Another Gas War May Spark Between Russia and EU in 2010

Russia and the European Union signed a memorandum on the mechanism of early warning in the energy sphere. The document was signed by Russian Minister of Energy Sergei Shmatko and European Energy Commissioner Andris Piebalgs. This is the way for the EU and Russia to prepare for possible winter issues with the transit of gas through Ukraine. The document is expected to be discussed by the heads of the two parties at the RF-EU Summit to be held in Stockholm on November 18.

“The mechanism of early warning is to ensure stable and continuous deliveries of energy carriers, as well as the prevention and overcoming of emergency situations in the energy sphere with minimal consequences,” says the report.

According to Piebalgs, “the new document describes the working process of the warning system, as well as the procedure of the joint work of experts in case of an emergency or conflict situation.” The document, he continued, includes measures to be taken by the parties for preventing conflicts, and in the situation, when a conflict emerges. The mechanism will work not only in gas transportation, but also in the sphere of oil deliveries and the transmission of electricity, ITAR-TASS reports.

In the beginning of 2009, Gazprom suspended gas supply to Ukraine. According to the Russian company, transit fuel for European consumers was supplied to the Ukraine’s Gas Transmission Network but was not delivered to the consumers. This caused the holding to suspend the transit of gas through Ukraine.

The transit resumed after contracts were signed between Gazprom and Ukraine’s Naftogaz. However, a number of European countries experienced lack of fuel, which resulted in suspension of work of some factories and municipal establishments.

This year, the Russian party mentioned possible issues with payments for the gas supplied to Ukraine. In November, the Ukrainian party acknowledged the issues, but fulfilled its obligations within the set time frame.

Meanwhile, financial and economic state of affairs in Ukraine is threatening. Fitch Ratings downgraded Ukraine's sovereign rating to B-minus from B along with the ratings of cities and banks of the country, and the rating outlook is negative.

In September, Ukraine’s Naftogaz defaulted on the Eurobond. Later, the main Ukrainian railroad carrier Ukrzaliznytsya experienced a technical default on its syndicated loan of $550 billion. While Naftogaz’s debt was restructured at a raised interest rate, the government was not able to help the Ukrainian railroads.

Ukraine’s state debt is rapidly growing. According to Yushchenko’s front office, the state debt has increased 2.6 times since last year, and as of July 31, 2009 was evaluated at $23 billion. The sum of the sovereign debt increased four-fold, to $9.9 billion. Naftogaz’s budget deficit is over $4 billion.

Loans for $16.5 billion received from the International Monetary Fund are spent on covering the budget deficit, and likely, payments for the Russian gas. However, the Ukrainian party is not in a hurry to fulfill its obligations to the Fund, including those in the area of increasing consumers’ prices for gas. Besides, the country uses domestic loans. There is information that the government is set on unsecured emission of the local currency, which may cause hyper inflation in the near future.

Experts believe that the new decree issued by the National Bank of Ukraine on changes to the organization and implementation of the currency exchange procedures on Ukrainian territory indicates that this is a possibility. According to this document, the banks are not allowed to change the exchange rate during the day, and physical persons are not allowed to buy foreign currency worth over 80 thousand grivnas. A passport is required when purchasing foreign currency worth over 15 thousand grivnas.

It is unknown how Ukraine is going to pay for its November gas. Meanwhile, Ukrainian media wrote about Moscow and Kiev exchanging drafts of new contracts for gas supply. The Ukrainian party is interested in mitigating the current terms and raising transit fees.

A Ukrainian media source released a document that is allegedly a copy of a Moscow contract draft. The draft contains the following phrase: “The Ukrainian party guarantees the immunity of the property of the Russian party and its economic entities, natural gas and the Gas Transmission Network that belong to Russia and are located on Ukrainian territory.”

According to the same source who could not yet be verified, possible arguments between the parties would be considered by the Moscow Arbitration Court.

Ukraine ’s issues are obvious to Europeans as well, hence the memorandum. Some sources suggest that a new gas crisis may change the status of the Ukrainian gas transportation system.

Anastasia Romasheva.

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Author`s name Dmitry Sudakov