Ukraine misses gas payment. How will Putin respond?

Ukraine again missed a payment deadline late Monday on the natural gas it buys from Russia. Ukraine's debt to Russia over natural gas has led to supply cutoffs before, but there are other ways to resolve a long-standing dispute.  

Dmitry Astakhov/RIA Novosti/Reuters/File
Russia's Prime Minister Dmitry Medvedev (L) meets with Gazprom Chief Executive Alexei Miller in Moscow last week. Russian officials have defended recent gas price increases for Ukraine, and have called on Kiev to repay its debts in full.

Another past-due gas bill is ratcheting up tensions between Ukraine and Russia.

Ukraine missed a deadline late Monday to make its monthly natural gas payment to Gazprom, Russia's state-owned gas company, which Kiev already owes a reported $2.2 billion for fuel for heating and electricity. Monday's blown deadline further strains relations with its primary gas supplier, and echoes past gas disputes in which Russia shut off supplies to Ukraine.

That could happen again, analysts say, but there's hope that the two sides might come to a more peaceful solution to Ukraine's gas debts. Once Western financial aid starts flowing into Kiev's coffers, it can begin to pay off what it already owes Gazprom. As for future debts, it could challenge Gazprom's recent price hikes in an arbitration court – a case analysts say Kiev could win.

Still, Europe isn't taking any chances with a supplier that has a history of closing the spigot over unpaid bills. European Union officials have organized an emergency "gas coordination group," Reuters reported Tuesday, with Ukraine's energy minister and industry leaders. The aim is to determine how to supply Ukraine and others in Europe with gas by tapping storage or reversing pipelines in case Russia cuts off its supply. 

The likelihood of that happening is 50/50, according to Dmytro Naumenko, an energy analyst at the Kiev-based Institute for Economic Research and Policy Consulting.

"[A gas cutoff] may be used by Russia to escalate the political conflict with Ukraine," Mr. Naumenko writes via e-mail. "But in spring-summer season it's not a very efficient tool of pressure and thus will have limited impact on Ukraine."

A more likely outcome is that the two will negotiate a new price or will settle the dispute in an arbitration court. Ukraine's energy minister, Yuri Prodan, offered that possibility before a cabinet meeting Saturday. 

"If we don't come to an agreement [with Russia] then there is a procedure laid out in our contract, going to the arbitration court in Stockholm," Mr. Prodan said, as reported by Reuters. "We are not trying to break our contract but to set up a fair price like in Europe."

Last week Gazprom nearly doubled Ukraine's gas price from a discounted $268.50 per 1,000 cubic meters to $485 per 1,000 cubic meters. It's the result of Moscow canceling two major discounts it had signed with Ukraine's now-ousted president Viktor Yanukovych. 

That price makes it the highest price paid in Europe for Russian gas, and is "obviously unfair," according to Mikhail Korchemkin, head of Malvern, Pa.-based East European Gas Analysis. "Ukraine has good chances to winning [an] arbitration trial," Mr. Korchemkin writes via e-mail.

Meanwhile, Russian officials defended the increase as a market price, and have called on Kiev to repay the debt in full. 

"Ukraine received 1.956 billion cubic meters of gas in March and so far no payments have come for these supplies," Gazprom head Alexei Miller said late last week, according to the transcript of a meeting with Russian Prime Minister Dmitry Medvedev. "We hope that in the near future Ukraine will start settling its debts and paying for current supplies, though we see that the situation is not improving, but only getting worse."

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