Choke on there gas...

Ukraine tells EU to play rough with Russia on gas prices

Skeptics call the plan unrealistic but it’s a way of avoiding the political deadlock on sanctions.

BY AMERICA HERNANDEZ

Ukraine is telling the EU to give the Russians a taste of their own strong-arm tactics when it comes to gas prices.

EU countries have been quick to condemn Russia over Ukrainian reports of war crimes, but they're still reluctant to introduce sanctions that would cut their gas purchases from Moscow's export monopoly Gazprom for fear of undermining their economies. So, Kyiv is laying out a highly unorthodox gameplan for the Europeans — one that would require legalistic Brussels bureaucrats to be as cavalier toward contracts as Russia is toward international law.

Officials from Kyiv say the European Commission should take control of all EU gas purchases by designating one authority to negotiate a new price for Russian gas exports — one significantly lower than current spot rates. This new price would make it worthwhile for Gazprom to keep the gas flowing but drastically reduce the profits that fund its war in Ukraine. The price would also be pitched at a level to allow Ukraine to keep on earning transit fees — worth some $2 billion in 2020.

"There is a lot of opportunity for the EU to replace Russian gas, but it's really difficult to replace it in a short period of time without huge effects on the economy because its total share is 40 percent," Ukraine's Deputy Energy Minister Yaroslav Demchenkov told POLITICO.

The scheme would require the EU to designate a single buyer for Russian gas, instead of the current system of private companies negotiating with Gazprom.

"This designated entity would be buying gas on specific conditions set by authorities — by the Commission, but it's negotiable — and would release the gas onto an exchange in Europe so that all other traders have access to these volumes on equal terms," he said.

If Gazprom didn't like the idea of being deprived of its usual ability to play divide-and-rule among multiple EU buyers, Demchenkov said it would not have any choice but to face the new reality.

"On the key question, will Gazprom agree to this? Here we argue that Gazprom has no other options than to send gas to the EU," Demchenkov said. "Gazprom needs to export between 140 and 190 [billion cubic meters] of gas a year, and 80 percent plus of this can only go to Europe by pipeline."

Those volumes can't be rerouted to China via pipeline, while Russia's liquefaction capacity is still too small to export that amount via ship to Asian markets, he added.

Demchenkov's idea is one of a range of proposals making the rounds that seek to find a way of minimizing Russia's earnings while ensuring that the EU still gets Russian gas. Estonia, for example, is proposing that a large chunk of the money payable for gas should be held back in an escrow account until Russian soldiers have pulled out of Ukraine.

There is, however, skepticism that Brussels would be able to simply create a European super-entity to buy gas — fully backed up with legal authority to override current buying arrangements — especially given past failed efforts at buying gas as a bloc.

Jonathan Stern, founder of the Oxford Institute for Energy Studies' gas research program, called the Ukrainian proposal "completely unrealistic" and said that EU purchases of Russian gas are governed by long-term contracts entered into by private companies — many of which don't expire until 2030.

"These contracts sit above any national law, that's how they were drafted, so governments could not suddenly say, 'We've changed our minds, those contracts are no longer valid,'" Stern said. "No one's mentioning that."

Still, in potential support of Demchenkov's more maverick approach, trade lawyers have noted that Russia is unlikely to play ball in long, complex and expensive international arbitration settlements either. Companies seeking compensation for Moscow's attempts to stop them withdrawing from Russia are seen as unlikely to get their millions back. International arbitration cases with Russia could just turn into a dead end, putting some leverage back into the hands of the far bigger economic party: the EU.

Gazprom did not respond to a request for comment on Demchenkov's proposal. The European Commission said its joint gas purchase idea was still “a work in progress,” and that when European Energy Commissioner Kadri Simson met with Demchenkov the focus was not sanctions but rather the “EU’s support to Ukraine, including ensuring nuclear safety in Ukraine, securing fuel supply for the planting season and next steps for the electricity grid synchronization.”

Demchenkov's proposal is an effort to figure out how to punish Russia without imposing sanctions on energy exports — a step that requires unanimity among all 27 EU members, which currently appears impossible.

On Monday French President Emmanuel Macron spoke in favor of sanctioning Russian oil and coal. Italy has said it wouldn't veto sanctions on Russian gas, but Germany and Austria are dead against.

Hungary's Viktor Orbán, the Kremlin's closest ally in the EU, also just won a thumping election victory.

"We see very strong support from Poland and from Baltic countries, but we also see that a lot of countries are not ready even to discuss the [sanctions] issue," Demchenkov said.

EU officials are aiming to finalize a package of sanctions against Russia ahead of a meeting of EU ambassadors on Wednesday, but it's likely that measure will target oil and not gas.

Rather than sanction Moscow, Kyiv's single buyer scheme would encourage Brussels to propose between $300 and $350 per thousand cubic meters —  three or four times cheaper than current rates on EU spot markets, but a figure Gazprom has cited in the past as a fair price for Europe in normal times.

There are other factors that might bring Gazprom to the negotiating table — it's currently the subject of an EU antitrust probe into gas market manipulation, while its German subsidiary was temporarily seized by national authorities on Monday.

Russian President Vladimir Putin has threatened to stop gas exports to Europe if companies don't amend those their contracts to pay in rubles.

But Demchenkov argues Putin's threat is empty, and that Russia has few choices but to send its gas west — even under unpalatable conditions. Without access to European markets, Russia would only be able to send excess gas to its own storage facilities for four to six weeks before it would have to stop pumping.

"Then the two options Gazprom would have would be: kill its production or send this gas to the EU," he said.