Russia calls Europe’s bluff on Ukraine gas deal

Russia, Ukraine and the European Union failed to strike a deal that would guarantee Russian gas supplies through the coming winter, after the EU refused a request by the Russian side to guarantee full and proper payment by Ukraine.

The deadlock revives the risk that Russia may cut off gas deliveries to parts of Europe this winter, as part of a wider strategy to assert its influence in Ukraine. That would further aggravate the economic slowdown that has hit both countries since the Ukrainian crisis erupted.

It also exposes the reluctance of Europe to back up its political support for the Kyiv government with hard cash.

Ukraine has a record of siphoning Russian gas destined for Europe, and its own finances are in a disastrous state after years of mismanagement. The economy is projected to shrink by some 7 percent this year.

Russia supplies over a quarter of the EU’s gas, and most of those supplies have traditionally gone through Ukraine. Countries such as Bulgaria and Slovakia are completely dependent on Russian gas shipped through the Ukrainian pipeline system, and would face drastic energy shortages this winter if no agreement is struck.

Russia stopped shipping through Ukraine in May, claiming Ukraine owed it over $5 billion for past supplies. Ukraine’s national gas company Naftogaz says it only owes $3.1 billion. The sides are arguing over the difference in a Stockholm arbitration tribunal.

A deal had seemed close after the two sides agreed the rough outlines of a solution. Under an EU-proposed compromise, Naftogaz would pay OAO Gazprom $1.45 billion now and another $1.65 billion later to clear its debts. That would allow Gazprom to resume supplies to Ukraine at a price of $385 per thousand cubic meters–roughly in line with what Gazprom’s other European customers pay.