Russia Threatens to Cut Gas Discounts to Ukraine

The ouster of Ukrainian President Viktor Yanukovych and the new pro-Western interim government prompted a severe reaction from Russian President Vladimir Putin. Russia sent its military to occupy Crimea and to secure its naval base at Sevastopol. The world is watching Russia’s next move in Ukraine on March 3rd as global markets gyrate up and down.

Russia largely controlled Yanukovych due to the discounted gas provided by Gazprom. Ukraine is highly dependent on Russian gas to fuel its economy, and at cheap prices, Yanukovych increasingly looked towards Moscow. With the change in government, Gazprom has threatened to end the discounts, which will imperil Ukraine’s already crumbling economy. Gazprom is demanding $1.55 billion it says Ukraine owes. If Ukraine doesn’t pay, Gazprom will increase its rates.

Russia has demonstrated a willingness in the past to curtail natural gas exports to gain political leverage over its adversaries. As a supplier of about one-third of Europe’s imported natural gas, any imbroglio in Ukraine that cuts off supplies of natural gas will lead to supply disruptions in Western Europe as well, as Ukraine is a vital transit country for Russian gas. Natural gas prices in Germany were already up 8.1% and they were up 10% in the U.K.

Related Article: There's no Easy Fix to Ukraine's Energy Dilemma

However, Russia is also hurting from its invasion as the markets tumbled on March 3rd. Gazprom’s shares were off 17%. The Ruble and the Moscow stock exchange were also sharply down.

The agreement between Ukraine and Russia made by Yanukovych ends in March, and while Gazprom previously said that those discounts could be extended beyond that date, the change in government has prompted a reversal on Gazprom’s part. “It seems without payments for gas and fulfillment of commitments, Ukraine may not keep its current gas price discount,” Gazprom spokesman Sergei Kurpriyanov said, according to Bloomberg.

By Charles Kennedy of Oilprice.com