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Russia Shuts Off Gas to Ukraine

If the citizens of Ukraine (and the European Union) are in need of a silver lining, at least it’s not winter right now.

You see, after failing to strike a deal with Ukraine, the Russian gas giantGazprom (OGZPY), has cut off supplies to its western neighbors.

And until Ukraine agrees to pay a hefty $4.5-billion sum to Gazprom – which the government doesn’t believe it owes – the gas lines will remain closed indefinitely.

For now, that’s not a huge issue… but by the fall, supply shortages are likely, and service disruptions to the rest of the European Union could leave people across the continent out in the cold this winter.

Failing to Come to Terms

Right now, there are several issues preventing Gazprom and Ukraine from reaching an agreement… and the primary one is that Gazprom believes it’s owed $4.5 billion in back pay.

The dispute stems from a bailout package that Moscow provided for Ukraine in December 2013.

At that time, former Ukrainian President Viktor Yanukovych had dissolved a partnership pact with the EU in order to take money and benefits from Russia, instead. One of those benefits happened to be extremely cheap gas.

However, once Yanukovych was ousted by pro-Western protesters just a few months later, Russia canceled all price discounts. Then, Ukraine stopped paying its bills in the midst of the much broader conflict between Kiev and Moscow.

Gazprom has twice extended the deadline for payment, but Kiev remains stubborn.  The government is unwilling to pay higher gas prices when, as Prime Minister Arseniy Yatsenyuk put it, Russia will just “spend this money on weapons, tanks and planes to bomb Ukrainian territory.”

Kiev says it will pay its debt if Gazprom lowers the price of gas down to the December 2013 level – about $268.50 per 1,000 cubic meters. However, the chances of that happening seem extremely slim.

Russian Prime Minister Dmitry Medvedev has called this proposition “blackmail,” and seeing that Gazprom has always prevailed in its previous gas conflicts with Ukraine, it’s hard to imagine that Russia won’t get its way this time, as well.

For the moment, Ukraine’s Soviet-era gas depots are fully stocked, and the country isn’t in a hurry to end the dispute.

But once the stores run low, industry is affected, and winter gets closer, the pressure will mount for Kiev to get the gas flowing again – and not just from Ukrainians, either.

Why It Matters for Europe

Alexander Konovalov, Director of the independent Institute of Strategic Assessments in Moscow, says that the “tug-of-war could go on for quite a while” between Ukraine and Gazprom.

And if it does, the gas dispute could have major implications for the European Union.

You see, a pipeline running through Ukraine supplies roughly 15% of all natural gas consumed by the EU. For some countries, such as Bulgaria, Slovakia and Hungary, more than 75% of their natural gas comes from Russia via Ukraine.

Many worry that the gas meant for EU nations will be siphoned off in Ukraine, which Russia claims happened during the gas dispute in 2009.

So if the seasons begin to change and gas flows haven’t been restored to normal, don’t expect the EU to sit idly by. Though Ukraine and the EU may be at odds with Russia, the prospect of facing winter without any heat is sure to speed up negotiations.

In Pursuit of the Truth,

Christopher Eutaw

Christopher Eutaw

, Staff Writer, Politics

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