You're reading: Experts: Gazprom unlikely to pay increased gas transit tariff

The escalating trade war between Ukraine and Russia has spilled over into a new frontier: a longstanding contract dispute over gas deliveries between the two countries.

On Jan. 19, Energy and Coal Industry Minister Vladimir Demchyshyn announced that Ukraine’s state-owned oil and gas monopoly, Naftogaz, would raise tariffs on Russian gas transiting the country by more than 50 percent.

Demchishin’s remarks come one day after Gazprom billed Naftogaz for $2.5 billion for failing to receive months of natural gas, as part of an ongoing conflict over a contract between the two state-owned gas companies signed under ousted President Viktor Yanukovych.

Under the 2009 deal, Ukraine was required to buy more gas than it needed due to a “take or pay” clause.

Gazprom demands more than $32 billion, arguing that the contract’s terms mean that Ukraine is obligated to pay for gas it does not use.

Naftogaz has contested the requirement’s validity against Russia in the Arbitration Institute of the Stockholm Chamber of Commerce.

Payment unlikely

Multiple energy industry experts told the Kyiv Post that Gazprom would be extremely unlikely to pay the increased tariffs.

“It is true that new points of tension are emerging between Naftogaz and Gazprom,” Dennis Savka, an energy industry analyst with Dragon Capital told the Kyiv Post in a telephone interview.

“But I doubt that Gazprom will pay,” Savka added. “The game is about each side trying to extract better conditions for itself.”

Gazprom itself did not reply to a request for comment.

According to the current contract between Gazprom and Naftogaz, signed in April 2015 after around of intense negotiations, transit tariffs are tied directly to the price of gas.

Alexander Paraschiy, head of research at Concorde Capital, told the Kyiv Post that Gazprom is unlikely to pay the added costs. However, Paraschiy said, Ukraine likely violated its contract with the Russian gas conglomerate by heightening the tariff.

“Setting any other rate would contradict the contract,” Paraschiy said. “So, either the contract is amended by both sides, or it should be invalidated by an authorized court.

Rada Energy Saving Subcommittee Head Alex Ryabchyn from Yulia Tymoshenko’s Batkivshchyna Party said that politcally, Ukraine would be unlikely to back down from its claim on increased tariffs.

“We won’t buy Russian gas more expensive than $200, because we can already buy it in Europe for $190,” Ryabchyn told the Kyiv Post in a telephone interview.

“This is another element of the hybrid war between out countries that started with the annexation of Crimea and continued with the trade war, and now the gas war.”

All roads lead to Stockholm

The Stockholm arbitration is already reviewing Kyiv’s claim that Gazprom unfairly charged it under the 2009 contract’s “take or pay” section.

“Most likely, the situation [with the new tariffs] will be the same as with the “take-or-pay” clause,” said Paraschiy, the Concorde Capital analyst.

“So, I see the same scenario here – Ukraine could charge some different rate, but the final decision on how much Gazprom should pay for transit will be made by a court some time in the future.”

Stanislav Batryn, a partner at Lionsgate Litigate who sued the Ukrainian government in 2013 to have the 2009 contract annulled, told the Kyiv Post that the tariff issue would likely be resolved in the Stockholm forum.

“Both sides are gradually increasing their claims in the arbitration,” Batryn said, before suggesting that the tariff hike could be a gambit to increase Ukraine’s leverage in the arbitration case.

“There are fears that Ukraine will not seize the chance to get a political and economic effect from the international arbitration verdict, and, following from that, get a comprehensive settlement in the gas fight.”

The Ukrainian Energy Ministry also did not reply to a request for comment.

Kyiv Post staff writer Josh Kovensky can be reached at [email protected]