Ukraine to Pay Its $2 Billion Gas Bill to Russia's Gazprom

After Russia threatened to halt Ukraine's natural gas service over an unpaid bill, Ukraine has finally agreed to pay back their debt.

After Russia threatened to halt Ukraine's natural gas service over an unpaid bill, Ukraine has finally agreed to pay back their debt. After some negotiation over the sum of the debt, they settled on a bill of $2.5 billion. The amount of the bill was a matter of debate because Gazprom jacked up prices for natural gas earlier this year from $268.50 per 1,000 cubic meters to $485, erasing a discount that has been agreed to under the President Victor Yanukovych before was ousted. 

Because of EU pressure (and not wanting to have the nation's gas supply cut on June 1), Ukraine agreed to the sum of $2.5 billion. Now, Gazprom has agreed to start talks for ongoing gas shipments to Ukraine. Russian Energy Minister Aleksandr Novak said, "We are ready to continue discussing prices for gas which we deliver to Ukraine. We hope that the Ukrainian side will discuss our proposals with its leadership."

EU Energy Commissioner Guenther Oettinger has been instrumental in helping Ukraine negotiate the settlement thus far, and will continue to help when its time to set the new price. 

While negotiations are moving forward for now, that price is still the key sticking point. The discounted rate of $268.50 was granted to Ukraine because of the Kremlin's relationship to the former president. Now, with Petro Poroshenko set to take hold of the country, Russia will not be so kind to Ukraine. In addition, Gazprom has just settled a $400 billion deal with China, so they aren't exactly strapped for funds. This major new deal with Beijing puts them in a negotiating position which Ukraine simply does not have.

Novak has said "The price of gas is determined by the contract between Russia's Gaprom and Ukraine's Naftogaz. The price is determined by a formula which has been operating since 2009. [The formula] is not expected to change...we can only talk about discounts in the context of the reduction of export duties."

Ukraine's Energy Minister Yury Prodan said "the price must be market-oriented and fair." He wants the price to remain $268.50 per 1,000 cubic meters.

However, Russia has set natural gas prices a fair amount above that. Russia will charge China $335 per thousand cubic meters in their upcoming deal. Their average charge for European nations is $380.50 per 1,000 cubic meters. It seems the $268.50 deal was the Kremlin's family and friend discount.

Ukraine has also benefitted from being the transit country for gas going from Russia to Europe. Russia provides Europe with 30 percent of its gas and 50 percent of that goes through Ukraine. Putin offered his opinion, "We all know who is to blame - the transit country, Ukraine has abused its position. Ukraine insists on benefits it is not entitled to." Not entitled to under the new leadership, at least.

While it is a good sign that negotiations are moving forward, there is a lot of work to be done to find a price that works for both Ukraine and Gazprom.