EU Proposes Russia Keeps Dishing out $3 Billion a Year to Ukraine for a Pipe It No Longer Needs

EU has a bright idea. Why doesn't Russia keep propping up the pro-EU Ukraine with the equivalent of 3% of Ukraine's GDP per year while Kiev plots how to engineer yet more anti-Russia sanctions by the West?

The European Union (EU) is proposing that Russia guarantee 60bn cubic metres (cm) of gas transits from Russia to the EU via Ukraine after the current contract expires at the end of this year, as negotiations over a new transit deal open.

Trilateral talks between Ukraine, Russia and the EU on gas transit from Russia to the EU via Ukraine started on January 22 and immediately stalled.

The current contract covering Russian gas transits to Europe negotiated by former Ukrainian prime minister Yulia Tymoshenko in 2009 is due to expire at the end of 2019 just as Russia’s new gas pipeline to Europe that by passes Ukraine’s Nord Stream 2 comes on line at the start of 2020.

Construction of the 1,220 km Nord Stream 2 pipeline is “well advanced” a German spokesman said this week and it now almost certain to be completed, and on time, despite the best efforts of many of the members of the EU, like Poland, to scupper the project.

“Gas supplies via the Nord Stream 2 gas pipeline will begin as planned from January 1, 2020,” Gazprom CEO Alexey Miller said on January 10, according to Interfax-Ukraine. “We are working on plans that were approved from the very beginning. The plan for the start of gas supplies is January 1, 2020.”

At issue for Ukraine is the $3bn a year, or about 3% of GDP, it earns in transit fees and can ill afford to lose.

The EU proposal for a new, 10-year Russia-Ukraine gas transit contract calls for guaranteed minimum annual flows at 60bn cm, 31% below the 87bn cm handled by the Ukrainian pipelines last year, according to Reuters report from Brussels.

The Russian state-owned gas monopoly Gazprom is playing hardball and suggested the terms of the existing contract simply be extended, but that deal does not include any guaranteed minimum transit volumes of gas and would leave Ukraine at the mercy of the Kremlin’s whims.

Separately, a poll in Germany found that three quarters (73%) of Germans surveyed by Forsa back building the pipeline under the Baltic. Two-thirds rejected as false US President Donald Trump’s assertion that the pipeline will render Germany dependent on Moscow. And 77% told pollsters from the sociological centre that the Trump administration is using the sanctions threat to blackmail Germany. Nord Stream 2 is going ahead because of German support. Berlin argues that the pipeline is an “economic” project and denies it has a political component.

Despite Gazprom’s record exports of gas to Europe in 2018 of circa 200 bn cm its share in European gas usage has fallen from over 80% in the 90s to around 34% today. Moreover, given European demand for gas is expected to continue to grow in the next decade even if Gazprom increases the volume of gas it delivers to Europe, the Russian share in Europe’s overall gas use is unlikely to change much, say experts, as bne IntelliNews reported in its article “Busting Nord Stream 2 myths” in August 2018.

The three sides are to meet in May to see if they can agree on a new deal, but negotiations are very unlikely to go anywhere until at least after Ukraine’s presidential elections at the end of March that might see Tymoshenko returned as president, nor until after the October parliamentary elections that might see a strong pro-Russia opposition elected. In both these scenarios the political ground will shift significantly and new possibilities for compromise may open up. The administration of current President Petro Poroshenko is implacably opposed to Russia and unlikely to make any concessions at all.

Even then Russia is unlikely to do a deal but will simply wait until the year ends.

“Gazprom is delaying real talks in terms of transit in order to build Nord Stream 2 and then to have a different negotiating position,” Yuriy Vitrenko, Naftogaz deputy CEO, told Reuters on January 22.

Analysts say the only workable deal is if EU gas traders buy Russian gas at the Russia-Ukraine border and let them transport gas though Ukraine to the EU without the involvement of the Russians.

“But, so far, Gazprom is doing all it can to prevent this, and the lack of clarity about the future legal status of the Ukrainian transit pipeline plays in favour of Gazprom,” Alexander Paraschiy of Concorde Capital said in a note.

Two contracts will be needed for Russian gas to flow through Ukraine next year, Elena Zerkal, deputy foreign minister for European Integration, wrote on Facebook. One would be a Russian-Ukraine interconnection under EU energy law. The second contract would be a Naftogaz-Gazprom contract for gas transit services. 

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