October 29, 2014 / 10:40 AM / 5 years ago

Gas deal still eludes Ukraine and Russia at EU talks

BRUSSELS (Reuters) - Ukraine and Russia bargained late into the night on Wednesday but European Union officials trying to broker a deal to resume gas supplies to Kiev as winter sets in said there was still no accord to announce.

Russian Energy Minister Alexander Novak arrives for gas talks between the European Union, Russia and Ukraine at the EU Commission headquarters in Brussels October 29, 2014. REUTERS/Francois Lenoir

At talks in Brussels hosted by energy commissioner Guenther Oettinger two days before he makes way for a new EU executive team, officials cancelled an evening news conference at which they had hoped to announce a deal after months of negotiation.

“Negotiations are ongoing and likely to continue until late in the evening,” the European Commission said in a statement at 9 p.m. (1600 ET). “In case of agreement, the press conference is envisaged to take place tomorrow morning at 8:30 a.m.”

With Kiev and Moscow locked in conflict over pro-Russian rebellions in Ukraine and over the former Soviet state’s move to bind itself closer to the West, the European Union, which also depends heavily on Russian gas, is trying to help overcome wrangling about payments that threatens to disrupt supplies.

Russian state utility Gazprom (GAZP.MM), whose chief executive was attending the talks with Oettinger along with the Russian and Ukrainian energy ministers, halted supplies to Ukraine in June, citing Kiev’s unpaid gas bill, which Moscow says is around $4.5 billion.

The EU, which has lending facilities to Ukraine along with the IMF, is looking at releasing more funds. And Germany, a key ally for Ukraine’s pro-Western leaders, has spoken of providing international “bridging finance” to see Kiev through the winter.

For months, the gas cut-off has had little impact. But pressure is mounting for a deal as temperatures start to drop below freezing and Oettinger, who has been mediating, prepares to leave office on Friday, making way for a new Commission.

The two sides came close in September, but last week differences were wide over Kiev’s ability to pay.

Some of Russian President Vladimir Putin’s many critics in eastern Europe question his interest in concluding an agreement on commercial grounds and see the temperature of Ukrainian homes in the coming months being determined more by Kremlin calculations of its geostrategic interests.

Oettinger, a German, said before talks began on Wednesday that there was a 50 percent chance of a breakthrough. If he cannot broker a solution, it will be down to his Slovak successor, who takes office on Saturday.

Weekend elections returned a pro-Western parliament in Kiev, potentially stoking tensions with Moscow, although Russia’s EU envoy, Vladimir Chizhov, said earlier in the day that the mood could be more relaxed now the vote had taken place.

“During the last rounds of talks, let’s not conceal it, the pre-election situation had its influence on Ukrainian side,” Chizhov told Russian agency RIA Novosti. The only unresolved problem, he said, was where to get the money from for winter supplies.


Ukraine’s Naftogaz company has set aside $3.1 billion in a special escrow account to pay off a chunk of its debt to Gazprom, but Russia is also demanding prepayment for winter supplies before it is willing to turn the taps back on.

Kiev says it is working to raise more money from all possible sources of financing, including the European Union. The European Commission is considering Ukraine’s request, made last week, for a further loan of 2 billion euros.

But Kiev also says money alone may not be enough.

“I have an impression that the Russian side doesn’t want to agree,” Ukrainian Finance Minister Oleksander Shlapak said on Tuesday.

Analysts said it could be very hard to come up with enough assurances to satisfy Russia, even if Gazprom, and more widely the Russian treasury, would welcome new revenues as the economy suffers from the effects of Western trade sanctions.

Ukraine at the same time is pushing for written guarantees that any agreement on price will be lasting.

For all sides, there is much at stake.

Russia provides around one third of the European Union’s gas, roughly half of which is pumped via Ukraine.

Ukraine in turn relies on Russia for around 50 percent of its own gas and despite storage has a winter shortfall of around 3 billion to 4 billion cubic metres (bcm), depending on the weather.

For Russia, the gas sector contributes approximately a fifth of the national budget.

Ukraine's Energy Minister Yuri Prodan arrives for gas talks between the European Union, Russia and Ukraine at the EU Commission headquarters in Brussels October 29, 2014. REUTERS/Francois Lenoir

Sanctions on Russia, which EU officials decided to leave unchanged on Tuesday while conflict in Ukraine continues, are sapping an already weak economy. But Moscow could well be willing to endure much more hardship for political ends.

“Economic factors are generally not given precedence when national security concerns are at stake,” Pasquale De Micco, a national expert from the European Parliament’s policy department, said in a research paper on Europe’s gas supply options.

“What is certain is that a gas war risks harming both parties in the short term and that it would hamper future efforts to re-establish mutually trusting relations.”

Additional reporting by Vladimir Soldatkin and Ekaterina Golubkova in Moscow, Natalia Zinets and Pavel Polityuk in Kiev and Michael Nienaber in Berlin; editing by Andrew Roche

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