Oettinger's temporary package envisions Ukraine's Naftogaz paying off $2 billion in debt to Russian energy giant Gazprom by the end of October and $1.1 billion by the end of December. In winter, Ukraine would purchase and prepay for natural gas at $385 per thousand cubic meters, the price point Gazprom has advocated since cutting off Ukraine's natural gas supplies in June, satisfying almost all Russia's demands. In return, Ukraine would receive at least 5 billion cubic meters of natural gas in the winter. When combined with Ukraine's 16 billion cubic meters of natural gas in storage and reverse flows from Slovakia and Poland, this would be enough to meet Ukrainian consumption needs this winter.
EU and Russian Interests
Europe has a strong interest in seeing Russia resume natural gas supplies to Ukraine this winter, since a cutoff could cause Ukraine to divert natural gas supplies bound for the European Union. Increasing the pressure on Brussels to compromise with Moscow, Russian President Vladimir Putin has recently written letters to European leaders threatening consequences for Europe in response to the recent EU-Ukrainian association agreement. The European Union therefore will probably help Ukraine pay its energy bill through International Monetary Fund assistance.
For its part, Russia is likely to approve Oettinger's plan, though Gazprom and Naftogaz have yet to agree to the European proposal. Moscow might, however, decide to link the deal to a broader energy deal with the European Union that would include EU approval of the South Stream pipeline, which would connect Russia and the European Union via a pipeline under the Black Sea to Bulgaria.
Ukraine Under Pressure
Meanwhile, Ukraine will likely agree to Oettinger's proposal given EU pressure and the prospect of natural gas shortages should the cutoff continue. Moscow has placed significant pressure on Kiev in preparation for the trilateral energy negotiations. While Ukraine has been able to rely on its storage and reverse flows from European countries for natural gas since Gazprom cut off supplies in June, without renewed supplies from Russia, Ukraine will likely begin experiencing natural gas shortages by early January.
Worsening Ukraine's position, Russia is targeting the reverse flows from Europe that keep Kiev supplied with natural gas. Moscow has begun pressuring the European countries participating in reverse flow schemes to stop. These include Hungary, which is highly dependent on Russian natural gas and has a leadership that has worked to improve relations with Moscow. Hungarian Prime Minister Viktor Orban, who met with Gazprom CEO Alexei Miller on Sept. 22, said Gazprom will supply Hungary with more natural gas to fill its storage units under a new agreement. Later, Hungarian natural gas operator FGSZ indefinitely suspended all natural gas flows to Ukraine starting Sept. 25. The Hungarian cutoff will hamper Kiev's negotiating position with Gazprom.
And while Ukraine for the time being continues to receive reverse flows from Slovakia and Poland, both have experienced reductions in supplies from Russia over the past weeks. Slovakia, which can export about 22.4 million cubic meters per day to Ukraine, is Kiev's most important source of reverse flows. Since Slovakia is a major transit hub for Russian energy, Russia has less energy leverage over Slovakia. Even so, the Kremlin may use the economic and energy clout it does have with Slovakia to further reduce Ukraine's natural gas stocks should Kiev balk at Moscow's terms.
If Ukraine and Russia ultimately agree to Oettinger's temporary deal, contentious negotiations will continue over pricing, debt and payment conditions for long-term natural gas deliveries — with broader negotiations over the future of Ukraine continuing between Kiev, Moscow and the West in parallel.
