Let’s Make a Deal

Russian brinkmanship over energy supplies to Europe is peaking, yet the European Union, Ukraine, and Russia apparently reached a deal to keep natural gas flowing, preventing millions from freezing this winter.

On Friday, Sept. 26, the parties struck a preliminary agreement whereby Russia would resume exporting natural gas to Ukraine — which it hasn’t since June — in exchange for billions of dollars in back payments. Although the arrangement only holds through March, and Moscow and Kiev still must ratify it, nervous policymakers from Brussels to Belgrade are starting to breathe again.

Under the preliminary — and well-received — terms worked out by EU Energy Commissioner Günther Oettinger in three-way talks in Berlin, there’s a little something for everyone.

Ukraine gets to replenish its half-empty storage tanks; Russia gets at least some of the money Ukraine owes it. And by promising to sell Ukraine modest volumes over the next six months at a reasonable price, the deal undercuts Europe’s newfound business of reselling gas to Ukraine. Europe, for its part, would see fears of a supply crunch recede: The more gas Ukraine has, the less likely Kiev is to tap into transit gas flows that pass through the country on their way to other customers in Europe, as happened in the past. That’s especially important for vulnerable countries in southeastern Europe.

To be sure, given Russian President Vladimir Putin’s yearlong campaign to wrench Ukraine away from the West and back into Moscow’s orbit, there’s no guarantee that he won’t use the energy cudgel again. Ukraine’s leaders are certainly worried that Russia’s control over energy supplies could tip the balance this winter.

"They want us to freeze," Ukrainian Prime Minister Arseniy Yatsenyuk said Thursday.

Russian energy giant Gazprom further squeezed Ukraine on Thursday by again leaning on one of the European countries that has been supplying it. All year, Russia has railed against so-called "reverse flows," in which European traders take advantage of pricier gas in Ukraine to sell supplies there. This month, Russia suddenly limited gas exports to countries such as Poland and Slovakia that were supplying Ukraine with gas.

On Thursday, Russian Energy Minister Alexander Novak again warned European countries not to resell their gas.

With Hungary, Russia seems to have offered both carrot and stick. Just days after Gazprom chief Alexey Miller visited Hungarian Prime Minister Viktor Orban, Hungary’s Russian gas supply mysteriously dropped by the exact amount Budapest sold to Ukraine.

That underscores Putin’s divide-and-conquer tactics right as EU leaders are trying to create an "energy union" and urging EU member states to speak and act with a single voice on energy policy.

"I think Orban has been fooled by the Russians concerning the timing. In my view they postponed the reduction for Hungary until after the big meeting so it would seem like they could easily influence an EU member-state leader and do a direct cut towards Ukraine," said Andras Jenei, director of CFPA Energy Workshop in Budapest.

At the Miller-Orban meeting, Russia also brought along a treat: Despite Gazprom’s assurances to Putin this month that there were no extra volumes available for European customers, the company agreed to ship extra gas to Hungary to help it fill its storage tanks.

"After showing a stick to Poland, Gazprom gave a carrot to Hungary for halting the reverse flow to Ukraine," said Mikhail Korchemkin, the head of East European Gas Analysis, an energy consultancy.

Under the preliminary deal struck Friday, Ukraine will pay at least $3.1 billion of its arrears to Russian by year’s end. And it can import 5 billion cubic meters of gas — the minimum Ukraine needs for winter consumption — from Russia at a moderate price of $385 per thousand cubic meters.

Analysts think there’s a good chance that Russia could respect the preliminary deal with Ukraine. State-controlled Gazprom needs to keep Europe a satisfied customer: About 80 percent of Gazprom’s exports go west, and Russia’s new deals to supply China will take years to come to fruition. In the meantime, protecting its reputation as a reliable energy supplier is just as important as squeezing all the leverage it can out of its dominant position.