The rapprochement between Moscow and Kiev, following a deal to provide Ukraine with a $15 billion loan and a gas price reduction from about $400 per 1,000 cubic metres to $268.50, raises questions over the faith of Russian gas monopoly Gazprom’s South Stream natural gas pipeline, bypassing Ukraine.
South Stream was really motivated by Ukraine having a tough stance on the transit of the Russian gas but that doesn’t seem to be an issue at this point, Slava Smolyaninov, chief strategist at UralSib Financial Corp in Moscow, told New Europe. “People might at some point start asking questions why South Stream is so important if everything is getting resolved with Ukraine,” he said.
Russian President Vladimir Putin has strongly backed South Stream. But Smolyaninov argued that was motivated by what was believed to be non-constructive stance of Ukraine on Russian gas transit to Europe. “If Russia and Ukraine fall back in love at least for some time things may look a lot better at on that side,” the UralSib chief strategist said.
Chris Weafer, a senior partner at Moscow’s Macro Advisory, told New Europe that there is no chance of a dispute between Ukraine and Russia causing supply problems for Gazprom’s European customers. “Moscow’s bailout deal for Kiev, announced early December and which includes a new gas deal, now places Ukraine much closer to Russia than it has been for more than ten years,” he said.
Regarding Gazprom’s long-standing ambition to own an equity stake in the Ukraine transit pipe, Weafer reminded that this was eventually part of the deal for cheap gas to Belarus. “The point about this is that it would be much easier and cheaper to upgrade that pipe and plug it into the Balkan’s South Stream network than to build the Black Sea transit pipe. It would also satisfy President Putin’s demand that state companies cut spending and, perhaps, allow Gazprom to boost the dividend,” Weafer said.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp, told New Europe that Russia will not abandon South Stream. “If it was purely run on a value maximization basis then probably South Stream would be unnecessary and Ukraine could be fixed and lots of cash would be freed up by dropping South Stream. But I think the way the government sees it in Moscow is a bit different,” Kokin said. “They really want a long-term solution to this chronic problem with Ukraine because of Ukraine’s enormous importance as a transit country. So they really want to bypass it and that’s non-negotiable. What is negotiable is certain terms of contracts and even prices with EU countries,” he added, referring to the recent European Commission antitrust probe, partly at Lithuania’s request, regarding Gazprom’s pricing for gas sales in central and eastern Europe. The Commission has also raised concerns that South Stream may violate the Third Energy Package and urged EU member states to renegotiate their contracts with Russia.
“I think it will end with Gazprom cutting prices for Eastern Europe and basically the European Commission getting a bit more flexible on distribution and South Stream. The net result would probably be Gazprom doing further discounts to countries that have no alternative source of gas,” the UralSib oil and gas analyst said.
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