EU Commission warns of worst “within weeks” as EU looks to help fund Ukraine gas

The European Union is preparing to organise a loan to help Ukraine meet its gas bills. Head of the EU Commission, Jose Manuel Barroso, says the EU cannot "sleepwalk" into another gas crisis between Russia and Ukraine.

He says vulnerable member states should prepare for the worst, while noting that the EU didnt have the money to pay for Ukraine's debts for Russian gas.

“There is indeed a risk of another major crisis, in weeks, not months, and we must protect European citizens. In the short term the Commission intends to hold a meeting, next week, with representatives of the international financial institutions, European gas companies, and member states, to look at whether a short term package of stop-gap funding can be put together."

Earlier this week Ukrainian Prime Minister Yulia Tymoshenko, asked European banks to lend Ukraine $4bn to pay for gas, as Ukraines largest cities this week faced cuts in hot water and heat for cooking after Naftogaz Ukraine said it would limit supplies to major industrial consumers and regional utilities, which owe an estimated $456 million.

Roman Kazmin, Market Analyst, Natrural Gas and LNG, at Icis Heren, in London, doesn’t believe there is much likelihood of the meeting scheduled for next week agreeing to give Ukraine the money it needs.

"There is a slight chance that an international institution will agree to finance some of the money Ukraine requires. However, I don’t think we will see any concrete solutions. That has to do more with the situation inside Ukraine that anything else. Even if certain institutions agree to finance Ukraine, how will Ukraine repay it? They can’t settle their gas bill, so surely financing $4.2 billion will require repayment. Most of the people who are capable of providing this will ask the same question – how will you repay us?"

Ukraine has also suggested the EU consider renting its storage to maintain consistent supplies because domestic demand, in the face of near economic meltdown in Ukraine, has fallen below levels needed to keep the storage system running.  To make its May payment Ukraine resorted to buying its own bonds, after using advance transit fees from Gapzrom to pay in April.

Evgeny Fyodorov, Russian State Duma Deputy, believes the EU is wary of lending the money to Ukraine.

“I think the EU has the same problem as Russia – it doesn’t trust Ukraine. That is why it is also doubting if it should lend against property that can be confiscated. That is a more serious problem which is related to the political and economic system in Ukraine. It’s not good to steal.” 

Supplies of Russian gas to Ukraine are between 25 to 35 million cubic meters a day, in comparison with 170 to 180 cubic meters a day a year ago, with Gazprom claiming earlier this week that Ukraine had not been pumping gas into underground storage facilities for the past 7 to 10 day.

It needs to buy some 19 billion cubic meters for storage before winter in order to both meet local demand and secure transit to the west. That volume is worth about $4.8 billion dollars.