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11 Nov, 2013 14:26

Drop by Drop: Ukraine’s Naftogaz halts Russian gas

Drop by Drop: Ukraine’s Naftogaz halts Russian gas

Ukraine’s national oil and gas company Naftogaz has reportedly completely stopped buying gas from Gazprom, Russia’s state-owned energy company Interfax news reported, citing the Fuel and Energy Dispatch Center.

In October, Naftogaz received 3.2 billion cubic meters of gas from Gazprom, about 104 million cubic meters per day. In November, purchases have nearly halved, dropping to about 9 million cubic meters each day. On November the 8th operations were completely suspended.

Russian President Vladimir Putin met with his counterpart Viktor Yanukovich on Saturday, but there is no official communiqué on their meeting, or if they discussed gas.

Earlier in October Naftogaz said it had 17 billion cubic meters of gas in storage, which they believe will be enough to heat Ukraine through the winter.

Last week, Deputy Prime Minister Yuri Boyko announced that Ukraine plans to taper Russian gas purchases.

Ukrainian Prime Minister Mykola Azarov said that if Gazprom refuses to revise its contract, Ukraine would stop importing gas from Russia.

In a step away from energy dependence on Russia, last week Ukraine signed a $10 billion shale gas deal with Chevron.

Last month Gazprom CEO Alexei Miller demanded the "immediate" payment of $882 million for gas provided to Kiev. The debt had reached $1.4 billion, which Miller called a “critical” level. Miller also said if the debt wasn't paid, they would have to stop pre-pay deliveries.

Former Ukraine Prime Minister Yulia Tymoshenko signed a ‘pre-pay’ contract with Gazprom in 2009 and was later jailed on charges of abuse of power.

Since the ‘pre-pay’ contract was established, Ukraine has excessively complained of ‘expensive’ gas prices, which average around $400 per 1000 cubic meters for Russian gas, one of the highest prices in Europe.

Ukraine is speeding up its effort to diversify its supply, and has looked at different exporters, fracking, new offshore projects in the Black Sea, as well as new LNG terminals and pipelines to diversify supply.

Ukraine imports more than half of its gas from Russia, but under Viktor Yanukovich’s leadership, has intentionally scaled down Gazprom imports 40 percent over ‘unfair prices’.

Ukraine’s is close to signing a EU trade association agreement in Vilnius in late November, a move which could trigger a new series of trade and gas wars with Russia.

Russia and Ukraine waged two gas wars over prices in the winters of 2006 and 2009 (which lasted 3 weeks) over a claim Ukraine was late in paying.

Debt and Downgrades

Ukraine’s depreciating currency reserves and massive deficit have put it close to economic collapse, and an IMF bailout of between $10-15 billion seems more and more likely.

Ukraine’s government reserves are so depleted they may no longer be able to keep Naftogaz afloat, and may be forced to find a foreign buyer.

The worsening outlook has prompted the big three rating agencies to downgrade their outlook on Ukraine.

Fitch downgraded Ukraine’s long-term foreign local currency issuer default rating to ‘B-‘ from ‘B’ following S&P’s announcement to downgrade their debt rating to ‘B-‘ to the same junk level as Greece and Cyprus. Moody’s cut its Caa1 rating to Caa1 from B3 in September putting them at “very high default risk”.

US money manager Franklin Templeton has picked up $5 billion of Ukraine’s international debt, nearly a fifth, the Financial Times reported.

Russia’, which holds a significant portion of Ukraine’s sovereign national debt, wants to dissuade it from signing an EU associate membership in Vilnius on November 28-29; a top Putin aid calling it 'trade suicide’.

EU ministers were in Kiev this past week and met with parliament leaders over the possible release of Tymoshenko from prison, an almost certain condition for Ukraine to sign in Vilnius. EU officials convene on November 18 ahead of the summit to decide if Kiev has met enough criteria to sign.