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Ukraine Threatens Oil and Gas Cut-Off in Russia Sanctions

By Daria Marchak and Volodymyr Verbyany
August 08, 2014 2:08 PM EDT 669 Comments
The list of possible sanctions includes a “complete or partial ban on the transit of all resources,” Prime Minister Arseniy Yatsenyuk told reporters in Kiev today in response to a question about halting gas flows.
Photographer: Vincent Mundy/Bloomberg
The list of possible sanctions includes a “complete or partial ban on the transit of all resources,” Prime Minister Arseniy Yatsenyuk told reporters in Kiev today in response to a question about halting gas flows.

Ukraine threatened to block Russian oil and gas supplies to Europe in new sanctions against Vladimir Putin’s government, which it blames for a separatist uprising that has ravaged the country’s east.

Ukraine, which no longer receives any gas from Russia but acts as a conduit for its neighbor’s European customers, is considering a “complete or partial ban on the transit of all resources” across its territory, Prime Minister Arseniy Yatsenyuk told reporters today in Kiev. It may also ban Russian planes from its airspace and cut defense-industry cooperation.

“There’s no doubt that Russia will continue its course -- started a decade ago -- aimed at banning imports of Ukrainian goods, limiting cooperation with Ukraine, pressure and blackmail,” Yatsenyuk said. “In the most negative scenario for Ukraine, losses during the first year may reach $7 billion, not only because of sanctions but also because of the Kremlin’s aggressive policy.”

Unrest in Ukraine

The threat may signal that the government in Kiev calculates it has little to lose. It comes a day after Russia banned food imports from Ukraine, the U.S., the European Union and other countries that blame it for stoking the worst geo-political crisis since the Cold War. Gas prices in western Europe rose on the news of Ukraine’s sanctions plan, which would require parliamentary approval.

Less Dependent

Ukraine hasn’t received Russian gas since June 16, when OAO Gazprom cut its supplies in a debt and pricing dispute. The country will manage at least until the end of the year by using stored gas and reducing consumption, according to NAK Naftogaz Ukrainy Chief Executive Officer Andriy Kobolyev.

Ukraine transported 86.1 billion cubic meters of Russian natural gas and 15.6 million metric tons of oil last year, according to a February bond prospectus. That’s about half of Russia’s total gas exports, though less than 7 percent of oil shipments.

“That’s pretty significant, so I can see why prices are going crazy,” Trevor Sikorski, head of gas, coal and carbon at London-based consultants Energy Aspects Ltd., said by phone. “It is quite an extraordinary statement. Western European governments are not going to be happy with this.”

Winter gas in the U.K., Europe’s biggest market, jumped as much as 2.6 percent to 62 pence a therm ($10.42 per million British thermal units), the highest level since July 29 on the ICE Futures Europe exchange. Dutch gas for September rose as much as 2.8 percent to 18.60 euros ($24.91) a megawatt-hour on the Title Transfer Facility hub.

Other Routes

Gazprom stopped shipping gas through Ukraine for almost two weeks in 2009, leaving several EU states including Bulgaria and Slovakia without supplies. It has since worked on other transit routes, including opening Nord Stream, which pumps gas under the North Sea, in 2011. Gazprom also plans to complete the South Stream project with European utilities such as Italy’s Eni SpA (ENI) and France’s Electricite de France SA, by 2019.

Russia also has routes to ship oil that bypass Ukraine, and restrictions would have a bigger effect on Ukraine’s budget and EU countries, Igor Dyomin, a spokesman for Russia’s oil pipeline operator, OAO Transneft, said by phone. The Russian Energy Ministry and Gazprom declined to comment immediately.

Bond Losses

In Washington, the American Petroleum Institute lobbying group said Ukraine’s announcement underscored the need to speed the approval of natural gas exports, even if U.S. gas won’t replace Russian fuel in Europe anytime soon.

“If policy makers act now to allow free trade, U.S. energy exports can further reduce the impact of unrest overseas and limit the influence of foreign suppliers that dominate other markets,” John Felmy, API’s chief economist, said in a statement. The group’s members include Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX)

Ukrainian government bonds extended losses, with the yield on the dollar note maturing in July 2017 climbing 10 basis points to 11.04 percent. The hryvnia also weakened even after the central bank intervened yesterday to stabilize the currency. Russian stocks gained after losses yesterday in the wake of the import ban. The Micex Index (INDEXCF) rose 1.1 percent in Moscow.

Ukrainian lawmakers will vote Aug. 12 on the sanctions bill, which was approved by the cabinet today. It would enable the government to use 26 types of penalties, including possible asset freezes and bans on participation in state asset sales.

The government put forward a list of 65 companies, mostly Russian, and 172 individuals against whom penalties might be imposed. Russia’s Energy Ministry is also assessing risks because of U.S. and EU sanctions and will take measures to bolster the oil and gas industry, including steps related to replacing sanctioned equipment, Energy Minister Alexander Novak said in a statement today.

The one-year Russian restrictions on fish, meat, fruit, vegetables and dairy goods leave a $9.5 billion hole for domestic companies and developing nations such as Brazil to fill. The ban, which also applies to Canada, Australia and Norway, is designed to “protect national interests,” according to a decree signed by Putin.

Latest Fighting

Ukraine’s army engaged separatists, who’ve been pushed back toward the cities of Donetsk and Luhansk by a government offensive in recent weeks, in 44 firefights during the past 24 hours, military spokesman Andriy Lysenko told reporters in Kiev today. Seven soldiers and eight border guards were killed, he said.

Tens of thousands of Donetsk’s 1 million people have fled amid civilian deaths, power cuts and water shortages. The city council has accused both sides of shelling. Lysenko rejected that accusation, saying only the rebels are doing so.

Ukraine is continuing to come under fire from Russian territory, Lysenko said, accusing its neighbor of keeping up a supply of heavy weapons, equipment and vehicles to the rebels.

Putin is facing increasing isolation over the rebellion in Ukraine, which ignited when he annexed Crimea from Ukraine in March. More than four months of fighting has killed almost 1,400 people and displaced hundreds of thousands more, according to United Nations estimates.

To contact the reporters on this story: Daria Marchak in Kiev at dmarchak@bloomberg.net; Volodymyr Verbyany in Kiev at vverbyany1@bloomberg.net

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

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