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Ukraine and Russia's gas wrangle reignites

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Ukraine and Russia's gas wrangle reignites
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Ukraine’s state gas company Naftogaz says it cannot pay a $7 billion (5.2 billion euro) bill it has received from Russian gas giant Gazprom. The matter is now likely to end up in international arbitration.

Gazprom – which is controlled by the Kremlin – issued the bill for imports of gas which Ukraine did not take last year, but which it is still obliged to pay for under the terms of a contract signed four years ago.

Ppayment rows between Moscow and Kiev in 2006 and 2009 meant disruption to gas flows to Europe as it is fed through pipelines which cross Ukraine.

The European Commission said no one is talking about a crisis at this time, and Brussels expected both parties to ensure that gas supplies to the EU are not interrupted.

IMF consequences

The shock gas bill from Russia significantly weakens Ukraine’s negotiating position in talks for a $15 billion loan with the International Monetary Fund underway this week.

The huge bill adds to the $9 billion of foreign debt which Ukraine needs to repay this year and may force the country to be more open to the IMF’s austerity prescriptions.

However, accepting the Fund’s tough lending conditions could have longer-term political implications for the Ukrainian leadership and negotiations on the deal could take months.

“The IMF will likely demand tough fiscal austerity, gas price hikes and foreign exchange market liberalisation as the minimum price for any deal – any programme will also be long on prior actions and short of front loaded cash disbursements,” Standard Bank analyst Timothy Ash said.

“Ukraine’s room for negotiation has suddenly shrunk quite considerably.”

A lack of agreement over Ukraine’s domestic gas and heating prices prompted the IMF to suspend Ukraine’s previous programme in early 2011.

Ukraine buys natural gas from Russia and then resells it to households and heating companies at a discount, with the state budget absorbing billions of dollars in losses every year.

Abolishing the subsidies, as suggested by the IMF, would be a politically risky move for the Kiev government and personally for President Viktor Yanukovich who plans to run for a second five-year term in 2015.

For the last two years, his government has been trying to negotiate a discount on Russian gas supplies instead while cutting gas imports. But these talks have produced no results.

In the background to all this is Russia hope that Ukraine would enter into the customs union it has with Belarus and Kazakhstan. Moscow has said that customs union membership would trump previous gas agreements.