Thursday, 17 November 2011

UPDATE: Russia Says Still No Gas Deal With Ukraine

MOSCOW, Russia -- Russia Wednesday denied media reports that it had agreed a new gas contract with neighboring Ukraine, but the risk of gas supply disruptions to Europe remains slim, observers say.
Ukraine--Europe's main link to Russia's natural gas supplies--is seeking to renegotiate its gas contract with Russia in order to help state gas company Naftogaz balance its books, a key stumbling block in negotiations with the International Monetary Fund.

The IMF halted a $15 billion bailout program to Ukraine earlier this year, after the government failed to take unpopular steps, such as raising the gas prices for households.

Ukrainian Prime Minister Mykola Azarov has said he will try to reach an agreement to unfreeze lending, after a new gas price deal is reached with Russia.

A previous dispute over prices between the two former Soviet republics led to a cut-off of Russian gas supplies to Europe that lasted three weeks in January 2009.

This caused severe disruptions in Central and Eastern European countries that are dependent on Russian gas delivered through Ukraine's pipeline--and sparked concern in Europe over the high reliance on Russian gas.

Europe relies on Russia for almost a quarter of its gas needs, the majority of which is shipped through Ukraine.

Ukrainian media reports this week said Russia had agreed to a sharp reduction in Ukraine's gas import price, and that the country had agreed to let Russia receive "preferences" for participating in the privatization of the country's state enterprises, including the strategically important gas transit pipeline system.

"The negotiations are continuing," a spokesman for Russian Prime Minister Vladimir Putin said, adding that a new contract will be signed when an agreement has been reached.

"Until that happens, we consider it premature to say anything."

Ukraine is seeking to renegotiate a current ten-year gas deal signed in 2009, which put pressure on Ukraine's fragile state finances.

Both Ukrainian and Russian officials have said talks to renegotiate the 2009 gas deal were at an advanced stage.

Kiev earlier this year vowed to take Russia to arbitration in Brussels, but the harsh rhetoric has been replaced by talk of cooperation and concession, said Andrew Neff, analyst at IHS Global Insight.

"Given the history, there's always a risk of transit supply disruptions via Ukraine, particularly with no new deal still, but both sides say they will abide by the existing supply and transit agreements until a new contract is completed," said Neff.

Moscow is willing to negotiate a lower price, if Ukraine gives up control of its natural gas transmission to Russia's state gas monopoly OAO Gazprom.

But Ukraine's opposition is likely to react with anger to any deal that gives Gazprom a stake in the gas transmission system, let alone control.

"So the revision of the existing Gazprom-Naftogaz contract is sure to introduce more volatility into Ukraine's domestic political environment," said Neff.

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