You're reading: To pay or not to pay Gazprom, that’s the $7 billion question

With Russia sticking Ukraine with a $7 billion bill for not purchasing enough of its above market-priced natural gas last year, memories of gas wars between the two countries - which led to supply interruptions to Europe in 2006 and 2009 - are being revived.

Speaking at a conference organized by the
European Business Association on Jan. 29 in Kyiv, Foreign Minister Leonid
Kozhara said that while the government has not yet acted to the demands, all
options are on the table.

These, he said, included measures set out by the
2009 bilateral contract – which contains a „take-or-pay clause” – or a
friendly settlement, possibly through a restructuring of the debt combined with
reduction in the price for Russian gas.

When pressed for clarification, Kozhara
backpedaled and claimed that Ukraine did not officially recognize the debt.

Others agree.

“Under no circumstances should Ukraine
consider (paying) this bill,” said Valentyn Zemlyansky, an independent energy
expert and former Naftogaz Ukraine spokesperson. Ukraine has fulfilled all its
obligations toward Russia’s Gazprom, he argued, and can now follow one of two
scenarios – annulling the bill itself or go for arbitration in Stockholm.

Asked what Russia’s motives were, Zemlyansky
said there was a combination of ill will and reaction to a contract on shale gas exploration potentially worth $10 billion, signed between Ukraine and Royal Dutch Shell
on Jan. 24.

Mostly, however, it is to ensure that future
negotiations will be conducted from a position of strength, Zemlyansky said.
“This is absolutely standard procedure for them,” he added.

Several countries in Central and Eastern
Europe have in the past year renegotiated the terms of their contracts, spurred
on by a European Commission probe into gas price-fixing by the Russian
monopoly, which Moscow has denied.

Despite being a member of the European Energy
Community, however, Ukraine has so far failed to persuade Russia to
lower the price for Naftogaz, one of its biggest clients. Naftogaz imported
about 25 billion cubic meters of Russian gas last year. OstChem, owned by
billionaire Dmytro Firtash, imported another 8 billion cubic meters.

In an attempt to wean itself off expensive
Russian gas, the government also embarked on a diversification strategy that
includes gas imports from Europe and boosting domestic production, but so far
it has had limited impact on Ukraine’s gas balance.

The recent Gazprom bill is based on a
take-or-pay clause within Naftogaz Ukraine’s deal with Gazprom that requires
payment for any undelivered gas below the volume of 41.6 billion cubic meters,
or 33 billion cubic meters by mutual agreement.

According to analysts at Kyiv-based investment
bank Dragon Capital, the $7 billion bill was rolled out for 16 billion cubic
meters of gas at last year’s prices, and represents a sum beyond Naftogaz
Ukraine’s means.

“It is clear that Naftogaz has neither
the financial capacity nor willingness to meet Gazprom’s demands, and further
confrontation may see the sides take their dispute to court,” the
investment bank’s analysts wrote in a note to investors.

Moving forward, the analysts argued, Naftogaz
could appeal the take-or-pay clause on the grounds that Ukrainian legislation
has changed since the deal was signed and Naftogaz lost its status as a monopoly
gas importer, or appeal the contract itself on grounds that it was signed under
pressure in the wake of previous 2009 gas war.

Kozhara’s statement about the possible
restructuring of debt came as a surprise to the expert community.

“This is rubbish,” Dmytro Marunych,
head of the Independent Energy Studies think tank in Kyiv, commenting on
Kozhara’s statements. The take-or-pay clause should not be applied, he argued,
and anyway the combined Naftogaz-OstChem imports would be close to 33 billion
cubic meters, enough to cover the stipulated amount.

Marunych also doubted that Naftogaz assets
could be used to pay for the bill, as the gas lacked any significant property,
with even its offices being leased from municipal authorities.

Some experts warn that events might take a
much more serious turn. Mikhail Gonchar, director of the Nomos think tank, told
the EU Observer website recently that the Gazprom bill could be the prelude to
a new gas war if the weather stays warm enough so that downstream countries
like Bulgaria and Romania do not suffer excessively.

“According to Russia’s standard practice,
we must expect an acceleration of events from their side. I mean, we must
expect them to cut gas supplies in the next few days or next week at the
latest,” he told the website.

Kyiv Post editor Jakub Parusinski can be
reached at
[email protected]