MOSCOW – Russia's natural gas company Gazprom will stop energy shipments to Ukraine and sharply raise the price for future deliveries if it doesn't pay a $2 billion debt by New Year's Eve, the company's chief executive warned Tuesday.
Ukraine faces a replay of the January 2006 crisis, when a cutoff of Russian gas shipments resulted in a brief reduction of supplies in Europe. The state-run Gazprom supplies a quarter of the gas used by EU nations, and around 80 percent of it goes through Ukraine.
But this year could be worse. The financial crisis has hit Ukraine harder than most other European countries, and Kiev was recently forced to seek a $16.5 billion loan from the International Monetary Fund.
"The countdown has started," Gazprom CEO Alexei Miller said in a televised statement. "If Ukraine doesn't pay off the debt by Dec. 31, Gazprom will have no grounds to continue shipping gas to Ukraine."
Gazprom spokesman Sergei Kupriyanov said Miller was continuing to negotiate with Oleh Dubina, the head of Ukraine's gas company Naftogaz, but his comments reflected the tense atmosphere of the talks.
"My boss is now sitting with Dubina in both the direct and figurative sense of the word," Kupriyanov said, referring to the fact that Dubina's name can mean "blockhead" in Russian.
Gazprom's spokesman said the company would "do its best" to ensure supplies to Europe, adding that Russia has a valid transit contract with Ukraine that is separate from the supply deal.
He said Russia and Ukraine are discussing different options for the debt settlement, including the possibility of Gazprom paying Ukraine in advance for transit, with the money to go toward repaying the debt.
The Interfax news agency reported from Kiev that the Ukrainian government has approved a transit fees-for-debt swap, citing an unnamed participant. Naftogaz spokesman Valentyn Zemlyansky denied the report, but said Ukraine still hopes to reach an agreement before Thursday.
Gazprom is demanding that Ukraine pay $418 per 1,000 cubic meters for future deliveries, roughly what Russia charges other European consumers. That would more than double the current price of $179.50.
Ukraine insists the price should be significantly lower, but Kupriyanov said Ukraine had to pay off its debt first before it can negotiate a lower price.
While Gazprom's European customers now pay the higher price, the cost of gas is expected to fall sharply in coming months as a result of the steep drop in the price of oil.
For months, Russia and Ukraine have been locked in a dispute over past and future natural gas shipments from Gazprom, which has seen the value of its stock slip by almost 75 percent since the beginning of 2008.
Gazprom's net earnings climbed to $10.2 billion in an unaudited 2008 first-half earnings report released Tuesday. The same report showed the company's debt has dropped from $84.5 billion at the end of 2007 to $69 billion on June 30. In recent years, the state gas company has spent billions to acquire oil and other assets on behalf of the Kremlin.
Analysts said Tuesday that Ukraine would be hard pressed to pay the $418 price for future gas deliveries.
"This year is especially tough because the financial crisis has hit Ukraine hard," said Ron Smith, chief strategist at Alfa Bank. "I'm sure Gazprom's suggesting the debts can be exchanged for Gazprom ownership of the Ukrainian transit pipes, which, of course, Ukraine will not do."
Gas analysts noted that Gazprom reviews gas prices in its European contract every quarter to reflect changes in energy prices. Valery Nesterov, a gas analyst with Troika Dialog, predicted that Ukraine may agree to the $418 price in the short run, expecting the price to decline in the future.
"It would be hard for Ukraine to come to terms with $300 to $400, but in the next three or five years we are not going to see this level of prices," Nesterov said.