Ukraine-Russia gas row: Red bills and red rags

Gas gauge in village north of Kiev (file photo - March 2014) The political pressure is rising as the pipeline pressure falls

Related Stories

Ukraine says Russia has cut off gas supplies, in what is a major escalation of a dispute between the countries.

Gazprom, the Russian state energy firm, has pledged to continue supplies to Europe, but says it is Ukraine's responsibility to ensure gas flows through the country.

We examine what's behind the row, and its potential impact on Europe and its gas supplies.

What is the row about?

The immediate dispute is about Ukraine's unpaid gas bill to Russia. For months, Gazprom had threatened to halt supplies, only for Ukraine to make part payments just before the deadlines imposed by Russia.

However, it seems that Russia has lost patience. Gazprom has now in effect installed the world's largest pre-pay meter. It wants Ukraine's state-owned Naftogaz to pay upfront for its gas.

Gazprom says it is owed an immediate $1.95bn (£1.15bn) out of a total outstanding bill of $4.5bn.

Despite continuing talks in Brussels to try to resolve the dispute, Gazprom and Naftogaz have filed lawsuits against each other at the Stockholm arbitration institute.

line break
Is this just about unpaid bills, or something more?

There is definitely a bigger picture. Lurking behind all this is the power struggle between the interim Ukrainian government, which leans towards the EU, and Russia, which wants to keep Ukraine firmly within its sphere of influence.

In February, months of street protests culminated in the removal from power of Ukraine's pro-Russian president, Viktor Yanukovych. He had decided not to sign an association agreement with the EU, opting instead to join Russia's customs union.

But the interim government in Kiev has reversed course. In return, the EU is providing development assistance, a loan of 1.6bn euros (£1.3bn; $2.2bn), the temporary removal of customs duties on Ukrainian exports to the EU, and a programme to lessen Ukraine's energy dependence on Russia.

That angered the Kremlin, and Gazprom raised the price Ukraine would have to pay for its gas in future by 81%.

Europe's pipeline network

Previously, Ukraine's gas imports were subsidised in return for Russia's lease of the naval base at Sevastopol in Crimea, the home of the Russian Black Sea fleet. But since Russia annexed Crimea last month, that agreement is no longer valid.

Before Russia scraped the discount, Ukraine paid $268 per 1,000 cubic metres. The price now is $485.50 per 1,000 cubic metres, the highest in Europe.

Ukraine's economy: How bad is the mess?

line break
Will anyone outside Ukraine be affected?

Quite possibly - the EU gets about a third of its gas from Russia, with some 50% of this flowing through Ukraine.

Outside Ukraine, two other pipelines link Russia to the EU: the North Stream (under the Baltic) and the Yamal, which flows through Belarus and Poland.

Germany and Italy are the two biggest customers for Russian gas. However, Germany is building more coal-fired power plants and renewable energy installations, including offshore wind farms.

Countries most reliant on Russian gas flows via Ukraine (cubic metres, billion)

Source: Oxford Institute for Energy Studies

2013

2012

Italy

25.33

15.08

Turkey

13

14.02

Germany

11.71

21

Czech Republic

7.32

7.28

Hungary

6

5.29

Slovakia

5.42

4.19

Another pipeline, the South Stream, is under construction, running from Russia under the Black Sea to Bulgaria and then splitting into two branches, north through Hungary to Austria, and south to Italy. The project website says the South Stream is scheduled to begin supplying gas late next year and be completed in 2018-19.

However, Bulgaria has halted construction of its section of the pipeline, prompting Russia to accuse the European Union of imposing "creeping" economic sanctions.

Interconnectors between different pipelines could also help. South-eastern EU countries such as Austria and the Czech Republic receive their supplies via Ukraine and are most at risk if Russia turns off the taps. However, they could receive relief supplies via the interconnectors flowing down from Germany.

Other countries, such as Poland, Lithuania, Estonia and Finland, are looking to diversify their energy supplies, for example by bringing in more liquefied natural gas (LNG) from non-European countries, such as Qatar, or shale gas from North America.

One factor working in the favour of EU consumers is the weather: energy use falls in summer, reducing dependence on imports.

South Stream project website

Analysis from The Economist on reducing EU dependence on Russian gas

Reuters: EU imports from Russia could fall 25% by 2020

line break
Gazprom logo (file photo)
Hasn't Gazprom promised to maintain Europe's supplies through Ukraine?

It has, promising to supply Europe at "full volume". Gazprom added, though, that it was Ukraine's responsibility to ensure shipments passed through the country uninterrupted.

History suggests that Europe should remain cautious.

On New Year's Day 2006, Russia said it wanted to increase the Ukraine price per 1,000 cubic metres by more than 400%. When Ukraine said no, Russia turned off the country's supplies.

Within hours, other countries - including Austria, France, Germany and Italy - began reporting pressure drops in their pipelines of about 30%. The dispute was settled three days later, but prompted much nervousness in the EU about its dependence on Russian energy.

Three years later, again on New Year's Day, Russia again cut supplies. This was during a very cold spell, leaving countries such as Bulgaria and Slovakia with serious cuts to supplies. Industrial plants were shut down, while people struggled to heat homes and schools.

After more than two weeks of shortages, Russia and Ukraine reached an agreement that was supposed to run for 10 years.

line break
File photo of German Chancellor Angela Merkel and Russian President Vladimir Putin Germany is Russia's biggest EU customer for gas but relations have turned distinctly frosty since the crisis in Ukraine erupted
How reliant is Ukraine on Russian gas?

Traditionally, more than 50% of Ukraine's gas needs have came from Russia, although the country has also been a big importer from Turkmenistan.

Last year, Gazprom exported about 26 billion cubic metres (bcm) of gas to Ukraine, more than half the 50.4bcm it consumed.

Although Ukraine's nuclear and coal sectors produce more electricity than gas, the Oxford Institute for Energy Studies (OIES) says that "industry and municipal infrastructure are highly dependent on gas".

The OIES estimates that Ukraine's gas requirement for this year will be about 50bcm, with about 20bcm produced inside the country.

If the worst came to the worst, and Russia halted supplies, Ukraine would have to find alternative suppliers for some 30bcm.

Talks are under way within the EU about helping Ukraine in an emergency by sending gas via pipelines in Slovakia.

line break
Main gas pipelines in Ukraine
Surely, a serious cut in gas exports would also hurt Russia

Almost certainly.

The question is, would President Putin be prepared to suffer short-term pain for long-term gain (whatever that gain might be)?

The Oxford Institute for Energy Studies estimates that last year, 53% of Gazprom's export revenues - or $33.3bn - went through Ukraine.

Any escalation of the gas dispute could seriously dent Moscow's tax earnings.

It may also be a reputational disaster. Gazprom, and Russia generally, won't want to be known as an unreliable supplier.

That would curtail international investment in the country's oil and gas sectors, and spur on the West to find alternative sources of energy.

But, while the West might want to reduce its dependency on Russia, Moscow has showed it is capable of reducing dependency on the West. In May, President Putin signed a multi-billion dollar, 30-year gas and investment deal with China.

Guide to the 2006 Russia-Ukraine gas dispute

Guide to the 2009 Russia-Ukraine gas dispute

More on This Story

Related Stories

More Business stories

RSS

BBC Business Live

  1.  
    INSOLVENCY FIGURES 09:47:

    Some 27,029 people went into personal insolvency in the second quarter of this year, a 5.1% increase on the same quarter last year, official figures from the Insolvency Service.

     
  2.  
    MARKET UPATE 09:36:

    European shares are mixed. They started out good after a batch of encouraging company results. Retailer Next is among the big winners - up 2.45% to 6680p on the FTSE 100 so far.

    • The FTSE is 0.12% higher at 6796.35
    • Germany's Dax has just turned negative and is now 0.09% lower at 9589.54
    • The French Cac-40 is also down 0.18% at 4336.92
     
  3.  
    Via Twitter Adam Parsons Business Correspondent

    tweets: "Next now worth slightly more than Sainsbury's and Morrison's put together."

     
  4.  
    GHERKIN SALE 09:14:
    An aerial view of the "City", London"s business disctrict

    London landmark and general troubled child of the City's tall buildings, the Gherkin - otherwise known as 30 St Mary Axe - has been put up for sale for £64m. It was put into receivership with accountants Deloitte managing the place since April. Co-owners Evans Randall and German firm IVG told it to put it up for sale after they failed to reach a deal with their lenders over restructuring the building's mounting debts.

     
  5.  
    BANKERS ETHICS 08.58:
    Book

    Back to the proposed bankers' oath. Would it mean an end to such fines as the £218m Lloyds received yesterday for fiddling rates? Think tank ResPublic, which operates "on the premise that human relationships should once more be positioned as the centre and meaning of an associative society", hopes so. Click here to read what it suggests are the magic words.

     
  6.  
    RUSSIAN SANCTIONS 08:45: BBC Radio 4
    Russian President Vladimir Putin

    Former foreign secretary Sir Malcolm Rifkind is talking to the Today programme about the potential impact of sanctions on Russia. He says President Putin is unconcerned about his popularity at home. "This isn't about his popularity this is about imposing sanctions that will require Putin to change his policy," he says. Up to now, he says, sanctions have been "pretty useless". Sanctions need to be about serious economic damage to Russia, he adds.

     
  7.  
    UBS PROBE 08:35:
    The floor of the New York Stock Exchange on 28 March, 2014.

    The "Dark Pools" investigation widens to include UBS. The Swiss bank became the latest bank to say it is cooperating with inquiries about these alternative trading systems. Its second quarter report this morning said a clutch of US regulators, including the Securities and Exchange Commission, the New York Attorney General, and the Financial Industry Regulatory Authority had made inquiries. Banks Barclays and Credit Suisse are also involved in probes.

     
  8.  
    RUSSIAN SANCTIONS 08:25:

    Separately the US State Department has accused Russia of violating a key arms control treaty by testing a nuclear cruise missile. Russia tested a ground-launched cruise missile, breaking the Intermediate-Range Nuclear Forces Treaty signed in 1987 during the Cold War, the US says. A senior US official described it as "very serious" but gave little more in the way of detail.

     
  9.  
    PAY KICK? 08:13:

    Two fund managers overheard on the 06:45 to Vauxhall: "It's called a pay away, not a kick back." Business Live (not being perfect) does not know what this means. Any ideas?

     
  10.  
    HEADLINES
  11.  
    RUSSIAN SANCTIONS 08:05: BBC Radio 4

    One more from Malcolm Bracken on Today. He doesn't mince his words. He says: "Putin has looted an enormous amount of money from the Russian people." Mr Bracken adds he doesn't think the aim of sanctions will be to "devastate the Russia economy or isolate it from the world." But squeezing "the cronies" will be language Mr Putin can understand, he says.

     
  12.  
    NEXT PROFITS 07:53:
    Woman in picture

    Next also has results. First half profits at the clothing and homeware retailer rose 10.7%. Next tells investors to stand by for better profits of between £775m and £815m. Sales at the physical stores were up 7.5% and through the Next Directory were 16.2% higher.

     
  13.  
    BP PROFITS 07:43:

    BP says rising oil and gas production from new or recently started projects led to increased processing of heavy crude oil by the newly-modernised Whiting refinery contributed to operating cash flow of $7.9bn in the quarter. Total operating cash flow for the first half of 2014 was $16.1bn.

     
  14.  
    RUSSIAN SANCTIONS 07:36: BBC Radio 4

    The purpose of sanctions is to target the regime and [Russian president] Putin's cronies, not really the Russian people, Malcolm Bracken, analyst at Redmayne Bentley, tells the Today programme. "The mismatch," he says "Is that Russia needs German money from gas sales even more than Germany needs Russia gas." Germany can get its gas from countries other than Russia, he adds. But Putin can impose far greater economic pain on his people than Angela Merkel can on hers.

     
  15.  
    MORRISON'S CHAIRMAN 07:30:
    Signage for Morrisons supermarket on a trolley handle

    There's confirmation that former Tesco finance director Andrew Higginson will become the the new chairman of rival supermarket Morrison's when Sir Ian Gibson retires in 2015. Mr Higginson will join the board on 1 October as non-executive deputy chairman. He was finance director at Tesco between 1997 and 2012. He is currently chairman of Poundland, N Brown Group and McCurrach UK as well as a non-executive director at BSkyB.

     
  16.  
    BP PROFITS 07:17:
    British Petroleum sign

    BP has reported profits (second-quarter replacement cost profit - which strips out the effect of oil price movements) of $3.2bn, compared with $2.4bn a year earlier.

     
  17.  
    BIG CHEESE 07:13: BBC Breakfast
    Cheese

    The biggest event in the global cheese calendar starts today in Nantwich in Cheshire. Steph McGovern is at the International Cheese Fair for Breakfast along with the 4,500 cheeses there. Andrew Loftus, agriculture manager for Morrison's supermarkets says: "Customers need a big variety, the block cheese, the cheddars, but we also have our own range that we cut and grate in our factories."

     
  18.  
    BANKING ETHICS 07:03: Radio 5 live

    Control Risks' Charles Hecker on Wake Up to Money pulls together the two big topics of the morning - Russia and banking ethics. He says it's the ethics that attract them: "There is a reason why the British banking sector is by a mile the preferred destination for Russian financial transactions. It's seen as transparent and liquid market that is well regulated and is seen as clean." And they also like the flight time and the restaurants, he says.

     
  19.  
    UBS RESULTS 06:53:
    The logo of Swiss bank UBS

    Swiss bank UBS reports second quarter net profit of 792m Swiss francs (£516m), up from 690m francs last time. Results were whacked last year by a $885m settlement with the US housing regulator over the mis-selling of mortgage-backed bonds. The bank has still had to set aside 254m euros (£165.4m) this year, mainly to settle legal claims that it helped wealthy Germans to dodge taxes.

     
  20.  
    RUSSIAN SANCTIONS 06:41: BBC Radio 4

    In case you were wondering why sanctions were back on the news menu, last week, European leaders agreed there should be tougher sanctions on Russia after Ukrainian separatists brought down Malaysia Airlines MH17. This week they decide what sanctions should be applied and against whom or what.

     
  21.  
    BANKING ETHICS 06:31: Radio 5 live
    Triumph of Virtue and Nobility

    Would getting bankers to swear an oath promising good behaviour work? That's a suggestion by one think tank, ResPublica. It wants to introduce "Virtuous Banking". But the chairman of the Banking Standards Review Council, Sir Richard Lambert, tells Wake Up to Money an oath won't help to bring that about.

     
  22.  
    GAS GUZZLER 06:21:
    Mayor of London Boris Johnson

    London mayor Boris Johnson wants the drivers of diesel cars to pay an extra £10 - on top of the congestion charge it should be noted - for the pleasure of driving into the centre of the capital according to a report in the Daily Mail today. Other cities are also considering introducing low-emission zones to crack down on diesel fumes. These cars were once encouraged as being less polluting...

     
  23.  
    RUSSIAN SANCTIONS 06:08: Radio 5 live

    More from Charles Hecker. He tells Wake Up to Money: "I don't think anybody is that keen on sanctions that are going to impact on their own economic sectors." Part of the problem with European sanctions against Russia is the French have defence deals with Russia, there is a substantial amount of Russia money in the UK's financial services sector and Germany has energy deals with Russia, he adds

     
  24.  
    RUSSIAN SANCTIONS 06:01: Radio 5 live

    Charles Hecker of consultancy Control Risks tells Wake Up to Money targeted sanctions, whether against sectors of the Russian economy or against individuals, would have a potential impact and suggests the Russian economy is already teetering on the edge of recession. But he adds both Cuba and Iran have been subject to far more stringent sanctions and that further sanctions against Russia are unlikely to change the country's behaviour.

     
  25.  
    06:00: Rebecca Marston Business reporter, BBC News

    Yes, we're back. And we're here: bizlive@bbc.co.uk @bbcbusiness - should you wish to get in touch.

     
  26.  
    06.00: Matthew West Business Reporter

    Morning everyone. Yesterday afternoon we had a £218m fine for Lloyds for its part in the 2012 Libor scandal, while the think-tank ResPublica has suggested this morning bankers should take an oath - a bit like doctors - to fulfil their "proper moral and economic purpose". We also have second quarter trading updates from BP and Next this morning, plus more on Russian sanctions.

     

Features

From BBC Capital

Programmes

  • A digger operated via an Oculus Rift and a controllerClick Watch

    Why controlling a heavy digger with a virtual reality helmet might improve safety

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.