December 12, 2012 / 5:05 PM / 5 years ago

Russia, Ukraine hint new gas deal possible next week

* Russian envoy says deal could be signed on Dec. 18

* Not clear what concessions Kiev is ready to make

* Ukraine has offered Russia a compromise trade bloc deal

* Stand-off over gas price unnerves European consumers

By Olzhas Auyezov

KIEV, Dec 12 (Reuters) - Russia and Ukraine might be close to signing a new gas supply deal next week, ending a long-term stand-off that has repeatedly threatened Europe’s energy security, officials from both sides indicated on Wednesday.

Ukraine, a large buyer of Russian gas and a major transit nation for Russia’s exports by pipeline to Western Europe, says Moscow is charging far too much for the fuel under a 10-year contract signed by the previous Ukrainian government in 2009.

Moscow is seeking significant political and economic concessions from Ukraine in exchange for reviewing the gas deal, such as joining a Russia-led trade bloc - which would mean Kiev giving up its strategic goal of European integration.

On Wednesday, officials on both sides hinted at a possible agreement - although on several occasions in the past such indications turned out to be false, leaving European buyers of Russian gas worried about potential supply disruptions.

Clashes between Kiev and Moscow that led to interruptions in the Western flow of gas via Ukraine seriously disrupted European supplies in 2006 and 2009, causing countries including Bulgaria and Slovakia to be without energy in the depths of winter.

Commenting on rumours that Ukrainian President Viktor Yanukovich would visit Moscow on Dec. 18 to sign a new gas deal, Russia’s ambassador to Ukraine, Mikhail Zurabov, said the trip could indeed take place if the deal is ready by that time.

“If this meeting happens on the 18th - and work is under way on its agenda and content - it will happen only if there is an agreement to be reached,” Interfax news agency quoted him as saying.

Separately, Interfax quoted an aide to Russian President Vladimir Putin as saying that a meeting between Putin and Yanukovich was being discussed though no date had yet been set.

Russia’s pipeline gas export monopoly, Gazprom, declined to comment. But in a statement it said its chief executive Alexei Miller met Ukrainian Energy Minister Yuri Boiko in Moscow on Wednesday.

On the Ukrainian side, Kommersant-Ukraine newspaper quoted an unnamed central bank source who also said he expected a new deal with Russia soon, probably before a fresh round of talks with the International Monetary Fund (IMF) in late January.

Getting a significant discount from Russia could help Kiev secure fresh IMF support without raising gas and heating prices for households, the source said.

Europe has a major interest in seeing the issue resolved as it gets around a quarter of its gas from Russia and around two thirds of this still flows via Ukraine, although Moscow has been developing alternative routes.


The consensus among analysts is that, for a deal to materialise, Ukraine will have to make some major concessions.

One of Russia’s ambitions has been to gain control of Ukraine’s pipelines and other energy infrastructure. Kiev has long refused to privatise the gas pipelines, seeing them as strategic assets and a source of leverage over Moscow.

“It could be the (Ukrainian gas) pipelines... and Russia could be also interested in our underground gas storage facilities,” Kiev-based political analyst Volodymyr Fesenko said.

Ukraine has refused to join the post-Soviet Customs Union of Russia, Belarus and Kazakhstan as that would mean scrapping plans to sign a free trade agreement with the European Union.

Russia sells its gas to Belarus at about $170 per thousand cubic metres, about 40 percent of the price that Ukraine pays.

Ukraine’s free trade deal with the EU has been agreed in principle, but was shelved after a court jailed former prime minister Yulia Tymoshenko on charges of abuse of office in 2011 - over the same 2009 gas deal Kiev is trying to renegotiate.

Kiev, however, says European integration remains its priority and has offered Moscow a compromise solution - signing a separate trade pact with the customs union.

Whichever concession he chooses to make now, Yanukovich will face accusations from opponents of betraying national interests.

But a deal with Russia may be the only way to revive economic growth and cut the ballooning budget deficit without resorting to politically risky austerity policies two years ahead of the 2015 presidential election.

So far, Russia and Ukraine have been using a costly strategy of attrition in the dispute.

Kiev this year started cutting gas imports while Moscow threatens to leave Ukraine without gas transit fees worth about $2.5 billion a year by building alternative pipelines - such as the $20 billion South Stream - to ship the fuel to Europe.

Although Ukraine’s import cuts - to 27 billion cubic metres this year from about 40 bcm in 2011 - mean it will pay billions of dollars less to Gazprom, they come at a cost.

Ukraine announced this week it had borrowed $3.7 billion from China’s Development Bank to finance the conversion of its power plants from burning gas to coal.

Kiev’s other energy projects, such as launching shale gas production and building a liquefied natural gas (LNG) terminal on the Black Sea, require billions of dollars in investments.

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