Report

Russia Cuts Gas to Ukraine

Russia Cuts Gas to Ukraine

 

Note: This article was updated Monday afternoon to include State Dept. comments and more.

With tensions between Russia and Ukraine at fever pitch, Moscow unsheathed its energy weapon Monday, cutting off natural gas supplies to Ukraine amidst a dispute over billions of dollars in unpaid bills. The gas cutoff, Russia’s third in less than a decade, raises concern in Europe that one of its main sources of imported energy could be affected, with few realistic alternatives on the horizon.

A last-ditch effort by the European Union to broker a compromise between Russia and Ukraine broke down Sunday night. Monday morning, Gazprom, the big Russian gas firm, said it halted gas flows to Ukraine and that it won’t ship any more until Kiev pays its hefty arrears and then prepays thereafter.

Gazprom said that Ukraine was guilty of "persistent nonpayment," and said Kiev owes it about $4.5 billion. Russian officials said they would only be willing to go back to negotiations if Ukraine settles its outstanding debt. Russian Prime Minister Dmitry Medvedev blamed Ukraine for the crisis after it rejected "very beneficial, very preferential proposals" from Gazprom.

Ukrainian leaders sounded a defiant note after the shut-off, saying the energy fight was part of a broader offensive by Moscow against the beleaguered country.

"This is not about gas. This is part of the general plan of Russia to destroy Ukraine," said Arseniy Yatseniuk, Ukraine’s prime minister, according to the Financial Times. "Ukrainians will not pull $5 billion out of their pockets a year so that Russia can use this money to buy arms, tanks and planes and bomb Ukrainian territory."

European officials, led by European Energy Commissioner Günther Oettinger, remained hopeful that the two sides could reach a deal. Europe and Ukraine suggested that Kiev partially pay off its overdue bills and that Gazprom lower its rate. But Gazprom insisted on a higher price for gas deliveries. A spokesperson for Oettinger said he offered Monday to continue mediating the dispute.

State Department spokeswoman Jen Psaki called the EU proposal "fair and reasonable" and urged Russia to resume talks with Ukraine over the gas dispute. 

The gas cutoff comes on the heels of heightened tension between the two countries, after pro-Russian separatists shot down a Ukrainian military transport plane Saturday, killing 49 people. In response, protesters attacked the Russian embassy in Kiev, sparking outrage in Moscow.

For Europe, the gas cutoff is a reminder of the continent’s reliance on Russian energy — and the risk of supply shortages. In the winter of 2006, and again in 2009, Russia cut off gas exports to Ukraine, which affected European customers as well. About 15 percent of Europe’s natural gas comes through Ukraine.

The shut-off is a reminder of Russia’s willingness to flex its energy muscles to cow other nations. At the same time, after decades of relying largely on Europe as an export market for natural gas, Russia is increasingly looking east. In May, it inked a massive deal with China, and Russian officials hope to land a second big contract. That could give Moscow even more leverage in dealing with European gas buyers.

For now, the Russian shut-off hasn’t affected flows to Europe, European Union officials said. But natural gas prices spiked in London and Holland on the news of the cutoff.

One big difference from previous gas interruptions is the time of year: Gas demand is much lower in summer than in winter. And storage levels in Ukraine and Europe could keep them running for months. But the energy problem will be acute later this year if the dispute continues and European countries can’t replenish their stocks.

"If there’s going to be a gas fight, now’s the time for it, from Ukraine’s perspective," said Steven Pifer, a former U.S. ambassador to Ukraine who is now at the Brookings Institution. But Russia’s tactics will only redouble Europe’s efforts to find other sources of energy.

"To the extent that Russia raises questions about its reliability as a gas provider, the more it raises interest in Europe in finding alternate sources" of gas, Pifer said.

In the short term, Kiev’s energy options are limited. It can get gas from other European countries, such as Hungary, Poland, and Slovakia, but that would meet less than half its annual demand. And there are few other alternatives: Plans to build a terminal to import liquefied natural gas via tanker were revived after the energy fight with Moscow heated up earlier this year, but the country can’t import LNG until it is finished.

Many U.S. lawmakers have touted the prospects of tapping the U.S. energy boom to supply friends in Europe and Asia with cheap energy. "This act of aggression further escalates the need for the U.S. to increase its exports of liquefied natural gas to our NATO and European allies," said Rep. Michael Turner (R.-Ohio).

But the United States won’t be able to export meaningful volumes of gas until close to the end of the decade. And even if it can ship out enough, LNG is more expensive than Russian gas sent to Europe by pipeline.