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Ukraine crisis: Can a gas deal save Russia's economy?

The EU is optimistic it can close a deal between Russia and Ukraine that will bring gas flows back to Ukraine in time for winter. But even if tensions in the Ukraine crisis ease, Russia still has a lot of work to do to stabilize its economy amid Western sanctions.

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    Alexey Miller, CEO of Russian gas supplier Gazprom leaves a news conference of European Union Commissioner Guenther Oettinger in Berlin, Friday, Sept. 26, 2014. Trilateral gas talks between the European Union, Russia and Ukraine about gas supply from Russia for Europe during the upcoming winter took place in the German capital.
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A deal to ensure a steady flow of Russian gas to Ukraine this winter may keep Ukrainian homes warm and factories churning out products as long as Kiev pays past bills for gas and remains current on new deliveries.

But even if the tentative agreement leads to a further easing of tensions between the two countries and a resultant end to Western sanctions against Moscow, the Russian economy will remain at risk, according to the World Bank.

Guenther Oettinger, the European Community's energy commissioner, said Sept. 26 in Berlin that under the deal, Ukraine would pay $3.1 billion to the Kremlin-run gas giant Gazprom by the end of this year to settle old debt. Russia then would provide at least 5 billion cubic meters of gas to Ukraine from October 2014 through March 2015, for which Ukraine must pay in advance.

The leaders of both countries still must approve the pact, but Oettinger was optimistic. “I’ve experienced tough but constructive negotiations over the past weeks,” he said. “Avoiding gas shortages is in the interest of all those involved.” (Related: Could Iran Be Trading Oil With Russia For Nuclear Support?)

To settle past gas debt, Ukraine would pay $2 billion to Gazprom by the end of October and the remaining $1.1 billion by year's end, with the help of a loan from the International Monetary Fund guaranteed by the EU. Russia, meanwhile, would supply at least 5 billion cubic meters of gas to Ukraine during the coming six months at a price of $385 per 1,000 cubic meters, paid in advance.

Oettinger's optimism applies only to the energy dispute between Moscow and Kiev, and that is merely a byproduct of basic conflict between the two countries, which includes Russia's unilateral annexation of Ukraine's Crimean peninsula in March and its suspected support of pro-Russian separatists in Ukraine.

Because of the conflict, the United States and the EU have imposed economic sanctions on Russia, aimed mostly at its valuable energy sector, keeping Western financing and technology out of Russian hands. Already the sanctions have led two large Western oil companies, ExxonMobil in the United States and Total in France, to suspend work with Russian partners, Rosneft and Lukoil, respectively.

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But even if Russia abruptly returned Crimea to Ukraine, withdrew all its forces suspected of being in Ukraine and credibly ended its support of the separatists – and if all this persuaded the EU and Washington to repeal the sanctions – Russia's staggering economy would see little improvement, according to the World Bank's biannual report on Russia issued Sept. 24. (Related: Another Western Energy Company Ends Russian Cooperation)

With the sanctions in place, the World Bank, said Russia’s gross domestic product would grow by no more than 0.3 percent next year and could even shrink if the Ukraine crisis gets worse, prompting a further escalation of Western sanctions. In 2016, the Bank said, GDP will rise by 0.4 at most.

Russia’s forecast is more optimistic, with a growth estimate of 1.2 percent in 2015 and 2.3 percent in 2016 due to growing investment. But the World Bank’s economist for Russia, Birgit Hansl, told reporters in Washington, “We don’t believe that investment growth is picking up as much as the government believes,” Hansl said. “Their assumption is that monopolies will be investing.”

Even if Western sanctions are quickly repealed, the World Bank report said, the economy would only inch upward by 0.9 percent in 2015, and 1.3 percent in 2016. Meanwhile, it said, any increase in geopolitical tensions would actually cause the economy to contract.

“The economy is at the threshold of recession and will remain there for a while," Hansl said.

By Andy Tully of Oilprice.com

More Top Reads From Oil Price.com:

Source: http://oilprice.com/Latest-Energy-News/World-News/World-Bank-Russia-Could-Be-On-The-Brink-Of-Recession.html

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