Ukraine’s attempts to secure a cheaper price for natural gas from Russia failed again this week, with the Kremlin continuing to play hardball.
The refusal by Russia to offer Ukraine a discount comes as relations between the countries turn increasingly prickly, with Kyiv so far resisting pressure from Moscow to join its customs union, despite much cajoling and offers of cheaper gas in exchange for membership.
On a visit to Moscow on June 7, Prime Minister Mykola Azarov repeated complained that the rising price of Russian gas was damaging Ukraine’s economy, still limping after it crashed during the financial crisis.
But Russia showed no signs of budging. Nonetheless, on June 9, Azaroz sounded upbeat and announced the formation of a negotiating team, saying: “We are confident that the talks will be positive.”
The energy prices we are dealing with are not, in my opinion, the best for us, so we are taking very serious steps to ensure energy supplies from other countries
– Prime Minister Mykola Azarov
Azarov also told Russian Information Agency News (RIA Novosti) that Ukraine is taking measures to diversify its energy supplies away from a dependence on Russia, Azarov said on June 8.
“The energy prices we are dealing with are not, in my opinion, the best for us, so we are taking very serious steps to ensure energy supplies from other countries,” Azarov said.
Ukraine is paying $295.6 per 1,000 cubic meters of Russian gas in the second quarter and expects to pay $350 in the third quarter.
However, Russian Prime Minister Vladimir Putin told Azarov at the Moscow meeting that the agreements, which he reached with the previous Ukrainian government of Yulia Tymoshenko, should be followed.
Ukraine’s current government has provided little public indication of what it could offer its neighbor in return.
A discount was sealed last year in exchange for allowing Russia’s Black Sea Fleet to remain based at the Ukrainian port of Sevastopol until 2042.
Russia has made several public suggestions as to what could secure a cheaper price – merging the two countries’ state energy companies, handing over Ukraine’s gas pipelines that carry 80 percent of Russian gas to Europe, or Kyiv joining a customs union which Russia has established with Belarus and Kazakhstan.
But the Ukrainian government has balked at these offers and is instead pursuing a free-trade agreement with Europe, which would preclude membership in the Russian-led union.
Putin also urged Ukraine to choose its customs union rather than join a free trade zone with the European Union.
We are not going to invent any kind of new (pricing) formula for anyone or link it to (the price) of any other type of fuel.
– Alexei Miller, Gazprom CEO
Analysts expect Ukraine to continue pushing for a cheaper gas price, but with little hope unless officials sweeten any deal.
“Despite Gazprom’s unwavering stance, we expect Ukraine to continue demanding more favorable gas supply terms, but think it will achieve little without offering some significant concessions,” wrote Dragon Capital business analysts.
Gazprom CEO Alexei Miller also told reporters on June 6 the company would not consider revising the gas price.
“We are not going to invent any kind of new (pricing) formula for anyone or link it to (the price) of any other type of fuel,” Miller told journalists in Russia’s Black Sea resort town of Sochi.
Ukraine, through which 80 percent of Russian gas flows to Europe, has been trying for months to renegotiate the price of its imports of Russian gas and also wants to raise the price for the transit of gas to the European Union as it comes under threat from the new Nord Stream pipeline.
Azarov said earlier on June 6: “If the price of gas has risen, that should be reflected in transit fees.”
Gazprom’s Miller said last month the company would redirect around 20 billion cubic meters of gas currently transited through Ukraine to Nord Stream, which would carry gas under the Baltic Sea to Germany. It is slated to start operation this fall.
Despite Gazprom’s unwavering stance, we expect Ukraine to continue demanding more favorable gas supply terms, but think it will achieve little without offering some significant concessions.
– Dragon Capital business analysts
Last year 95.4 billion cubic meters of Russian gas crossed Ukraine into Europe, and at current rates analysts estimate that Ukraine stands to lose $700 million if Russia cuts 20 billion cubic meters.
Price disputes between Moscow and Kyiv have in the past led to disruption of gas supplies in winter through pipelines across Ukraine to consumers in the European Union.
