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7 May, 2014 16:03

Russia to demand advanced payment for gas supplies to Ukraine from June

Russia to demand advanced payment for gas supplies to Ukraine from June

Gazprom says Kiev has failed to pay its mounting gas bill, which now has hit $3.5 billion. This means that in June Ukraine will receive Russian gas only on the condition of advanced payment.

"The deadline has passed, no payment has been received," said Sergey Kupriyanov, the company's representative. Earlier the company said that if the deadline was not met, Gazprom would issue an advance bill for June gas supplies on May 16.

Naftogaz, Ukraine’s state-owned oil and gas company, has a long record of late payments and unpaid bills to Gazprom, a problem which has only gotten worse as Ukraine has slipped into civil unrest.

The debt as of May 7, 2014 stands at $3.508 billion, Gazprom said Wednesday, up from the $2.2 billion tab at the end of April. The sum is contested by Ukraine. Moscow, Kiev and the European Commission plan to hold a new round of talks to negotiate the debt; its date will be discussed on May 12, Russia's Energy Ministry said.

The missed April payment came the same day Ukraine received its first tranche of $3 billion from the International Monetary Fund (IMF). Out of that sum, Naftogaz may be eligible to use up to $2.16 billion to pay off its massive debts to Russia, according to documents prepared by the fund. If the money isn't used to pay to Gazprom, Russia's gas company has the right to ask for advanced payments.

Gazprom supplies Europe with 30 percent of the continent’s natural gas. Half of these Russian supplies are shipped through Ukraine.

Price wars

Later on Wednesday, the prime minister of Ukraine’s coup-imposed government, Arseny Yatsenyuk, said that Kiev will quickly repay its Russian debt if Gazprom agrees to return the gas price to $268.50 per 1,000 cubic meters, the price the country enjoyed under ousted President Viktor Yanukovich. Moscow ended the discount in April, raising gas prices nearly 50 percent.

“Once such price is established and the respective additional agreement signed, Ukraine will pay back its debt within ten days,” Yatsenyuk said, cited by Interfax.

But this will only happen if Gazprom realizes that using “gas as a political weapon is unacceptable,” he added.

Naftogaz CEO Andrey Kobolev said if the pricing conflict is not resolved, his company will take the case to the Stockholm Arbitration Council.

Meanwhile, the future cost of gas for Ukraine calculated separately by Russia and by the West is pretty much the same, but for different reasons. The IMF believes that Kiev will receive gas this year at the average European price of $380 per 1,000 cubic meters, a price the IMF took into account when calculating Kiev's lending program, Kommersant reported. The number is given with a perspective that Russia would renew its $100 discount to Kiev based on Kharkov agreements. Although Russia says that there will be no more discounts, the gas price for Ukraine in 2015 predicted by the Russian Ministry of Economic Development is said to be $350 per 1,000 cubic meters. It's even less than the IMF calculation and is based on the expected fall in the price of oil. As the situation with Ukraine is quiet unstable, the Ministry has taken into consideration a moderately pessimistic scenario, Kommersant was told by its source.

The first gas hike came in after Gazprom cancelled the Yanukovich discount after the first quarter of 2014 and bumped prices up to $385.50 per 1,000 cubic meters. The second $100 gas hike came in April when Russia canceled its Black Sea Fleet host agreement with Ukraine after Crimea voted to join Russia. Moscow said Kiev owes $11.4 billion for all the discounts it received since the 2010 deal.

Situation is 'critical'

Russian Energy Minister Aleksandr Novak warned over the weekend that the situation with gas transit through Ukraine had reached a “very critical point” as the gas supplies in underground storage facilities have dropped to a point where they can’t guarantee supplies from Russia to Europe.

In 2009, Moscow was forced to turn off supplies through Ukraine over pricing disputes, but even after this “trigger” Gazprom didn’t demand that Kiev start a prepayment contract.

State-owned Naftogaz is on the brink of bankruptcy because it has been selling gas domestically for only a fraction of the import price.

Ukraine’s economy contracted 1.1 percent in the first three months of 2014, a poor performance that puts the economy on track to slow 4 percent overall in 2014. This year, the hryvna has already slumped nearly 30 percent. The Central Bank, which is running dangerously low on foreign exchange reserves, may not be able to prop it up for much longer.

The country is likely to default before the end of the year, Standard & Poor ratings agency says.