Russia, Ukraine Reach Gas Deal, May Sign by Tomorrow

By Mark Sweetman and Amanda Jordan

Jan. 18 (Bloomberg) -- Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko reached an agreement on natural-gas supplies that may see shipments to Europe resume after almost two weeks of disruption.

A package of documents covering prices and transit fees should be prepared by tomorrow, allowing Russian exports via Ukraine to restart, Timoshenko said today on Russian state television after meeting Putin in Moscow. The talks had been “very difficult,” she said.

The two premiers agreed that Ukraine will get a 20 percent discount on the price it pays for gas from Russia this year should it maintain the fee it charges for transporting fuel to Europe at the 2008 level, Putin said. The countries will move to a European pricing formula for gas supply and transit next year, he said, without specifying any prices.

The breakthrough came after officials from the European Union, which has suffered gas shortages during the crisis, stepped up the pressure on both sides to find a solution at a Kremlin summit yesterday. Exporter OAO Gazprom cut off flows to Europe via Ukraine on Jan. 7 after talks over pricing and transit fees broke down. Russia accused its western neighbor of siphoning off Europe-bound gas for its own use, a charge the country denies.

The agreement means supplies to Europe should start “soon,” Putin said, without giving an exact date.

EU Pressure

“Clearly there’s been pressure to get the gas flowing and get a deal which stops the current dispute,” Mark Spelman, global head of strategy at Accenture Ltd. in London, said yesterday by telephone.

Sergei Kupriyanov, a spokesman for Gazprom, declined to comment on the agreement when contacted by Bloomberg News.

The EU had labeled the talks a “test case” for the reliability of Russia and Ukraine as energy providers, while Russian President Dmitry Medvedev called for a new international agreement to prevent future wrangles over gas transit. Europe gets a quarter of its gas from Moscow-based Gazprom, which ended direct deliveries to Ukraine on Jan. 1 after negotiations on a supply contract for this year collapsed.

EU nations have reported declines in gas stockpiles since Gazprom turned off the taps, prompting renewed calls for diversification of energy supplies.

Stockpiles Drained

German inventories sank to “unusually” low levels, while Slovenia said supplies may last less than a month and Croatia sought emergency imports. Balkan countries, the worst hit by the halt in shipments, were forced to ration gas use, shut factories and cut power.

The gas crisis “shows how dependent Europe is on Russian exports,” Eugen Weinberg, senior commodity analyst at Commerzbank AG, said Jan. 15 in a Bloomberg Television interview. “Building alternative routes takes years; there is no way out just yet.”

The conflict has “exposed European weakness in gas,” Accenture’s Spelman said. The EU “hasn’t had a coordinated approach. What we need are moves toward a multiyear deal.”

The Moscow meeting was arranged after the EU said it may urge companies in the 27-nation bloc to seek legal redress if fuel supplies remain halted. Serbia said it may take legal action against NAK Naftogaz Ukrainy, Ukraine’s state utility, for failing to deliver gas, while Croatia’s Ina Industrija Nafte d.d. was considering a lawsuit against Russia, Business.hr reported.

“I think the damage has been done in terms of the relationships, particularly with the European Union,” Spelman said. “We’ve had a lot of bargaining. I wouldn’t be surprised if there aren’t one or two more twists and turns.”

Proposals

In the past two days, Russia and EU utilities made separate proposals to find a way out of the impasse.

European energy companies GDF Suez SA, E.ON Ruhrgas AG and Eni SpA yesterday sent a proposal to Gazprom that would allow flows to start immediately, they said in a statement. Their plan would have been a “temporary solution” to the crisis, meeting conditions demanded by Naftogaz in the “short term,” they said.

Their idea followed a meeting with Putin in Berlin on Jan. 16, during which he sought to persuade them to form a group that would buy the gas needed to operate Ukraine’s pipeline system. Ukraine’s demand that Russia supply this so-called technical gas has been one of the main sticking points of the dispute.

Medvedev subsequently put forward an alternative proposal, whereby a European bank would provide a “letter of credit” for as much as $1 billion for Ukraine, guaranteeing the country’s gas payments, the president told reporters in Moscow yesterday.

It was unclear whether the agreement reached by Putin and Timoshenko would draw on either of these proposals.

To contact the reporters on this story: Mark Sweetman in Moscow at msweetman@bloomberg.net; Amanda Jordan in London at ajordan11@bloomberg.net