Saturday, April 19, 2014

Putin Could Stop Selling Gas to Ukraine. Here's Why He Won't

Russian President Vladimir Putin holds a meeting with ministers to discuss the situation in Ukraine and natural gas transportation to Europe on April 9

For a time this week, Vladimir Putin looked ready to turn off the gas. In an April 10 letter to 18 European heads of state, he warned that Russia could “completely or partially cease gas deliveries” to Ukraine, in turn threatening Western Europe, which gets about 15 percent of its natural gas from Russia via Ukrainian pipelines.

But on April 11, the Kremlin appeared to soften its stance, saying that Russia didn’t plan to cut off Ukraine’s supply and promising it would honor its contracts with European customers.
Russia has played hardball with Ukraine before, most recently in 2009 when it shut off gas flows for two weeks in the middle of winter, causing supply disruptions across southeastern Europe. So why is Putin hesitating now?

Partly, it’s a question of timing. Because of reserves accumulated during an unusually warm winter, Europe doesn’t urgently need fresh gas supplies right now. More important, though, is Russia’s economy, which is “more vulnerable than has been perceived,” says emerging-markets economist Neil Shearing of Capital Economics in London.

All told, oil and gas sales to Europe account for 10 percent of Russia’s gross domestic product, according to Capital Economics.

Plagued by sagging growth, a weakening currency, and rising capital flight, “Russia needs money from its energy exports more than ever,” Shearing says. And there’s no practical way for Moscow to cut off Ukraine’s supply without hurting European customers that get their deliveries through Ukrainian pipelines.

In fact, Moscow still needs Ukraine as a customer, too, even as it complains bitterly that Kiev owes it billions in back payments for gas shipments. Under an agreement signed late last year by Putin and former President Viktor Yanukovych, Ukraine was to pay some $9.4 billion this year for heavily discounted gas from Gazprom—equaling some 6 percent of total revenue at the Russian state-owned gas export monopoly, according to the Oxford Institute for Energy Studies.

That deal has now been scrapped, and Russia is demanding higher prices. But Moscow probably won’t get a windfall, as Kiev is expected to reduce the volume of its Gazprom purchases and turn to European suppliers. These suppliers also buy from Russia, but in recent years they have squeezed big price concessions from Gazprom.

Ukraine and Western Europe certainly can’t afford to walk away from Russian gas, says Jonathan Stern, a senior research fellow at the Oxford Institute. “Without Russian gas, European gas prices would skyrocket. There’d be a massive increase in bills for everybody.” But an abrupt cutoff would be just as dangerous for Moscow, as it nurses a sick economy, Stern says. “It’s the last thing Putin needs.”

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