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25 Nov, 2008 11:21

Ukraine to clear part of gas debt

A government delegation from Kiev has reached a deal with Gazprom to repay part of Ukraine’s US$2.4 billion gas debt. Under the terms of the deal, Naftogaz will pay for September’s and some of October’s gas imports by the end of the month.

Gazprom spokesman Sergey Kupriyanov said the issue of the remaining debt would be discussed at later negotiations.

Gazprom said it would stick to an earlier decision not to sign an agreement on future gas exports to Ukraine until the outstanding bill had been settled.   

On top of the debt, cash-strapped Ukraine faces hefty increases in the price of gas. Gazprom CEO Aleksey Miller has said the price for 1,000 cubic metres of gas could go as high as US$ 400.  Ukraine currently pays US$179.50 per 1,000 cubic metres.  

Ukraine is almost entirely dependent on Russia for gas, and price increases are politically and economically sensitive.

Wrangling over the price of gas has become an annual feature in relations between Moscow and Ukraine. While Ukraine needs Russia’s gas, Moscow relies on Ukraine as a transit route to transport some of its natural gas to Europe.

But today’s crisis differs from the one of 2005. Back then the world was not in the grip of a crippling financial crisis.

Though Ukraine has received a US$16 billion loan from the International Monetary Fund, it remains unclear how it will pay its Gazprom arrears. The collapse of steel prices has dramatically reduced Kiev’s import receipts.

Should Ukraine fail to pay the rest of its debt, Gazprom has a number of options up its sleeve.

First of all, it could resort to law and sue Naftogaz. But experts on Ukraine say this is the least likely option because it is costly and time-consuming.

An obvious response would be to cut off supplies to Ukraine. Gazprom tried this in 2005.  The problem is that this threatens gas supplies to Europe, as Ukraine would not hesitate to re-route gas bound for Europe to it’s own storage tanks.  And Russia can’t risk its reputation as a reliable energy supplier in the EU.
Earlier this week Ukraine demanded a delay in repaying its gas debt, calling for further negotiations.

Neither side wants a repeat of the situation in 2005, when Gazprom briefly cut off gas supplies to Ukraine over unpaid debt. On that occastion, a deal was reached five days into the New Year.

Russian President Medvedev has said he “would like to meet the New Year calmly.”

He has put Russia’s case clearly: “The money only needs to be returned to us and then everyone will be in a good mood before the New Year.”

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