Foreign Policy Blogs

The gas conflict between Russia and Ukraine: Flaring up?

Yulia Tymoshenko

Yulia Tymoshenko

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, are set to meet on 29 April. The meeting comes nearly four months after disagreements over gas prices led to a standoff between the two nations, leaving a good portion of the continent without gas supplies in the dead of winter. Fortunately, the price issue has been resolved. But a conflict still looms.

The agreement between the two nations, not only stipulated price, but quantity. And due to the economic downturn in Europe — Ukraine’s gas export market — and the country’s economic collapse which necesitated IMF help, Ukraine has imported less than half of the 5 billion cubic meters of gas which it had agreed to import in the first quarter. Russian gas giant, Gazprom, has already indicated that it will seek punitive damages of roughly $2.7 billion for the shortfall.

What’s worse for Ukraine is that it is not on pace to purchase the 80% of the 40 billion cubic meters to which it had agreed. It will also have problems paying the roughly $5 billion to fill up its gas reserves this summer, as Ukraine’s gas company, Naftogaz, does not have the cash, nor is it able to borrow from financial markets.

Putin will likely show little sympathy, especially when he has been asked to pony up $5 billion to help with Ukraine’s ailing economy. He is set to seek concessions from Tymoshenko over a planned modernization of Ukraine’s Soviet-era pipeline network. The Russian PM had been upset by previous discussions between the European Commission and Ukraine over declarations on March 23rd that paves the way for EU investment in Ukraine’s infrastructure. He called the deal “unprofessional” and he delayed talks with Tymoshenko to show his dismay.

Putin fears that an alliance between his gas customers would weaken his geopolitical position. Without cash to pay the bills, Tymoshenko is set to give up some control of the modernization effort, a far greater prize for Putin than the cash Ukraine may owe. And that’s a win for Putin.

 

Author

David Abraham

David S Abraham has expertise in the analysis of geopolitical and economic risk as well in energy issues. At the White House Office of Management and Budget, his work included overseeing natural resource and foreign assistance programs, and serving on the interagency trade policy committee. In his previous role as a sovereign risk analyst with Lehman Brothers, subsequently, Barclays Capital, he advised the firm on geopolitical and economic risks in developing countries. He has also consulted for a variety of organizations including the United Nations Support Facility for Indonesian Recovery, RBS Sempra Commodities, ClearWater Initiative and a small German consultancy. David earned degrees from Boston College and The Fletcher School at Tufts University and proudly served as a Peace Corps Volunteer. His written work has appeared in a variety of publications, most recently in The New York Times, The Providence Journal, and CFR.org. He speaks Lithuanian and is a Term Member at the Council on Foreign Relations.

Area of Focus
Geopolitics; Economic Risk; Energy Issues

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