A natural gas line runs through the countryside outside Donetsk, Ukraine, on March 11, 2015. Andrew Burton/Getty Images
On Wednesday, Ukraine said it expects to sign a new agreement by mid-April for the supply of natural gas from Russia that will last until the end of March 2016. Kiev hopes the new deal would have an even larger discount than it has received under the “winter package” that ended on March 31, but that may be unduly optimistic. At $329 per 1,000cm3, the winter package’s rate was already $100 less than the regular price. On Tuesday, Russia agreed to extend this winter arrangement for another three months, provided that Ukraine continues to pay in advance and uphold its previous contractual obligations. Anything beyond that will have to take into consideration the price of oil, Russian President Vladimir Putin said.
The E.U., which is brokering the talks, urged Kiev to accept Russia’s offer. The E.U. gets over 10% of its natural gas from Russia through pipelines crossing Ukraine, so it is vital that a deal be concluded and the gas continues to flow. Naftogaz, Ukraine’s state-owned energy company, could now begin replenishing its reserves so as to secure the energy needs of both Ukraine and the E.U. for next winter. Its level of gas reserves, 7.7 billion cm3 as of March 31, is quite short of the 20 billion cm3 that E.U. officials estimate is needed, according to Agence France Presse.
The drop in crude oil prices, by roughly half since June, has also lowered the prices of Russian natural gas exports. Russia’s long-term gas contracts with European customers link its price to that of oil with a time lag of 6-9 months, making it a buyers’ market currently.
The one bright spot for crisis-stricken Ukraine’s is that global energy prices are this low, because it has very little leverage in these negotiations. After seizing Crimea and fomenting rebellion in the eastern Donbass region in early 2014, Russia continues to pressure Ukraine militarily (albeit indirectly). And looming in the background is the thrice-enacted threat of completely cutting off natural gas to Ukraine, which was done most recently for six months starting in June 2014.
Meanwhile, the E.U. is keen to avoid the scramble for alternatives it underwent last year after Russia halted gas exports to Ukraine. While some countries have other options available (such as Germany which imports natural gas directly from Russia via the Nord Stream underwater pipeline in the Baltic Sea), others like Bulgaria and Slovakia depend on Russian gas via Ukraine for over 80% of their needs.
With this in mind, the E.U. (and the IMF, in which Europe wields enormous influence) has major leverage- the aid money that Ukraine desperately needs to stay solvent. Ukraine’s economy shrunk by 6.9% in 2014, and a 5.5% contraction is expected this year. Its public debt has increased to $70 billion, equal to its projected GDP in the 2015 budget, and runaway inflation reached 34.5% in February. On March 11, the IMF approved a critical $17.5 billion four-year loan to Ukraine, and on March 31, the Council of the European Union approved a third financial assistance package to Ukraine, of $1.9 billion. While the E.U. has a strong interest in seeing Ukraine stabilized as a trading partner, and the IMF loan aims to strengthen Ukraine through required reforms in energy tariffs, banking, corporate governance, and tackling corruption, there is a crucial but unspoken requirement of continued assistance: Ukraine must keep the gas flowing to the E.U.
