Ukraine-Russia gas deal is only short-term thaw

Ukraine-Russia gas deal is only short-term thaw

Sanity has prevailed in the end. Russia will resume gas deliveries to Ukraine and the risk of a gas war between Russia and Europe has been averted. Nobody will have to freeze during the coming winter, excluding, of course, those millions of Ukrainians who will be unable to pay their gas bills, writes Professor Stefan Hedlund.

The deal has been viewed as a major achievement for European Union Energy Commissioner Gunther Oettinger, who managed to pull it off on his very last day in the job. One can imagine he would not have felt too good about passing this issue to his successor.

But what has really happened?

The deal has three components. First, Ukraine has agreed finally to pay its US$3.1 billion debt for previous deliveries. This has been Russia’s key demand since the flow of gas was stopped in mid-June 2014. It was understood when the International Monetary Fund handed over the first tranche of its US$17 billion credit, that part of that money would be used to settle the outstanding gas bill. It is good that Kiev has accepted that bills should be paid and one wonders why it has taken so long.

Second, Ukraine has accepted it pays for further deliveries in advance. This has been another key demand from Russian energy giant Gazprom, following months of stonewalling about past debts from Kiev. The sticking point was that Russian energy minister Alexander Novak insisted the EU must guarantee that Ukraine would pay.

‘If there is money, there will be gas.’ Brussels was reluctant to provide such guarantees but Russia has got its way.

Third, concerns price. Ukraine will now pay US$378 per thousand cubic metres (tcm) until the end of 2014, and US$365 per tcm in the first quarter of 2015. This is a slight reduction in the US$385 per tcm which Gazprom has been demanding since June.

It represents the only real gain to Ukraine from the deal. But it is very slight, and does not reflect the powerful downward pressure on oil and gas prices of recent months.

All in all, what has been achieved is that Brussels has hammered Ukraine into signing a deal which really should have been signed in June. In return, it has had to accept to foot the bill. The fiscal situation in Ukraine is a whisker shy of sovereign default, and will remain so for months to come.

Most importantly, the deal only covers until the end of March 2015. Gazprom insists that the price includes a discount of some US$100 per tcm, which may be withdrawn, and there is no guarantee we will not soon be back to square one, with fears of a showdown between Russia and Europe over gas all over again.

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