Russia and Ukraine have reached a compromise on gas supplies after nine years of conflicts. By the end of the year, Ukraine will repay debts and will start to make prepayments for gas imported from Russia. In turn, Russia agreed to a discount. The agreement was signed only for the forthcoming winter period, however, even if the parties adhere to the deal, this winter may not turn out to be an easy time.

“Special” price

On October 31] , Russia and Ukraine, with the assistance of the European Commission, signed a protocol in Brussels required for the provision of Russian gas to Ukraine this winter. The plan obliges Ukraine to pay $3.1 billion of a $5.3 billion gas debt by the end of the year as well as instituting a prepayment arrangement for additional gas. Moscow is providing Kyiv with a discount of $100/thousand cubic meters to the contract price via a decrease in the export duty. Therefore, the price of Russian natural gas for Ukraine in November-December 2014 will be $378/thousand cubic meters. What is the reason for Russia's "benevolence" towards its Europe-oriented neighbour?

The case is that without the discount of $100, the price would be plainly embarrassing. No country obtains Russian gas at such a price[e2] ! Ukraine pays for gas at inflated rates.

The prices Gazprom charges are generally commercial secrets separately dealt with in each contract with each company. Thus, there are no precise data on gas tariffs for European countries for 2014 and 2015. As for the average price, in September, Gazprom representatives said that the average export price of gas for 2015 is expected to be the same as this year — $350/thousand cubic meters. In 2013, the average annual price for EU member countries, according to Gazprom, stood at $387.

If we compare data from Gazprom, Interfax news agency and the Ukrainian State Statistics Service for the previous years, starting from 2012 the tariffs for Ukraine have been 7-12% higher than for EU countries.

In May 2014, Gazprom signed an agreement with  ENI on gas supplies to Italy. The price in the contract was $270-300/thousand cubic meters. Germany receives gas at $340. Gazprom is amenable to compromise with all European partners except for Ukraine. It sells gas to Ukraine at some "special" price. However, there are no economic reasons for such price discrimination.

Is siphoning off gas easy?

Russia has on several occasions stopped gas supplies to Ukraine. The first time it happened was in 2006 when then President Viktor Yuschenko said that a price of $230/thousand cubic meters was unacceptable to his country. Then Russia accused Ukraine of siphoning off gas meant for European consumers. Ukraine denied those accusations.

The conflict escalated in 2009, when Ukraine was deprived of gas supplies. Supplies were only resumed after contracts were signed. Ukraine fulfilled all obligations to supply Russian gas during these weeks and, unlike Russia, has joined the European Energy Charter which is legally binding on all parties. Conflict is underway

The Russia-Ukraine agreement reached in Brussels is an interim deal — to be in effect only until March 2015. After that time, Ukraine intends to sign a new agreement that would introduce a more acceptable price. Negotiations will not protect Europe from disruptions in Russian gas supplies.

The Russian gas monopoly needs to utilise Ukraine’s underground storage facilities to meet its obligations to European consumers. The capacity of these facilities is 32 billion cubic meters and the amount of gas already accumulated therein this season is 17 billion cubic meters. About 11-12 billion cubic meters can be taken from Ukrainian storage as some amount has to remain there. However, the problem is that Ukraine requires this gas to satisfy its own needs during the forthcoming winter. That means that Ukraine will not be able to provide enough gas.

In turn, that means that Europe should expect serious disruptions in gas supplies leading to a new round of the gas “blame game”, with Gazprom again accusing Ukraine of siphoning off gas. However, this time, Ukraine has installed measuring equipment on the gas pipeline so everything can be easily checked and Europe will most probably accuse Gazprom of the disruptions. So, the Russia-Ukraine-EU gas conflict is far from over.