Tensions flare over Russia-Ukraine gas deal

By Sara Stefanini

Russia shifts back to the west after its hopes of relying on China start to fizzle.

Senior EU energy official Maroš Sefčovič will attempt to jumpstart talks Friday with Russia on reopening gas deliveries to Ukraine, but the chances of a quick breakthrough appear remote.
The challenge is that Russia’s Gazprom wants to keep selling gas to Ukraine — the cash is welcomed as the Russian economy contracts — but for political reasons, Moscow wants to free itself from relying on Ukrainian pipelines to supply the European market.

The EU takes about a third of its natural gas from Russia, and half of that flows through Ukraine, which has been locked in a conflict with Russia.
That has layered geopolitical complexities on top of the already fraught commercial relationship between the two. The bad blood was evident in June, when Russia and Ukraine engaged in tit-for-tat boycotts that halted gas deliveries to Ukraine. Kiev now supplies itself through domestic sources and  “reverse-flow” agreements taking gas that originated in Russia from Central Europe, mainly Slovakia.
But the concern is that Ukraine doesn’t have enough gas in storage to get through the winter without starting to again buy gas directly from Russia, and it’s running out of time to secure more. The EU estimates that it needs 19 billion cubic meters in stock, and it only has around 14.3 bcm.
That’s why Sefčovič, the European Commission’s vice president in charge of energy union, is acting as a broker between Kiev and Moscow. Continued friction between the two countries could also have a knock-on effect on Europe’s confidence in the ability of Gazprom to supply the EU through the coming winter.
Sefčovič was meeting in Vienna on Friday morning with Russian Energy Minister Alexander Novak. Sefčovič met with the Ukrainian energy minister and the head of its oil and gas company Naftogaz two weeks ago.
This time last year, the trilateral talks helped to “resolve many of the small issues before they became big issues,” Sefčovič told POLITICO in a recent interview. “[We want] to make sure we have a winter package for next winter, which hopefully ensures that there are no gas dramas next winter, as we managed last winter.”
The negotiations with Russia focus on three main questions: the volume of gas to be delivered, the price Ukraine will pay, and where it will get the money to pay Gazprom. It was the same story this time last year, until Kiev and Moscow shook on a last-minute deal on October 30.

Search for compromises

An agreement this year might not even come until late November, said Frank Umbach, research director at the European Centre for Energy and Resource Security at King’s College London.
“There’s a certain strategy on both sides, a tactic to find the last compromises and not give in too early,” he said. “But I also think it is primarily the Russian side that still puts a lot of pressure on Ukraine.”
Adding to the difficulty is that Russia is bucking the EU’s goal of keeping Ukraine as a transit country for Russian gas, something that earns the cash-strapped government about $2 billion a year in fees and which Sefčovič called “absolutely crucial and of strategic importance to European energy security.”
But Gazprom recently struck a deal with a host of big European energy companies to double the capacity of the Nord Stream pipeline running under the Baltic directly from Russia to Germany. The move sparked outrage across Central Europe. Robert Fico, the Slovak prime minister, this week said the agreement is “making idiots of us” by undercutting EU policy. At the same joint news conference, Ukrainian Prime Minister Arseniy Yatsenyuk called the project “anti-Ukrainian and anti-European.”
The Poles, who also earn transfer fees and are worried about Russia using gas as a diplomatic weapon, aren’t happy either. Andrzej Duda, the country’s new president, called it an example of  “national egoism that completely ignores the interests of other countries.”
Sefčovič said he doesn’t see the point of building expensive new pipelines when only about half of the existing capacity between Russia and Europe is used.
In the end Russia is going to have to make a deal as it cannot afford to lose the EU as a customer.
“Because Europe is a solid market,” said Simone Tagliapietra, an energy and climate fellow at the Bruegel think tank. “Russia’s reputation as a solid supplier has been tarnished. You cannot permit yourself to cut off supplies to your golden customer because of a transit issue.”
An agreement is also made likelier because Moscow’s recent efforts to cozy up to China are not coming off as well as hoped, in part because China’s economic slowdown is affecting gas demand.
A year ago, Russia and Gazprom were still basking in the success of a landmark deal signed with China in May 2014. The agreement to build the Power of Siberia gas pipeline to eastern China marked the start of Russia’s trumpeted “pivot to the east.” That was quickly followed by promises of a second deal with Beijing, to build the Altai pipeline to western China, in 2015.
But the two governments tempered expectations last week at the Eastern Economic Forum in Vladivostok, saying not to expect an Altai deal until 2016. There are also rumors that the Power of Siberia could be delayed.
“Now we’re in this phase in which cooperation with China is looking more tricky,” said Tagliapietra.