ROAR: Russia holds back loan to Ukraine

A shortage of funds for Ukraine’s energy industries may spark a new gas war between Moscow and Kiev, the media and analysts warn.

As Russia does not want to provide a loan to Ukraine, the European Union is promising Kiev a credit, which is below Ukraine’s expectations.

At the beginning of 2009, Kiev asked Russia to grant a loan amounting to $4-5 billion to pump gas into underground storage facilities. Russian Prime Minister Vladimir Putin said at the time that Moscow was ready to consider this if the EU would be able to give half the money.

Kiev reached an agreement with the European Commission in late July on the modernization of Ukraine’s gas sector. According to the deal, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank and the World Bank will release a $1.7 billion loan to Kiev for the modernization. Only $300 million of this loan may be spent on buying gas for underground storage.

Russia, however, does not seem to be eager to grant a similar loan to Ukraine. “There is no need for this loan as far as we are concerned,” Russian Deputy Prime Minister Igor Sechin said.

“In fact, we have already granted a credit to Ukraine as a prepayment for transit,” Vedomosti daily quoted Sechin as saying. Russia’s Gazprom has paid Ukraine around $2 billion for the transit of gas to Europe till February 2010.

A meeting of representatives from Russia, Ukraine and the EU, devoted to the problems of gas supplies via Ukraine, will take place on August 11 in Brussels. Aleksandr Gudyma, an adviser to the Ukrainian prime minister, urged Moscow to fulfill its promise and grant Ukraine the same loan as the EU.

Kiev asked the European Union for a $4.2 billion loan. Now analysts fear that the deficit of funds needed to pay for Russia’s gas may provoke another gas conflict and the disruption of supplies to Europe. At the beginning of 2009, Russia stopped supplies via Ukraine’s gas pipeline system after a dispute broke over Kiev’s debt.

Russia supplies around one quarter of Europe’s gas. Ukraine transits around 80% of Russia’s Europe-bound gas.

A new gas conflict between Russia and Ukraine may start in any month, on one of the days when Ukraine pays for supplies of Russian gas, Leonid Grigoryev, the president of the Institute for Energy and Finance, told Ekho Moskvy radio.

“Now, I think, ‘peace’ will last till October,” Grigoryev said. He added, that Naftogaz of Ukraine, the country’s largest oil and gas company, is on the verge of bankruptcy.

Ukrainian Prime Minister Yulia Tymoshenko, on August 5, said that her country had paid in full for the natural gas which was pumped into storage facilities in July. Kiev had transferred $605 million to Gazprom, Tymoshenko said.

Russia’s Gazprom confirmed that Ukraine had paid for supplies made in July. Tymoshenko said that Ukraine is now ready to pay on schedule for gas supplies. But many analysts doubt this.

“Russia is in expectation of a new fuel war with Ukraine,” Novye Izvestia daily wrote in an article devoted to the topic. The paper notes that, unlike Grigoryev, some other analysts predict that the crisis is possible in January. “The prices for gas by that time will go up, and Ukraine will have its new president,” the daily said.

Naftogaz has no funds to pay for Russia’s gas, and the Ukrainian state is trying to save the situation, taking loans from foreign banks and spending the country’s gold reserves, Novye Izvestia wrote. “So far the payments have been made regularly and in time,” the daily said.

Kiev needs not only gas for consumers but also to pump its underground storage facilities to ensure transit of Russia’s gas supplies to Europe in winter. Ukraine has to spend around $2 billion in the third quarter alone to buy gas for its storage facilities.

The Ukrainian government is not eager to spend all its gold reserves and is trying to take out loans, Novye Izvestia wrote. It is unclear how long Kiev will be able to make payments using money from the Central Bank and loans, Vladimir Feygin, deputy chairman of the non-commercial partnership “Coordinator of the Gas Market,” told the paper.

“The priority for Ukraine now is to pay Russia for gas, and then collect some money from consumers,” Feygin said. “The introduction of a new mechanism, under which Ukrainian consumers will pay for gas in full, will take a long period of time.”

“If Ukraine fails to find new sources of finance, it will not be ready to the winter period,” Aleksandr Yeremin, analyst with the Finam investment company, told “Around $2 billion will not be enough; Ukraine needs that $4.2 billion to fill underground storage facilities,” he added.

“The fact that the country is not prepared for winter may entail very serious consequences,” Yeremin said. He warned that shortages of gas may emerge in Ukraine itself and lead to social unrest.

At the same time, Naftogaz said that Ukraine’s underground storage tanks were filled to over 70% capacity, Nezavisimaya Gazeta wrote. Feygin believes that Ukraine should fill the storage as soon as possible before the price goes up, otherwise there may be problems in winter.

However the dispute over the price for Russia’s gas is not over yet. Kiev wants to change some of the clauses in the gas agreement with Russia, Nezavisimaya Gazeta wrote.

“The contracts with Russia are crippling and enslaving,” the paper quoted Bohdan Sokolovsky, the Ukrainian president’s energy aide, as saying. Sokolovsky called these contracts “a fundamental mistake” of the governments of both countries, stressing that the agreements stipulate “blatantly exorbitant prices for Russian gas and low transit fees.”

Analysts believe Kiev will pay for gas in time until at least the presidential election in January. “Prime Minister Yulia Tymoshenko understands that, in the case of a gas conflict with Russia, she will be blamed for it,” Vladimir Zharikhin, deputy director of the Institute of the CIS countries, told Novye Izvestia.

“However, problems may emerge after the presidential election,” Zharikhin said. “The new president may complain of the previous agreements and start it own policy.”

Sergey Borisov, RT