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2014-10-28 23:21:00

UKRAINE GAS WINTER: $14 BLN

UKRAINE GAS WINTER: $14 BLN

Ukraine is likely to face energy shortages this winter if last-ditch talks to resume gas supplies from Russia fail on Wednesday.

Gas flows were severed in June in a payment dispute complicated by a conflict between Ukrainian forces and pro-Russian militias in the east of the country. A deal on restarting exports was expected last week following months of negotiations mediated by the EU. But the talks failed, with Russia insisting that it needed further evidence that Kiev was able to pay its bills.

In another attempt to broker a deal, Russian, Ukrainian and EU officials will meet on Wednesday in Brussels in what has become a critical deadline. If Russia continues to have doubts that Kiev can pay, the danger grows that cold weather will force Ukraine to start tapping its reserve gas stocks, which are only about half full.

"It has to happen now," said one western official involved in the talks. "It was always about getting the flows going before the winter. I didn't expect a deal in August, but I also didn't expect it to come at the last minute."

Any disruption of Russian gas into Ukraine also raises fears of possible interruptions of supplies to the EU. About 30 per cent of Europe's gas comes from Gazprom, Russia's gas export monopoly, half of it flowing through Ukraine.

European leaders worry that Kiev will siphon off that transit gas if it has not secured its own supplies from Russia by winter. The EU says it has steeled itself for Russian supply cuts, filling reserves to 94 per cent of capacity. "We can show to our Russian partners that there is no point using gas as a political strategy because we are ready for it," said Günther Oettinger, the EU energy commissioner.

Vladmir Putin, Russia's president, said last week that the dispute would be settled on Wednesday. "If this does not happen, we will again face the threat of gas siphoning from the export pipeline, which, in turn, could lead to a crisis. We don't want to see this happen," he said.

However, in a note to clients, analysts at Société Générale said they did not expect a deal on Wednesday and argued that Kiev would find it "difficult to meet local consumption this winter" if it needed to draw on its reserves soon. The French bank also predicted a "short interruption" to EU transit consumers.

The gas price has already been settled, potentially making a deal easier. The Ukrainians will pay in advance $385 per thousand cubic metres until March, after Russia dropped its price demand from $485. Kiev has also agreed to pay back $3.1bn of debt to Gazprom in two instalments.

"What the Russians are putting on the table is quite reasonable . . . but there's a real cash problem," Karel De Gucht, the EU's trade commissioner, said this week.

The main problem is Russia's request for assurances from the likes of the International Monetary Fund or other leading international lenders that Kiev is good for its money.

IMF and EU aid programmes to Ukraine contain about $3.1bn to pay arrears owed to Gazprom. The difficulty would be finding an additional $1.5bn to make a pre-payment for gas supplies for this winter.

One of the options would involve either the World Bank or European Bank of Reconstruction and Development providing a short-term bridge loan to Kiev to cover part of payment and asking the Ukrainian government to draw down some of its $14bn in foreign currency reserves to pay for the rest.

ft.com

Tags: GAS, RUSSIA, GAZPROM, EU