Russia-Ukraine Gas Deal Unravelling

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Russia-Ukraine Gas Deal Unravelling

The deal fails to resolve the underlying problem: Ukraine has no money to buy gas!

Remember the gas deal that Ukraine and Russia signed on 30 October? It was supposed to end Ukraine’s gas crisis. How much gas has Ukraine actually received from Russia since they signed the deal? Short answer: none.

The problem with the deal is that it doesn’t solve the problem. Ukraine has no money to buy Russian gas. Although Ukraine has paid (as the deal requires) the first $1.4 billion installment to clear its gas debt, it has no money to pay for additional gas. Since the Ukrainians have no money to pay for gas they have no gas. It’s as simple as that.

At the time the deal was signed there was talk the EU had given Ukraine a side letter saying they would help Ukraine pay for gas.

It is now clear the EU has provided Ukraine with no extra money to buy gas. The total amount of money Ukraine is getting from the west has not increased since the IMF and the EU agreed to their aid package in the spring. This is not enough to cover Ukraine’s gas bill this winter. As for the side letter, it has not been published and probably doesn’t exist.

So why did Russia and Ukraine sign the deal? The Russians couldn’t very well refuse after the Ukrainians accepted the offer the Russians made them back in June. The bigger question is why Ukraine signed the deal if it has no money to buy gas?

Ukraine signed the deal because they were told to do so by the EU. The EU leaders made Poroshenko agree to the price the Russians offered when they met him in Milan. EU Commission President Barroso phoned Poroshenko during the gas talks to tell him to tell his negotiators to sign the deal. Poroshenko did so. Since he needs the EU’s support, he had no choice.

Why did the EU do this? Not because they want to help Ukraine or Russia. They wanted a gas deal to secure their own supplies of gas this winter. Around half the gas the EU gets from Russia crosses Ukraine. The EU thinks if there is a gas deal, Ukraine will not steal Russian gas intended for them if its own gas runs out. Whether they are right to think this is another matter. Meanwhile the EU has told Ukraine to use part of its dwindling foreign exchange reserves, which are needed to support its currency, to pay for its gas until the next installment of the IMF loan arrives in January.

This is a high risk gamble. It is not certain Ukraine will qualify for the next installment of the IMF loan. Some officials within the IMF are known to be unhappy about the loan, saying it breaches the IMF’s rules because Ukraine can never repay it. Meanwhile Ukraine may have to choose between defending its currency or buying gas.

Ukraine has put a brave face on things. It says it will get all the gas it needs at a low price by “reverse flow” from the EU. No reputable energy analyst believes this. Meanwhile Ukraine’s attempts to buy coal from South Africa have ended in scandal, while new government rules mean private Ukrainian companies have stopped extracting gas in Ukraine itself.

The gas crisis is not over and winter is closing in.

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