This could mean that Moscow may cut off the gas supply, which could result in another gas crisis in some member states given that 80 percent of gas headed to the EU from Russia passes through Ukraine. Indeed, several weeks ago Mr. Putin even mailed letters to the governments of Bulgaria and Slovakia (both of which were severely affected by the January gas crisis) warning them of this eventuality. Ukraine's rather shady energy company, Naftogas, is broke. Its customers fail to pay for their gas so it has no money to pay the Russians. Therefore the state has to bail them out. Earlier this month Kiev just managed to scrape together enough cash to pay its May bill. With the next payment due on July 7 and the Ukrainian piggy bank empty, Ukraine is skating on very thin ice. With an economy teetering on the brink of total meltdown -- since the beginning of this year Ukraine has printed more than $3 billion worth of the national currency, the hryvna, to shore up its economy -- and its domestic politics in gridlock -- presently there are several empty seats in the Cabinet, the country is in dire straits. Corruption is rife in every sector and particularly bad in the energy sector where the business interests of the oligarchs who support Ukraine's political elites dominate. And all the while Ukraine's so-called leadership continues to play the blame game in an attempt to shore up public support for forthcoming presidential elections. They are truly shameless.
As in January, the EU finds itself caught in the middle. As Russia tries every trick in the book to discredit Ukraine and bring the country to its knees, the EU attempts to knock their heads together (the EU recently sent a “Gas Mission” to Kiev and Moscow) to find a way through although being careful at the same time not to be seen as taking sides. Ukraine needs around $4 billion to meet its contractual agreement with Gazprom -- a rotten deal struck by Ukrainian Prime Minister Yulia Tymoshenko with Putin earlier this year obliges Ukraine to buy 40 bcm even though gas demand in Ukraine has dropped considerably with factories and other industries using less gas. Putin has been trying to “help” the EU come up with a solution suggesting that Brussels offer funds to Ukraine so it can purchase the natural gas it needs to refill the vast natural gas storage reserves it will need to draw on in winter. During the summer months, demand for natural gas falls sharply, but in winter the gas pipelines that enter Ukraine from Russia aren't big enough to supply all of Ukraine's domestic needs as well as the gas that Ukraine transports to heat homes in the EU. As a result, Ukraine usually imports Russian gas in the summer months to fill its underground storage chambers, drawing on that supply to distribute domestically in the winter. Russia's real aim is to either take over Ukraine's gas network one way or another, or alternatively garner further support from the EU for its new gas projects -- Nord Stream and South Stream -- which totally cut out Ukraine.
But the news from the EU is not great. Although EU Commission President José Manuel Barroso recognizes the dangers, stating that the EU should not “sleepwalk into another crisis,” he has also said that it is not the responsibility of the EU and that no money can be taken from the EU budget for this purpose -- typical EU “double speak.” Rather Barroso has been busy telephoning friends at the International Monetary Fund (IMF) and other international monetary institutions to try and convince them to lend the money to Ukraine, but given the state of Ukraine, this could be highly perilous. Another alternative would be for EU energy companies to buy the gas, but this suggestion has hardly been welcomed with joy, either. However, these are only very short-term options, and as long as Ukraine's energy sector remains corrupt and in a shambles, another gas crisis will always be around the corner.
A deal signed between the EU and Ukraine in January to help modernize the network offers a glimmer of hope, but again, it is not for tomorrow. But let us not forget that Russia is also putting itself in a precarious position. Firstly, the Russian economy can hardly withstand the financial losses of cutting the gas; Russia needs to sell, not hold on to, gas. Secondly, given that the EU is still Russia's biggest market, can Russia really risk denting its credibility still further with its partner? The more trouble Russia creates the more it will backlash on itself as it may push the EU into making quicker progress on alternative energy sources/routes -- whether that be the Southern Gas Corridor, Nabucco, liquefied natural gas (LNG), etc. In fact, the most sensible thing that Russia could do would be to renegotiate the deal with Ukraine which would allow Kiev more flexibility and prove to the EU that Russia is a reliable partner. But somehow I doubt whether this is going to happen.
