Russia threatens already embattled Ukraine with cutoff of natural gas over unpaid bills


A worker turns a valve at an underground gas storage facility near Striy May 21, 2014. Moscow is using neighbor’s energy vulnerability and debt for gas supplies to keep Kiev from pivoting to West. (Gleb Garanich/Reuters)

— A new front is swiftly opening in the war over embattled Ukraine’s future: energy, with Russia threatening to cut off natural gas to the country as early as Tuesday.

Russian leaders are prepared to stop crucial gas flows and squeeze their struggling neighbor economically even as Russian citizens take an increasingly open role in the violent conflict in Ukraine’s east.

Ukrainian President-elect Petro Poroshenko has promised a newly vigorous effort to combat the pro-Russian separatists who have seized buildings and key cities across eastern Ukraine. But the battle over energy may be nearly as important for the country’s future, with the power to determine how far Ukraine turns to the West and how firmly it remains in Russia’s orbit. The disputed gas debt could be as much as $5.2 billion through the end of May, and Russia wants at least a partial payment by Monday.

Negotiations have dragged for months. On Friday, Ukraine said that it would make a $786 million payment toward the debt, but it was not immediately clear whether that would be enough to forestall a cutoff. Negotiations were to continue Monday, even as Ukrainian and Russian energy officials traded barbs about who was at fault in the standoff.

The tangled knot of economic and political dependencies means that any Western effort to loosen Russia’s grip on Ukraine may face steep challenges, even if Poroshenko signs an agreement to bring Ukraine’s economy closer to Europe’s, which he has promised to do as his first act after he takes office in the coming week. In November, then-President Viktor Yanukovych rejected that agreement with the European Union, sparking the pro-European protests in Kiev that ultimately led to his ouster in February.

Poroshenko said in the past week that one of his top priorities was freeing Ukraine from Russia’s gas-powered hold over the economy. Ukraine depends on Russia for 60 percent of its gas, and the European Union imports about 15 percent of the natural gas that it uses through Ukraine’s pipelines.

“We are looking to turn gas from Russia’s energy weapon into a commodity” that could be purchased anywhere, Poroshenko said.

Any gas cutoff now would be likely to have fewer serious consequences than if it took place in winter, since it would not immediately spin Europe into a deep freeze. Ukraine also has about two months of gas in storage, analysts and officials say. But stopping the flow of gas still would signal that Russia is willing to use its control over Ukraine’s energy supplies.

“The temptation in the Kremlin is quite great to do more for political reasons,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics who has been an economic adviser to the Ukrainian and Russian governments.

Ukrainian energy officials have expressed outrage that the Russian energy giant Gazprom in March started demanding $485 per thousand cubic meters, a standard unit of gas measurement, up from a discounted price of $269 per unit that Russian President Vladi­mir Putin offered in December. The new gas price is the highest in Europe, even though the costs for Ukraine ought to be among the lowest because the gas does not have to be piped as far.

What Gazprom is demanding for gas “is not a reasonable economic price,” said Igor Didenko, Ukraine’s acting deputy energy minister.

Gazprom, meanwhile, blames Ukraine.

“The problem with Ukraine’s gas debts is that Ukraine is bankrupt,” Gazprom chief executive Alexei Miller told Russia’s state-run broadcaster on Saturday.

But even if the gas keeps flowing, wide-ranging U.S. and European efforts to free Ukraine from its dependence on Gazprom could easily be imperiled by Russia’s extensive leverage over Ukraine, analysts and officials say.

Ukraine’s political stability depends on its economic stability — and the country’s industrial heartland in the east is in revolt. The largely outdated heavy manufacturing plants there are deeply dependent on Russia to supply the energy that flows in and to purchase the products that roll out. The factories need cheap gas to be viable, and they need a Russian market for steel and heavy machinery that often would be uncompetitive in Western markets.

“Ukraine can no longer avoid making the basic choice between expensive energy and political sovereignty on the one hand or cheaper energy and political submission to Russia on the other hand,” said Pierre Noel, an energy security expert at the International Institute for Strategic Studies. With economic clout, demand for cheap energy and sympathies for Russia in the east, he said, “the political economy is skewed toward division.”

Households, too, are accustomed to using natural gas that the government has provided at below-market rates, meaning that there are few incentives to try to conserve energy and that there are hard-set expectations that gas is a public good that ought to be cheap. Ukraine routinely rates among the least energy-efficient countries in Europe, since there have been few reasons to change.

Trying to change those habits, the International Monetary Fund has made raising energy tariffs a condition of the $17 billion bailout package it has offered Ukraine.

Didenko, the acting deputy energy minister, acknowledged the challenge for any government that tries to change the status quo.

“Some things people expect for free,” he said. “The political issue is not the best. The big mistake with the leadership for many years is that they promised sausages for a ruble,” he said, likening cheap gas to cheap groceries.

In the meantime, the United States and Europe can provide few immediate alternatives for Ukraine. One potential idea in Washington: exporting more U.S. natural gas to Europe. But it would take years for the complicated infrastructure to be built to make the undertaking viable, and even then, Gazprom might be able to undercut the price, reducing the project’s economic practicability.

A shorter-term solution, sending gas backward into Ukraine from European countries that have purchased it at lower prices, would not bring in enough energy to satisfy Ukraine’s needs and also appears to be slowed by foot-dragging among countries such as Slovakia that are themselves vulnerable to pressure from Gazprom.

“This is a painful process, and Gazprom does not want to give up power,” said Olena Pavlenko, the head of the Dixi Group, a Kiev-based energy analysis organization.

But the profitability of any long-term effort to reduce dependence on Russia is difficult to envision, one expert said, since the wildly fluctuating price that Gazprom charges Ukraine for gas makes it hard for investors to plan projects or to have much faith that they will turn a profit. That may be part of the objective, said Edward Chow, an energy expert at the Center for Strategic and International Studies.

“Heavy industry can’t plan if you don’t know what the price of gas is going to be next year,” he said. “You’re just planning on getting a break. So you milk the existing assets for all they’re worth, take your profits offshore, and keep hoping the game will go on.”

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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