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Russia Cuts Off Gas to Ukraine

russia cuts off gas
On June 16, 2014, tensions between Russia and Ukraine worsened after Russia’s state-owned company, Gazprom, cut off gas headed for Ukraine.

June 16 was the final day for Russia and Ukraine to come to an agreement about the gas dispute. Representatives from Ukraine, Russia and the European Union met over the weekend but were unable to reach an agreement.

With no agreement about the unpaid $2 billion debt installment the company demanded for June 16, a portion of the $4.5 billion total debt that Ukraine owes the company led Gazprom to declare that  it will only deliver gas that has already been paid for.

Ukraine disputes the amount that Gazprom has stated it owes and also requests a new future price.

The main cause for the dispute can be traced back to the conflict between Ukraine and Russia that led to an 80 percent price increase of gas, reaching $485.50 per thousand cubic meters of gas in April. Although some reductions were made following recent talks, they were still above the average $377.50 per thousand cubic meters Gazprom charged other European countries in 2013, and more still than the previous $268 per thousand cubic meters Ukraine used to pay.

Russia has stated that it will continue to provide oil for the rest of Europe. More than 30 percent of Europe’s demand is supplied by Russia, of which half must pass through Ukraine.

Since the cut off has occurred in June, the vulnerability of Ukraine and the rest of Europe to a possible shortage are low. However, as the cut off continues, the urgency to find a resolution increases. When July comes around, Ukraine and the rest of Europe generally begin to completely fill their storage tanks in preparation for the winter.

Tensions between Ukraine and Russia have continued to increase in the backdrop of the failed deal. In addition to escalating violence in Ukraine, Gazprom has attracted controversy with its decision to build an exclusive gas route despite violating Europe’s open access laws.

With the continuing escalation, it is unlikely a resolution to the gas crisis will occur in the near future. Although E.U. leaders are expected to discuss the crisis during the summit in Brussels on June 26, the E.U. has told its members to conduct stress tests to examine the potential effects of a disruption.

A potential disruption could bode poorly for those in poverty throughout Europe, especially in the winter months. Hopefully an agreement will emerge before the cold comes.

— William Ying 

Sources: CNN, New York Times, The Wall Street Journal, BBC
Photo: CNBC