Moscow ratchets up pressure on Ukraine by raising gas prices, asking for debt repayment

MOSCOW – Russia is tightening its economic screws on Ukraine, ordering Thursday a further increase in the price of gas it sells to the country and asking that past bills — which are growing by the day — be paid.

Ukraine, whose economy is on the brink of collapse as it awaits international aid, relies on Russia for almost all its energy. Russia had been giving it discounts on gas as long as the government was willing to have close ties with Moscow. Now that the new government has signed a partnership with the European Union instead, those favours are being pulled back.

Alexei Miller, the CEO of Russia’s state-owned gas company Gazprom, on Thursday said the discounts, a part of which were withdrawn earlier this month, would be scrapped altogether. In practice that means a 70 per cent hike in prices that will add to Ukraine’s $2.2 billion in gas arrears.

“Our Ukrainian counterparts should find the necessary funding to repay the debts and pay the bills because otherwise our co-operation in this sphere, as well as in other spheres, would not be possible,” Russian Prime Minister Dmitry Medvedev said. He stopped short of saying whether Russia is prepared to turn off the gas taps to Ukraine, like it did in 2009.

The statement “certainly ratchets up the threat of a gas war,” said Andrew Neff at IHS in Moscow, although he said it was unlikely unless Ukraine begins siphoning gas.

The effect on the wider region, however, would not be as severe as in January 2009 when a halt in Russian supplies left millions across Eastern Europe without heating. Gazprom has since built new pipelines bypassing Ukraine and increased the capacity of existing ones.

The fact that Russia has scrapped all the discounts for Ukraine indicates Russia is “lining up to get its money when the IMF, the EU (and) the U.S. come in to prop up Ukraine and Naftogaz,” said Neff.

The International Monetary Fund has pledged up to $18 billion in loans to Ukraine, linked to the country undertaking economic reforms, with the United States and EU also providing support.

Gazprom has not indicated when it might demand that arrears be paid. In the past, it has been patient with large debts if negotiating with pro-Russian governments and often strict with smaller debts while dealing with governments that fell out of the Kremlin’s favour.

The timing to claim the debts “will be a political rather than a business decision,” says Chris Weafer, an analyst at Macro Advisory in Moscow, “so the answer depends on whether Moscow and Kyiv can form a pragmatic relationship.”

Ordinary Ukrainians should expect a 73 per cent rise in their gas bills spread over the next few years, government officials said this week.

That will be painful for consumers and could deepen the recession, says Tim Ash of Standard Bank in London. On the other hand, they will incentivize Ukraine to become more energy efficient.

U.S. Secretary of State John Kerry this week vowed to seek ways to provide Ukraine gas through Poland, Hungary and Slovakia.

But there are hurdles to how much the U.S. and Europe can help.

Europe, which gets a quarter of its gas needs from Russia, does not have enough spare gas to supply Ukraine. It would have to import more from Russia, thus propping up Moscow. The U.S., meanwhile, has pre-sold all of its gas to China and other Asian markets.

Some have raised the possibility of tapping shale gas deposits in Ukraine, but it is still too early to tell if the deposits will yield much. Even so, it would take years to start extracting.

The only realistic option would be shipping gas across the Black Sea from Iran. That, however, is “very many years away and will need the Iranian sanctions lifted,” said Weafer, the analyst.

Ukraine’s best bet would be to keep negotiating with Moscow.

“Neither the IMF nor the EU will be keen to pick up the tab” for Ukraine, says Ash of Standard Bank, which “should at least open the way to bring Moscow to somebody’s table to discuss the issue.”