Christmas Holiday cold snap for Ukraine?

Russian energy giant, Gazprom, says it will stop gas supplies to Ukraine starting January 1, until the country pays off its $2 Billion gas debt for supplies in November and December, and a new contract is concluded.

On Thursday Gazprom spokesman Sergey Kupriyanov said the talks are in a deadlock.

He said Ukraine has transferred $800 million for repayment of gas supplies in autumn, but also informed Gazprom that no more money would be transferred until the new year starts.

“Thus we would have no legal grounds to supply gas starting January 1 and we won’t be able to turn to direct contracts with Ukraine until the debt is paid off,” Kupriyanov said.

The two sides have been negotiating for the past two months over a settlement of the gas debt but with no result.

Also, Gazprom Deputy CEO Aleksandr Medvedev said the company has offered Ukraine several options to settle the issue, taking into consideration the complicated economic situation in the country, before adding “Unfortunately, none of the offered schemes were accepted to further settle the issue.”

This comes after the signing of a memorandum, on gas cooperation, on October 2 between the Prime Ministers of Russia and Ukraine, Vladimir Putin and Yulia Timoshenko.

One of the key points of the document is the possibility of direct long-term cooperation between Gazprom and Ukraine’s Naftogas starting from January 1, 2009. It also facilitates Gazprom directly selling up to 7.5 billion cubic metres of gas per year, to Ukrainian consumers.

The document also confirms the intention to move step-by-step to mutually agreed market gas prices for Ukraine, and specifies prices for gas transit through Ukraine’s territory. The necessary condition, specified in the memorandum, is paying off the gas debt in full by Ukraine’s Naftogas company.

Show-me-the-money deadlock

The issue of Ukraine’s gas debt now seems a never-ending story.

Russian exports supply about a quarter of the EU's gas needs, and about 80 per cent flows through Ukraine.

In 2005, following a price dispute, Gazprom cut off the gas supply to Ukraine.

Kiev started siphoning off gas illegally, which resulted in disruptions of deliveries to Europe and many fear a repetition of 2005’s events.

“Ukraine has obligations as a transit country, and unlike the 2005-2006 situation, we have separate contracts for supply and for transit. So we expect that Ukraine will act in compliance with the transit contracts,” Aleksandr Medvedev said.

Gazprom’s representatives have already met with the European officials.

They hope the EU would be able to pressure Kiev into paying off the debt and now say they've reached an understanding.

“It certainly would be unusual in the western markets for an oil company or a gas company to provide discounted prices to a major customer and to say – ‘it’s fine, we don’t need payment for that’,” said PACE Global Energy CEO Timothy Sutherland.

As the financial crisis raises pressure on both sides, some analysts say Ukraine simply has no money. Others, however, ask where the money went.

“The margin between buying and selling is almost 50 per cent! They are buying it for $175 and selling for $340 – that’s more than enough to secure the payment!” says Leonid Sevastyanov, analyst from Stratinvest company.

So, the money shouldn't be the problem.

“The real problem is the political dispute between President Yushchenko and Prime Minister Timoshenko. The second reason is that Ukraine wants to show it is ‘under threat’ from Gazprom,” Sevastyanov adds.

The gas card is one of the Ukraine’s favourites in domestic and foreign policy, but recent events have shown it will be hard to accuse Russia of using it as a political tool.

“Gazprom continued supplying gas to Georgia even during the tragic days of Georgia-South Ossetia conflict,” stressed Gazprom Deputy CEO Aleksandr Medvedev.

The main question remains – when will the situation be resolved?

Some say that's a rhetorical question.

“Gas is a key to power in Ukraine – that’s why we see such a fight between Yushchenko and Timoshenko. To resolve it, we need to see political stability, one actual leader and a normal economy,” says Dmitry Aleksandrov, analyst from Financial Bridge Asset Management.

So far the chances of a resolution seem vague.