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At last minute, Russia and Ukraine agree to new five-year gas deal. Here’s who won.

Source: Meduza
Gleb Garanich / Reuters / Scanpix / LETA

Moscow and Kyiv have reached a new agreement on Russian gas transit through Ukrainian territory. If the two countries had failed to replace the current transit deal, which expires at the end of the year, the Russian energy giant Gazprom threatened to cease all shipments through Ukraine to European consumers. The new agreement was reported just as the United States imposed sanctions against contractors building Nord Stream 2, a system of offshore natural gas pipelines from Russia to Germany across the Baltic Sea. The U.S. sanctions have already disrupted the project, which is reportedly 92-percent finished. Experts believe that American intervention will slow the pipeline's completion by a few months, as Russian and Chinese companies replace the Western businesses that bow out. It’s possible that the U.S. sanctions were a decisive factor in driving Russia to strike a deal with Ukraine. The agreement’s text is still unpublished, but negotiators have already explained the terms. Meduza’s Dmitry Kartsev looks at who came out on top.

The terms of the agreement, supply volumes, and the price

What Russia wanted: Gazprom wanted to sign a short-term deal for just another year or an extension of the current contract with Ukraine, which was signed in 2009. The Russian energy giant wanted a free hand after Nord Stream 2 comes online, which will carry a significant volume of gas from Russia directly to Europe under the Baltic Sea. The new pipeline system will sharply decrease Russia’s dependence on Ukraine’s gas transit network, and by late 2020 the Russian monopoly will likely be able to dictate strict terms to Ukraine.

What Ukraine wanted: It was critically important for Kyiv to negotiate a long-term contract, preferably for another 10 years. This would have insulated Ukraine against the risks associated with the launch of an alternative route for Russian gas. Kyiv sought a deal for 65 billion cubic meters per year (this year, almost 90 billion cubic meters was sent through Ukraine, and in recent years this figure has been growing). 

What happened: The new agreement is for five years. According to Ukraine’s Naftogaz Executive Director Yuriy Vitrenko, this was a “difficult compromise.” In this compromise, Ukraine got the supply volumes it wanted: 65 billion cubic meters in the first year, and 40 billion the next year. It’s still unclear what Ukraine’s transit tariff will be, but Ukrainian officials have indicated that the fee will rise from its current level.

But by lowering the total volume of gas and cutting Ukraine’s desired contract term in half, the deal is more beneficial for Russia. With U.S. sanctions potentially delaying Nord Stream 2’s timetable, a slightly longer contract could be just what Russia needed. Had Gazprom negotiated a one-year deal, it might have found itself unprepared to make the necessary shipments without Ukraine by 2021, forcing it back to the negotiating table in 12 months. With a five-year deal, Gazprom protected its market position and won time to resolve the disputes over Nord Stream 2. Meanwhile, Ukraine will probably be forced to sign another, less favorable agreement with Gazprom in five years, given the unlikelihood that alternative sources of fuel will emerge before 2025. 

Litigation

What Russia wanted: One of Russia’s key demands, reiterated specifically by President Putin, was that Kyiv abandon its legal claims against Gazprom. The litigation in question concerned several lawsuits in Stockholm Arbitration filed against each other by Gazprom and Naftogaz. Ukraine has already won one of these cases, where a judge ruled that Russia was sending less gas than it had agreed. Gazprom was ordered to pay about $3 billion (roughly equal to the sum Moscow pays in transit tariffs for a year), under threat that European officials would seize the Russian company’s bank accounts and property if it refused. In total, Ukraine is suing Gazprom four nearly $12 billion.

What Ukraine wanted: The Ukrainian authorities demanded that Gazprom hand over the $3 billion already awarded in arbitration, and said they wouldn’t back down from other pending lawsuits. The only compromise Kyiv said it would entertain was that Gazprom could pay the outstanding amount directly in gas supplies. 

What happened: Gazprom committed to paying the $3 billion by the end of the year. In return, Kyiv agreed to withdraw its remaining lawsuits and refrain from filing any new claims. On the one hand, this could be described as a victory for Gazprom, which settled on a steep but feasible price to close this chapter in its history with Ukraine. On the other hand, even victory in arbitration didn’t guarantee that Kyiv would ever get the money from Gazprom, which would have required scouring all of Europe and lobbying for restrictions on the Russian energy giant. This way, Ukraine is getting the money here and now, as well as guaranteed income for the next five years.

Direct deliveries

What Russia wanted: Gazprom and Russia’s political leadership offered to resume selling gas directly to Ukraine, which was suspended back in 2015. Ever since, Ukraine has been getting its gas supplies through a so-called “reverse” scheme, where Kyiv buys up fuel from European countries that purchase directly from Gazprom. Russian negotiators said resumed direct deliveries of Russian gas would be available to Ukrainian consumers at discounts as high as 20 percent.

What Ukraine wanted: Until recently, officials in Kyiv have declined to comment on the possibility of resuming direct gas deliveries from Russia, and former Ukrainian President Petro Poroshenko has urged Volodymyr Zelensky not to consider it under any circumstances. The reasoning here is that Ukraine is still buying Russian gas, but it’s doing business with more reliable European partners and avoiding the political risks of engaging Moscow directly.

What happened: This is perhaps the most intriguing piece of the entire agreement. On the one hand, there’s apparently nothing said about the resumption of direct deliveries from Russia. On the other hand, however, Moscow and Kyiv did negotiate a formula to determine the price of gas, if these shipments do return. Additionally, it’s also been reported that five Ukrainian companies plan to buy gas directly from Gazprom. It would seem that both sides are close to restoring full-scale direct supplies in the near future, which should precipitate lower gas prices for Ukrainian consumers, as well as renewed attacks against Zelensky by his political opponents. 

Why did Moscow and Kyiv decide to compromise?

Ukraine’s reasons: According to officials in Kyiv, the country has enough reserves to make it through this next heating season. Meanwhile, Ukraine’s reverse scheme for buying gas shifts responsibility for all the country’s supply problems to European resellers. In this sense, Kyiv would have risked almost nothing, if Gazprom has stopped using Ukraine’s transit network on January 1, 2020. The risk would have been “almost nothing,” except for the money in transit fees that makes up 5 percent of the national budget. These stakes are precisely why it was so important for Ukraine to reach a new agreement. If Ukraine also renewed direct supplies from Russia, it might reduce social tensions domestically (for example, pre-election polling indicated that Ukrainians cared more about transit tariffs than a peace settlement in the Donbas), albeit at the cost of further entangling the country with Moscow. It’s unclear what will be more important for Ukrainians in the long term. 

Russia’s reasons: Nord Stream 2 was supposed to be operational by the end of 2019, but complications postponed the project by a year, and now U.S. sanctions have delayed the pipeline indefinitely. European states have also insisted that Russia continue to transport gas through Ukraine, in accordance with antitrust laws. Finally, some experts have questioned the capacity of Nord Stream 2 — even once it’s finished — to transport the volumes of gas currently sent through Ukraine, especially at peak times of the year, when fuel demand spikes. President Putin himself has said Russia never planned to abandon Ukraine’s transit network entirely. All this could have compelled Moscow to reach a deal with Kyiv now, but perhaps the biggest appeal was the prospect of renewing direct gas sales to Ukraine.

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Text by Dmitry Kartsev

Translation by Kevin Rothrock

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