Hope and obstacles as Russia and Ukraine seek gas deal

By Reuters

Oct 20, 2014 10:28 AM EDT

A tentative agreement between the Ukrainian and Russian presidents has raised hopes of ending a dispute in which Moscow has halted natural gas supplies to Kiev, but several obstacles still have be overcome.

Movement on the gas row was the only sign of progress at talks between Vladimir Putin and Petro Poroshenko on Friday which failed to resolve differences over fighting in eastern Ukraine and a deep crisis in relations.

The two sides, whose energy ministers will meet in Brussels on Tuesday, still differ over how to calculate Kiev's huge gas debt and the schedule for payments and there are doubts about Ukraine's ability to pay.

"The devil is in the details. I don't think that Russian gas will be delivered soon to Ukraine," a Russian government source close to gas talks told Reuters.

European Energy Commissioner Guenther Oettinger, who will mediate Tuesday's meeting between Ukraine's Yuri Prodan and Russia's Alexander Novak, was also expected to hold talks in Kiev on Monday to work out what Ukraine called a "common position".

"There are quite a number of details. We are just continuing with our discussions on a bilateral basis today," Marlene Holzner, a European Commission spokeswoman, said.

She said they were discussing the price, the number of payments Kiev should make and how much gas Ukraine will get from Russia over the winter period.

Ending the gas row is complicated by the deterioration in relations between Moscow and Kiev since a Ukrainian president sympathetic to Russia was overthrown in February, Russia annexed Crimea in March and pro-Russian separatists rose up in April in east Ukraine in a conflict that has killed over 3,700 people.

Moscow cut off gas supplies to Ukraine in June after failing to secure a deal on the unpaid bills and price, and pressure has been mounting on the former Soviet republic's leaders to reach an agreement before winter sets in.

European leaders fear there will also be disruptions in supplies of Russian gas to the rest of Europe via Ukraine, but say ending the gas dispute could help build trust overall.

"The German government considers a durable solution between Ukraine and Russia as a clear sign for de-escalation and a commitment for such a de-escalation," said Georg Streiter, a spokesman for German Chancellor Angela Merkel.

Poroshenko, who met Putin in Milan on Friday, said they had reached a preliminary agreement on a price until March 31.

The interim price would be $385 per 1,000 cubic meters - much higher than the average amount of some $350 that the Russian gas exporter Gazprom charges European companies but $100 less than Russia had demanded.

The EU wants to avoid a repeat of disputes in 2006 and 2009 in which its gas flows were disrupted - it gets a third of its gas supplies from Russia, half of that via Ukraine.

Despite halting Ukraine's supplies, Russia has continued the flow via Ukraine to the rest of Europe, though Putin has said there could be disruptions in winter because Ukraine could siphon off gas from the pipeline system.


Putin said on Friday Ukraine's debt for Russian gas supplies stood at $4.5 billion, considerably less than the $5.3 billion previously demanded by Gazprom. A spokesman for the company said the decrease in debt was due to a recalculation of the second quarter price to $385 per 1,000 cubic meters from $485.

Kiev had balked at the $5.3 billion figure and said the price used to calculate the arrears should be $268.5 - the cost of gas in the first quarter. Ukraine has also been unwilling to make any pre-payments for Russian gas.

The Russian energy ministry said on Friday Ukraine had agreed to make a first debt payment of $1.45 billion by the end of this month and another $1.65 billion by the end of the year.

Ukraine is likely to buy up to 5 billion cubic meters of Russian gas this winter, but state coffers have been drained by the conflict in the east, despite a shaky ceasefire.

Kiev faces a $3.5 billion funding shortfall for this year and next but the International Monetary Fund has said the government should be able to cover most of it with planned debt issues and an expected $900 million in further donor support.

"This time all sides appear to be in agreement. But it remains unclear where Ukraine would get the money for either the back payment for the gas delivered or the prepayment for future gas. Ukraine does not have the means to pay, and no one has yet offered the country a loan to finance this gas," analysts at Sberbank CIB said.

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