Search

Russia Invokes $2 Billion Ukraine Gas Debt Amid Crimea Crisis

By Daryna Krasnolutska, Kateryna Choursina & Anna Shiryaevskaya
March 07, 2014 4:32 PM EST 184 Comments
A Ukrainian soldier waits inside the Sevastopol tactical military brigade base in Sevastopol on March 3, 2014.
Photographer: Filippo Monteforte/AFP via Getty Images
A Ukrainian soldier waits inside the Sevastopol tactical military brigade base in Sevastopol on March 3, 2014.

Russia said Ukraine’s natural gas debt climbed to almost $2 billion and signaled supplies may be cut, ratcheting up pressure on its neighbor as they scrap over the future of the Black Sea Crimea region.

Ukraine hasn’t made its February fuel payment and owes Russia $1.89 billion, according to gas export monopoly OAO Gazprom (OGZD), which halted supplies to Ukraine five years ago amid a pricing and debt dispute, curbing flows to Europe. Lawmakers in Moscow said they’d accept the results of a March 16 referendum on Crimea joining Russia as Arseniy Yatsenyuk, Ukraine’s premier, reiterated that his cabinet deems the vote illegal.

While racing to seal a bailout, Ukraine is struggling to keep hold of Crimea after pro-Russian forces seized control of it in the wake of Moscow-backed Viktor Yanukovych’s ouster as president. The standoff over the peninsula, once part of Russia and home to its Black Sea Fleet, prompted Western governments to threaten President Vladimir Putin with sanctions and Russia to underscore its clout as an energy supplier.

Related:

“My gut feeling is they wouldn’t want to see a disruption going into western Europe, politically that would not be the best thing to happen at the moment,” Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects Ltd. in London, said of Russia in a phone interview. “They are quite happy to put greater pressure on the prevailing government in Ukraine and certainly a gas supply disruption in March would be painful for the Ukrainians.”

Hryvnia, Bonds

Ukraine’s international bonds due in June fell 0.2 percent to 92.89 cents on the dollar as of 8:01 p.m. in Kiev, increasing the yield 1.2 percentage points to 41.207 percent. The hryvnia weakened 0.4 percent to 9.23 per dollar, data compiled by Bloomberg showed.

The central bank in Kiev bought dollars on the foreign-exchange market, the Interfax-Ukraine news service reported, citing traders.

Ukraine is a key transit nation for Russian gas to Europe, whose passage was halted for about two weeks in 2009 amid a dispute over supply and transit pricing and Ukraine’s gas debt between the neighboring nations.

“We can’t supply gas for free,” Gazprom Chief Executive Officer Alexey Miller said in the statement. “Either Ukraine pays off its debt and pays for current deliveries or there’s a risk of a return to the situation we saw at the start of 2009.”

‘Real Danger’

Ukraine had 13.1 billion cubic meters of natural gas in storage facilities as of Jan. 12, according to Ukrtransgaz, a unit of state gas company NAK Naftogaz Ukrainy. The country needs to import about 30 billion cubic meters of the fuel a year, in addition to domestic production of about 20 billion cubic meters, Energy Minister Yuriy Prodan said March 5.

A gas cutoff is “an absolutely real danger because whatever Gazprom’s commercial motives -- and they want to sell their gas and do their business -- the problem is that the political relationships obviously are worse than they have ever been and the debt is very big,” Simon Pirani, senior research fellow at Oxford Institute for Energy Studies, said by phone.

There’s no indication that there’s “much risk” of a gas shortage in Ukraine, White House spokesman Josh Earnest told reporters traveling with U.S. President Barack Obama on Air Force One.

“Russia prides itself on being a reliable source of energy to countries around the world,” and it may not want to “undermine” its reputation, Earnest said.

IMF Talks

As Gazprom released its statement, Yatsenyuk was meeting in Kiev with an International Monetary Fund mission over a bailout. The country needs “urgent” financial aid, he said on the government’s website.

The Washington-based lender is prepared to support Ukraine’s program for economic change and is impressed by the government’s commitment, European department director Reza Moghadam said in a statement.

Ukraine’s economy is suffering in the wake of three months of street protests that toppled Yanukovych after at least 100 demonstrators and policemen were killed. While Russia halted disbursement of a $15 billion rescue package after Yanukovych fled to Moscow, Europe and the U.S have pledged financial aid.

The European Commission, the European Union’s executive arm, this week outlined an 11 billion-euro ($15 billion) package of loans and grants for the coming years tied to the government in Kiev agreeing on an IMF loan.

U.S. Aid

While the Republican-run U.S. House of Representatives passed a bill, 385-23, on March 6 to allow $1 billion in loan guarantees for Ukraine, the Senate controlled by Obama’s Democratic party has no immediate plans to follow suit.

Leaders in the Senate are sensitive to trying to give the administration room to maneuver as circumstances change rapidly, said a Democratic aide, who spoke on condition of anonymity to discuss party strategy.

Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters March 4 that he wanted to move “as soon as” possible on aid to Ukraine.

Senate Foreign Relations Committee Chairman Bob Menendez, a New Jersey Democrat, is working with committee Republicans on a package of aid for Ukraine and sanctions against Russia. The panel is scheduled to vote on the legislation, which hasn’t yet been made public, on March 11.

Lavrov’s Warning

Russian Foreign Minister Sergei Lavrov warned U.S. Secretary of State John Kerry against sanctions in a phone call today, according to Russia’s Interfax news agency.

“Lavrov cautioned against hasty and ill-considered moves that can damage Russian-American relations, especially sanctions, which would inevitably boomerang on the United States,” the Russian Foreign Ministry said in a statement cited by Interfax.

Ukraine’s political crisis was sparked when Yanukovych rejected an EU integration pact in November in favor of a $15 billion bailout from Russia, which opposed the deal. The focus has now shifted to the separatist mood in Crimea.

Former Ukrainian Premier Yulia Tymoshenko, who was jailed under Yanukovych’s rule, said any referendum on the region would have to include all Ukrainians and can’t be conducted in the presence of Russian forces. The vote offers a choice between continued autonomy within Ukraine and joining Russia.

“Today there are well-armed Russian troops,” she said at a conference in Dublin before going to Berlin for medical treatment. “I would like to ask whether one can have an open referendum under the Kalashnikov.”

‘No Concessions’

Yatsenyuk told reporters in Kiev today that the international community won’t recognize the referendum.

“I want to be very clear: Crimea was, is and will be an integral part of Ukraine,” he said. “No concessions. Full stop.”

Russia’s parliament will discuss a bill that would pave the way for the switch this month. Both houses said today they’d back the move, which has drawn rebukes from the West as Putin opens the 2014 Paralympic Games in Sochi.

The EU and the U.S. accuse Russia of being behind the separatist unrest in Crimea, a claim Putin’s spokesman, Dmitry Peskov, denied again today. The West has urged Russia to pull back, and began yesterday to impose sanctions.

The U.S. banned visas for Russian officials and others it said were complicit in violating Ukraine’s sovereignty. Obama signed an order authorizing financial sanctions, while EU leaders halted trade and visa talks with Russia and threatened punitive economic measures.

‘Serious Consequences’

The U.S. sent six F-15 fighter jets to Lithuania and will dispatch 12 additional F-16s to Poland, the two countries’ defense ministries said yesterday. The U.S. Navy sent the guided-missile destroyer USS Truxtun into the Black Sea in what it called a routine visit unrelated to events in Ukraine.

If Russia doesn’t back down, it risks “serious consequences from Europe,” French Foreign Minister Laurent Fabius said today on France Info radio. The U.S. and allies including Japan this week halted preparations for the Group of Eight summit planned for June in Sochi.

Putin and Obama hold differing views on the crisis, though U.S.-Russia relations shouldn’t be sacrificed, the Kremlin said in a statement on the leaders’ latest phone conversation. Russia says the armed men who seized key facilities in Crimea are acting independently amid perceived threats to Russian speakers following the change of power in Kiev.

Yanukovych fled for Russia days after signing an EU-brokered peace accord. He says he was forced to leave amid threats to his life and claims to still be Ukraine’s true leader, a view Russia shares.

Trust ‘Exhausted’

Calls for Russia to hold joint negotiations with Kiev aren’t credible after the Ukrainian government failed to stand by the earlier accord, Kremlin spokesman Dmitry Peskov said.

“This is laughable,” Peskov said on state television today. “Because our trust in such ‘guarantees’ has been probably been exhausted with what happened following the document signed by Yanukovych.”

Lawmakers in Crimea voted yesterday on a nonbinding measure to become part of Russia if voters agree in the referendum. They also asked Putin to begin drafting procedures for making the province a part of the Russian Federation, the state-run Crimean Information Agency reported. The move would reverse the 1954 transfer of Crimea to the Ukrainian Soviet Socialist Republic by Soviet leader Nikita Khrushchev.

People who identify themselves as ethnic Russians comprise 59 percent of Crimea’s population of about 2 million, with 24 percent Ukrainian and 12 percent Tatar, 2001 census data show.

Russian Troops

Russia has 16,000 troops in Crimea, according to the Russian ambassador to the UN, Vitaly Churkin. Ukrainian border guards put the number at 30,000, the Interfax news service said today. Refat Chubarov, leader of the executive body of Crimea’s Tatar population, called yesterday for a United Nations peacekeeping mission to ease tensions.

Observers from the Organization for Security and Cooperation in Europe were blocked at a Crimean checkpoint by armed men, the AFP news service reported today.

The mission ignored the “OSCE cornerstone principle of consensus, without accounting for the opinions and recommendations of the Russian side,” the Russian foreign ministry said in a statement, adding that the delegation also failed to wait for invitations from Crimean authorities.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net Larry Liebert, Michael Shepard

Comments
More related content »