Ukraine Learns About Putinomics as Russia Cuts Off Gas

Ukrainian protesters in front of the Russian consulate in Odessa.

Alexey Kravtsov/AFP via Getty Images

Ukrainian protesters in front of the Russian consulate in Odessa.

Russia, engaged in what appears to be a proxy war on its western border, cut off gas supplies to Ukraine, as Bloomberg’s Elena Mazneva and Daryna Krasnolutska report. Surprised? If not, you may be ahead of the European Union’s Energy Commissioner, who predicted two weeks ago that a deal to keep gas flowing was within reach.

There’s a familiar pattern developing here. Whether the issue is gas deliveries or troops on the border, Russia sends signals that it’s decided to be amicable and accomodating. Then it turns out not to be.

Ukraine owes Russia’s state-owned gas company, Gazprom, a great deal of money (exactly how much depends on who is counting; Gazprom says $4.5 billion). Ukraine’s essentially agreed to pay the back debt, but both sides want to link that to signing a new deal. Through much of the negotiations, Russia has asked for prices of $500 per thousand cubic meters of natural gas. That’s compares with about $294 for the same amount of natural gas in the U.K.* and the almost $400 that Russian gas sells for in Germany.

Now Gazprom’s CEO Alexey Miller said that the company was willing to go down to $385, the top of the range that Ukraine has said it was willing to pay. There’s no way to know for sure whether that’s true without having been in the negotiating room. In any case it may not matter so much. Either way the outcome is the same: Russia comes close to a deal, then at the end decides that it’s just not quite there.

With a new, post-Maidan government backed by Europe and dependent on European aid, the possibility of blocking Russian gas shipments to Europe is off the table for Ukraine. That takes away the only leverage that Ukraine may have had in this negotiation, and leaves Ukraine’s new government with two bad options. It can beg Europe and the International Monetary Fund to fund repaying its debt for Russian gas and buy more at extortionate prices. Or it can refuse to pay, face the prospect of a Russian shut-off, and hope it can survive the shock of a gas shortage.

How you see this, of course, depends on where you sit, and if that place happens to be the Kremlin, it doesn’t sound so bad. Vladimir Putin can keep squeezing Ukraine, encouraging Gazprom to keep holding out the prospect of a deal without quite reaching it, watching Ukraine’s fragile government flutter in the storm. Or Russia can sign a deal with Ukraine finally providing gas at an extortionate price, demonstrating Russian power while coming home with a windfall.

Which of these will Putin go for? Given everything he’s done so far, you’d be tempted to say, “Both.”


*That’s using U.S. FERC data, and converting the $7.83 per million BTU figure here.

Email mgimein@bloomberg.net or follow @markgimein on Twitter.

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