking to control nations on his borders.

“He continues to destabilize eastern Ukraine,” Clinton told France’s Inter radio. The Russian leader’s behavior is “not acceptable,” she said.

Ukraine invited Russia and EU Energy Commissioner Guenther Oettinger for more talks over the weekend, Kobolyev said. Olga Golant, a spokeswoman for Russia’s Energy Ministry, gave no confirmation of any discussions during the weekend when Bloomberg phoned seeking a comment.

Naftogaz is ready to pay its outstanding debt and set up a payment schedule if Gazprom accepts the price suggested by the EU, Kobolyev said.

EU Proposal

Under the EU proposal, Naftogaz would pay $326 per 1,000 cubic meters, Kobolyev said. Gazprom had offered $385 per 1,000 cubic meters, a $100 discount to the current price, while Ukraine sought a return to the first-quarter price of $268.50. The EU called Gazprom’s offer “appropriate,” Miller said in televised comments.

Ukraine must pay for gas delivered in November and December and some of its bill for April and May by 10 a.m. Moscow time on June 16 or risk being moved to a system of advance billing, with supply dependent on payments made, Miller also said.

“I am optimistic that we will do all to avoid disruption” of Russian gas supply and the EU will seek to continue talks as soon as possible, Oettinger said.

--With assistance from Ewa Krukowska in Luxembourg, Daria Marchak, Kateryna Choursina and Volodymyr Verbyany in Kiev, James G. Neuger in Brussels and Mark Deen in Paris.