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Ukraine Violence Clouds Russia Gas Deal

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Following lethal violence, Ukraine’s embattled President Viktor Yanukovich and opposition leaders have signed a breakthrough deal on ending the political crisis in the former Soviet republic. The agreement on 21 February was witnessed by EU foreign ministers who brokered the deal, including Poland’s Radoslaw Sikorski. Yanukovich announced early presidential elections and the return to the constitution of 2004. Yanukovich also said a national unity government will be created.

However, the political instability in Ukraine raises questions about Kiev’s ability to repay gas debts and concerns that Russia’s transit to Europe may be disrupted.

In December, Gazprom agreed to negotiate a restructuring of the $3.3 billion debt owed for gas already supplied to Ukraine. The Russian gas giant also agreed to cut the export price of gas from $410 per 1,000 cubic metres to $268.5 per 1,000 cubic metres. This new deal is to be confirmed every quarter.

Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp, told New Europe on 21 February that the gas price is more likely to go up if there’s a new election and the opposition wins the new election. “There’s a possibility that Russia might go back to the original treaty that basically calls for a price that would be close to $400 per 1000 cubic metres,” Kokin said. However, he noted that in that case Ukraine would increasingly turn to its western neighbours and start buying Russia’s gas through the western route. “I don’t think Gazprom will eventually benefit much from increasing the price because the volume will go down. And I’m not sure whether Ukraine will be able to pay on time and basically whether Gazprom will have to eventually write off the payment in arrears,” he added.

Chris Weafer, a senior partner with Macro Advisory, a Moscow-based consultancy, wrote in an e-mailed note on 21 February that Gazprom is the most exposed of the Russian names in terms of revenue and profits because of its gas exports to Ukraine. “Whether the Moscow-Kiev rescue deal remains in place or not, it is now a certainty that Ukraine will need to restructure more than the existing $3.3 billion owed to Gazprom. In that case it may, for example, be in a good position to swap some debt for equity in the transmission pipeline,” Weafer wrote.

Meanwhile, the EU relies on Russia for about a quarter of its natural gas supplies and most of that runs through a Soviet-era pipeline network in Ukraine. Kiev also holds the rotating presidency of the European Energy Community. The Group, bound by a 2006 treaty to look for a common regulatory energy framework, said it was lending its hand to Ukraine to help resolve the situation in a peaceful way.

Kokin would not rule out another gas crisis, disrupting gas supplies to Europe. “The relevant question is whether the new government or whether the protesters, the opposition, or whether Yanukovych, would any of them go as far as to try and disrupt Russian transit to Europe because that would be almost desperate,” he said, adding that internal conflict increases the risk to the gas transit system every day.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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