Ukraine’s imports of Russian gas – how a deal might be reached

The current gas dispute between Russia and Ukraine is potentially the most serious yet. It takes place against the background of the two countries’ deteriorating relations following the collapse of the Yanukovich government, the annexation of Crimea by Russia and the military conflict in eastern Ukraine. In June, negotiations between Russia and Ukraine on the pricing of gas imported to Ukraine broke down, gas deliveries were halted, and Gazprom (the exporter) and Naftogaz Ukrainy (the importer) began arbitration proceedings against each other.

The main obstacle to agreement on gas issues is political. Throughout the post-Soviet period, commercial agreements between Gazprom and importing companies in Ukraine were underpinned by inter-governmental agreements (IGAs). From 2006, contracts were signed without specific reference to IGAs, but the Russian and Ukrainian governments continued to participate in discussions of gas import and transit, and corporate negotiations were conducted alongside political negotiations. This year, political relationships have come close to breaking down, and the European Commission, concerned at the possible impact of a Russia-Ukraine dispute on the transit of Russian gas to Europe, has joined three-sided negotiations on the unresolved gas issues. By mid-June these had come to a standstill.

This comment assesses the commercial and political context of recent times leading up to the current impasse and places the price levels at the core of the commercial dispute in the context of developments in European traded markets, concessions on Russian contract price levels in North West Europe and prevailing prices in other FSU states.  This comment is the latest in a series of publications by the OIES Natural Gas Research Programme focusing on the continuing tension in natural gas matters – commercial and political between Russia and Ukraine.

By: Simon Pirani