Could gas deal signal Russia - Ukraine detente?

The accord is good news for millions of Ukrainians, who depend upon Russian gas to heat their homes and power their industries.

Sergei Chuzavkov/AP/File
A Ukrainian worker operates a valve at a gas storage point in Bil 'che-Volicko-Ugerske underground gas storage facilities in Strij, outside Lviv, Ukraine, May 21, 2014. Russia will resume shipping natural gas to Ukraine after Kiev pays off its first debt installment for past supplies of gas next week, officials said Friday, Oct. 31, 2014.

The very real danger that many Ukrainians could freeze this winter has been averted thanks to a hard-fought deal, brokered and guaranteed by the European Union, that was finalized  between Kiev and Moscow on Friday.

The deal embodies major compromises, say some analysts, despite the delays and acrimony that dogged weeks of negotiations. That could indicate a possible detente between Russia and Ukraine, who have been in a virtual state of war since early this year.

The accord certainly comes as very good news for millions of Ukrainians, who depend upon Russian gas to heat their homes and power their industries. The government had been working up plans to drastically cut energy consumption in a bid to stretch meager gas supplies through the winter. Not until last week, as temperatures hovered around 0 degrees C. and street protests proliferated, did authorities in Kiev finally agree to switch on the gas-fired central heating plants that serve most of the city's big Soviet-era apartment blocs.

"This agreement means that there's now no danger we will find ourselves without the means to warm up amid freezing temperatures this winter," says Vladimir Panchenko, chairman of the independent Institute of Economic Studies and Political Consultations in Kiev. "The Ukrainian government realized that this was a serious risk, and thankfully took steps to avert it."

But it won't come cheap for cash-strapped Ukraine, which had been holding out for the price of $268 per thousand cubic meters [tcm] of gas that the pro-Russian regime of former President Viktor Yanukovych had been paying. Ukraine will now have to pay the Russian-calculated price of $378 per tcm for the 4 billion cubic meters it wants to receive between November and March, and it will have to put up cash in advance.

Gazprom head Alexei Miller told journalists that Russia could start pumping gas to Ukraine as early as this weekend – provided Kiev stumps up at least part of its debt arrears plus $1.45 billion to pay for the new gas.

Still, Russia has compromised on those debts, say experts. Kiev owes billions of dollars for gas received between the February revolution that overthrew Mr. Yanukovych and June, when Gazprom shut off supplies to Ukraine. Until recently, Gazprom has calculated Ukraine's unpaid bills at $5.4 billion, based on Russia's cancellation of discounts that had been given to Yanukovych. But the deal struck Friday allows Ukraine to clear its arrears in two payments totaling just $3.1 billion by year's end.

"That means that all the gas Ukraine received up to June is calculated at the pro-Yanukovych price of $268 per tcm," says Dmitry Alexandrov, chief investment officer at Univer Capital, a Moscow-based investment firm. "That's quite a remarkable compromise on the Russian side."

The European Commission, the European Union's executive body, brokered the deal and reportedly extended financial guarantees to Ukraine in case of Russian price hikes.

Experts say the EU's primary concern is to prevent any recurrence of the past "gas wars" that twice before left downstream customers in Europe with potentially dangerous energy shortfalls in the dead of winter.

But it also, just maybe, means that the two sides can address their wider dispute in a similar spirit, says Mr. Alexandrov.

"This was the first real agreement between Russia and Ukraine since Yanukovych was overthrown in February," he says. "It permits us to hope that the two sides might be able to sit down and solve problems in other areas as well."

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