Ukraine: The real energy crisis starts in June

On June 3, Russia plans to reduce the gas supply to Ukraine — and hence, to Europe — if Kiev has failed to pay in advance for next month's gas deliveries, the price for which has been doubled as a result of the political crisis. 

Interim Ukrainian Prime Minister Arseniy Yatsenyuk is trying to play hardball with Moscow, suggesting gas talks cannot move forward until Russia addresses the issue of the $1 billion in gas it stole when it annexed Crimea. 

Yatsenyuk may be riding high on the sense of stability the recent presidential election has brought, not to mention the unleashing of the Ukrainian military on pro-Russian separatists in Donetsk, but the "stolen gas" gambit is a losing one — a bunch of bluster that certainly won't make Moscow go away. 

Ukraine owes $500 million just for May gas deliveries on top of a whopping $3.5 billion in outstanding gas debt, according to Moscow. If at least part of this debt is not paid, there won't be any negotiating over price. Gazprom says Ukraine had agreed to pay $2 billion of its debt this week, but Kiev is instead talking about stolen Crimea gas. 

What is promising in all of this is the election of Petro Poroshenko as Ukraine's new president by a wide margin and with more than 60 percent voter turnout. Ukraine has new, legitimate leadership that Russia, the United States and the European Union have all agreed to recognize. 

The new president immediately pledged to deal with the separatists in Donetsk and Lugansk, establish a working relationship with Russia and hold early parliamentary elections. This is undoubtedly an attempt to capitalize on the current political good will and further weaken a parliament dominated by former Regions politicians, Fatherland and business interests. 

The presidential elections give Kiev a bit more strength and a more united force to deal with its energy crisis and Moscow. 

In the coming days, Russia will recognize Poroshenko's legitimacy and remind him June 3 is right around the corner. By next week, we could see the disruption of gas supplies to Europe, Russia's largest and most profitable market. 

If this happens, an acute energy crisis in Ukraine is all but certain. Ukraine stockpiles its gas supply for the winter heating months during the summer. With current low supplies and higher prices expected for this summer, Russia will walk all over Kiev. 

Short of handing Gazprom a cashier's check, there is no way to avoid the present crisis. 

In the medium to long term, however, some hard decisions are going to have to be made — decisions former Ukrainain vice prime minister and energy minister Yuri Boyko would have liked to make some time ago, including selling off the state-run gas companies Ukrnafta and Ukrgasproduction. 

So we find ourselves reliving 2006 and 2009, when Russia cut off gas supplies to Ukraine and Europe. If Ukraine hopes to stop reliving these desperate years over and over again, it's going to have to start selling off assets and rolling out the transparency. 

The trick will be for Poroshenko and a newly appointed energy minister to work with both Russia and Europe to secure new pricing and to foster energy independence, while being mindful of one very important fact: Ukraine's westward drift toward the European Union is what led Russia to annex Crimea in the first place. 

Russia will continue to use Russian nationalist movements in eastern Ukraine to stir discontent and to sow chaos, striving to keep Kiev off balance as Moscow works to use gas as a weapon to ensure a compliant Europe. It's a hard balance to maintain, especially as some Central European countries are seeing the light at the end of the independence tunnel. 

Poroshenko is a highly pragmatic businessman, which is what Ukraine needs. But neither he nor those around him know energy or Russia. From the energy crisis standpoint, it is the appointment of a new energy minister that will change the real balance of power. 

There are very few figures in Ukraine who know the West, Russia and enough about energy to do what needs to be done. Poroshenko's pick for energy minister should then be the smartest choice, not the most popular one.

About the Author
James Stafford

James Stafford is the London-based editor of Oilprice.com.

Originally published on FuturesMag. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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