Putin Warns Europe "No Alternative... Will Cut Gas Supplies"

Tyler Durden's picture

European partners have left Russia with "no alternative" but to halt supplies of gas to Ukraine and Europe, according to a letter from Russian president Putin to European leaders.

  • *EUROPEAN PARTNERS LEAVE RUSSIA 'NO ALTERNATIVE,' PUTIN SAYS
  • *RUSSIA TO HALT UKRAINE GAS IF PAYMENT VIOLATIONS GO ON: PUTIN
  • *PUTIN: RUSSIA UKRAINE GAS SUBSIDY WORTH $35.4B IN PAST 4 YEARS

The remarks, as Reuters reports, were the strongest sign yet that Russia could curtail supplies of gas to (and through) Ukraine affecting supplies of gas to Europe (as they fear Ukraine will siphon off Russian gas meant for Europe). Russia is already reducing its delivery through Ukraine but it stil represents 39% of Europe's demand. Gazprom has also been forced to move to pre-payment terms on any future deliveries (there's your IMF bailout).

Via Reuters,

President Vladimir Putin has told European leaders a dispute over Ukraine's gas debt to Russia could affect supplies of Russian gas to Europe and proposed urgent discussions on the matter, his spokesman said on Thursday.

 

The remarks were the strongest sign yet that Russia could curtail supplies of gas to Ukraine, which could increase tension between Moscow and Kiev and aggravate the worst crisis in East-West ties since the Cold War.

 

"The situation is urgent," Putin's spokesman, Dmitry Peskov, said after Putin sent a letter expressing deep concern about Ukraine's $2.2 billion gas debt and warning of a possible impact on the transit of Russian gas to the European Union.

 

In the letter, Putin proposed "mechanisms of dialogue for urgent discussions of the situation that has developed," Peskov said. He did not give any details about the proposal or say which leaders were addressed.

Putin also added that Ukraine is in trouble...

  • *PUTIN SAYS UKRAINE IS HEADING TOWARD DEFAULT
  • *PUTIN URGES TALKS WITH EU MINISTERS ON UKRAINE GAS DEBT
  • *PUTIN: RUSSIA UKRAINE SUBSIDY INCLUDES $18.4B TAKE-OR-PAY FINE
  • *GAZPROM FORCED TO MOVE UKRAINE TO PREPAYMENT DUE TO DEBT: PUTIN

Reuters further adds that:

  • IN LETTER SEEN BY REUTERS, PUTIN SAYS THERE ARE RISKS UKRAINE WILL SIPHON OFF RUSSIAN GAS DESTINED FOR EUROPE
  • PUTIN SAYS IT IS NECESSARY TO PUMP 11.5 BCM OF GAS INTO UKRAINE GAS STORAGES TO SECURE UNINTERRUPTED RUSSIAN GAS TRANSIT TO EUROPE
  • PUTIN URGES EUROPE TO URGENTLY DISCUSS MEASURES TO STABILISE UKRAINE'S ECONOMY AND ENSURE DELIVERY AND TRANSIT OF RUSSIAN GAS

We are sure any new sanctions that Obama and his motley crew are coming up with have all of this in mind...

In sum, Russia is saying that Ukraine must build its own gas reserves to guarantee that there is enough for Europe, and Ukraine is saying no. Russia is thus implying that European gas supplies are at risk because Ukraine will take the gas supposedly traveling to Europe.

The math, as performed by Gazprom, via Bloomberg:

Ukraine needs ~18bcm of natgas in underground storage facilities for future winter consumption, to ensure uninterrupted transit of Russian fuel to Europe, Gazprom Deputy CEO Vitaliy Markelov says at govt meeting outside Moscow. Ukraine has 6.5bcm in storage now, ~0.65bcm are in Crimeanunderground storage facilities. Markelov adds that  11.5bcm needed before winter to cost $4b-$5b, if history is any example gas in storage before last winter was 19bcm, and currently has 7.2bcm in underground storage, according to Naftogaz Ukrainy.

So to paraphrase: Gazprom is saying it demands that Ukraine build up its gas holdings to assured it won't syphon off gas with a European destination, gas which will cost Ukraine up to $5 billion, money which Russia is now demand be paid up front. Or else Europe gets it.

* * *

Full Putin letter is below via Itar-Tass (highlights ours):

Ukraine’s economy in the past several months has been plummeting. Its industrial and construction sectors have also been declining sharply. Its budget deficit is mounting. The condition of its currency system is becoming more and more deplorable. The negative trade balance is accompanied by the flight of capital from the country. Ukraine’s economy is steadfastly heading towards a default, a halt in production and skyrocketing unemployment.

Russia and the EU member states are Ukraine’s major trading partners. Proceeding from this, at the Russia-EU Summit at the end of January, we came to an agreement with our European partners to hold consultations on the subject of developing Ukraine’s economy, bearing in mind the interests of Ukraine and our countries while forming integration alliances with Ukraine’s participation. However, all attempts on Russia’s part to begin real consultations failed to produce any results.

Instead of consultations, we hear appeals to lower contractual prices on Russian natural gas – prices which are allegedly of a “political” nature. One gets the impression that the European partners want to unilaterally blame Russia for the consequences of Ukraine’s economic crisis.

Right from day one of Ukraine’s existence as an independent state, Russia has supported the stability of the Ukrainian economy by supplying it with natural gas at cut-rate prices. In January 2009, with the participation of the then-premier Yulia Tymoshenko, a purchase-and-sale contract on supplying natural gas for the period of 2009-2019 was signed. The contract regulated questions concerning the delivery of and payment for the product, and it also provided guarantees for its uninterrupted transit through the territory of Ukraine. What is more, Russia has been fulfilling the contract according to the letter and spirit of the document. Incidentally, Ukrainian Minister of Fuel and Energy at that time was Yuriy Prodan, who today holds a similar post in Kiev’s government.

The total volume of natural gas delivered to Ukraine, as stipulated in the contract during the period of 2009-2014 (first quarter), stands at 147.2 billion cubic meters. Here, I would like to emphasize that the price formula that had been set down in the contract had NOT been altered since that moment. And Ukraine, right up till August 2013, made regular payments for the natural gas in accordance with that formula.

However, the fact that after signing that contract, Russia granted Ukraine a whole string of unprecedented privileges and discounts on the price of natural gas, is quite another matter. This applies to the discount stemming from the 2010 Kharkiv Agreement, which was provided as advance payment for the future lease payments for the presence of the (Russian) Black Sea Fleet after 2017. This also refers to discounts on the prices for natural gas purchased by Ukraine’s chemical companies. This also concerns the discount granted in December 2013 for the duration of three months due to the critical state of Ukraine’s economy. Beginning with 2009, the total sum of these discounts stands at 17 billion US dollars. To this, we should add another 18.4 billion US dollars incurred by the Ukrainian side as a minimal take-or-pay fine.

In this manner, during the past four years, Russia has been subsidizing Ukraine’s economy by offering slashed natural gas prices worth 35.4 billion US dollars. In addition, in December 2013, Russia granted Ukraine a loan of 3 billion US dollars. These very significant sums were directed towards maintaining the stability and creditability of the Ukrainian economy and preservation of jobs. No other country provided such support except Russia.

What about the European partners? Instead of offering Ukraine real support, there is talk about a declaration of intent. There are only promises that are not backed by any real actions. The European Union is using Ukraine’s economy as a source of raw foodstuffs, metal and mineral resources, and at the same time, as a market for selling its highly-processed ready-made commodities (machine engineering and chemicals), thereby creating a deficit in Ukraine’s trade balance amounting to more than 10 billion US dollars. This comes to almost two-thirds of Ukraine’s overall deficit for 2013.

To a large extent, the crisis in Ukraine’s economy has been precipitated by the unbalanced trade with the EU member states, and this, in turn has had a sharply negative impact on Ukraine’s fulfillment of its contractual obligations to pay for deliveries of natural gas supplied by Russia. Gazprom neither has intentions except for those stipulated in the 2009 contract nor plans to set any additional conditions. This also concerns the contractual price for natural gas, which is calculated in strict accordance with the agreed formula. However, Russia cannot and should not unilaterally bear the burden of supporting Ukraine’s economy by way of providing discounts and forgiving debts, and in fact, using these subsidies to cover Ukraine’s deficit in its trade with the EU member states.

The debt of NAK Naftogaz Ukraine for delivered gas has been growing monthly this year. In November-December 2013 this debt stood at 1.451,5 billion US dollars; in February 2014 it increased by a further 260.3 million and in March by another 526.1 million US dollars. Here I would like to draw your attention to the fact that in March there was still a discount price applied, i.e., 268.5 US dollars per 1,000 cubic meters of gas. And even at that price, Ukraine did not pay a single dollar.

In such conditions, in accordance with Articles 5.15, 5.8 and 5.3 of the contract, Gazprom is compelled to switch over to advance payment for gas delivery, and in the event of further violation of the conditions of payment, will completely or partially cease gas deliveries. In other words, only the volume of natural gas will be delivered to Ukraine as was paid for one month in advance of delivery.

Undoubtedly, this is an extreme measure. We fully realize that this increases the risk of siphoning off natural gas passing through Ukraine’s territory and heading to European consumers. We also realize that this may make it difficult for Ukraine to accumulate sufficient gas reserves for use in the autumn and winter period. In order to guarantee uninterrupted transit, it will be necessary, in the nearest future, to supply 11.5 billion cubic meters of gas that will be pumped into Ukraine’s underground storage facilities, and this will require a payment of about 5 billion US dollars.

However, the fact that our European partners have unilaterally withdrawn from the concerted efforts to resolve the Ukrainian crisis, and even from holding consultations with the Russian side, leaves Russia no alternative.

There can be only one way out of the situation that has developed. We believe it is vital to hold, without delay, consultations at the level of ministers of economics, finances and energy in order to work out concerted actions to stabilize Ukraine’s economy and to ensure delivery and transit of Russian natural gas in accordance with the terms and conditions set down in the contract. We must lose no time in beginning to coordinate concrete steps. It is towards this end that we appeal to our European partners.

It goes without saying that Russia is prepared to participate in the effort to stabilize and restore Ukraine’s economy. However, not in a unilateral way, but on equal conditions with our European partners. It is also essential to take into account the actual investments, contributions and expenditures that Russia has shouldered by itself alone for such a long time in supporting Ukraine. As we see it, only such an approach would be fair and balanced, and only such an approach can lead to success.