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Ukraine is urging the EU to give the Russians a taste of their own powerful tactics when it comes to gas prices.
EU countries have been quick to condemn Russia over Ukrainian war crimes reports, but they are still reluctant to introduce sanctions that would cut their gas purchases from Moscow’s export monopoly Gazprom for fear of undermining their economies. So Kyiv devises a highly unorthodox game plan for the Europeans – one that would require the legalistic Brussels bureaucrats to be as unconcerned about treaties as Russia is about international law.
Kyiv officials say the European Commission should take control of all EU gas purchases by designating an agency to negotiate a new price for Russian gas exports – one well below the current one spot rates. This new price would make it worthwhile for Gazprom to keep the gas going, but drastically reduce the profits that fund its war in Ukraine. The price would also be at a level that would allow Ukraine to continue earning transit fees – worth around $2 billion in 2020.
“There are many opportunities for the EU to replace Russian gas, but it is really difficult to replace it in a short period of time without much impact on the economy, since its total share is 40 percent,” Deputy Energy Minister of Ukraine Yaroslav Demchenkov told POLITICS.
The system would require the EU to designate a single buyer for Russian gas, rather than the current system of private companies negotiating with Gazprom.
“This notified body would buy gas on certain terms set by the authorities – by the Commission, but it’s negotiable – and put the gas on an exchange in Europe for all other traders to have access to those volumes on equal terms” , he said .
If Gazprom didn’t like the idea of being stripped of its usual ability to play between multiple EU buyers, Demchenkov said it had no choice but to face the new reality.
“On the key question: will Gazprom agree to this? Here we argue that Gazprom has no choice but to supply gas to the EU,” said Demchenkov. “Gazprom has to export between 140 and 190 [billion cubic meters] gas per year, and more than 80 percent of that can only get to Europe via pipeline.”
These volumes cannot be pipelined to China, while Russia’s liquefaction capacity is still too small to export that volume to Asian markets by ship, he added.
Demchenkov’s idea is among a number of proposals making the rounds aimed at minimizing Russia’s revenues while ensuring the EU continues to receive Russian gas. Estonia, for example, is proposing that much of the money to be paid for petrol should be held in escrow until Russian soldiers leave Ukraine.
However, there is skepticism that Brussels would be able to simply set up a European super-entity to buy gas – fully vested with legal powers to overrule current purchase agreements – particularly in light of past failed attempts to buy gas to buy as a block.
Jonathan Stern, founder of the Oxford Institute for Energy Studies’ gas research programme, called Ukraine’s proposal “completely unrealistic” and said EU purchases of Russian gas will be governed by long-term contracts signed by private companies – many of which are not expire by 2030.
“These treaties are above any national law, so they were designed so governments couldn’t suddenly say, ‘We’ve changed our minds, these treaties are no longer valid,'” Stern said. “No one mentions that.”
Still, in possible support for Demchenkov’s unconventional approach, commercial lawyers have noted that Russia is also unlikely to play a role in lengthy, complex and expensive international arbitrations. Companies demanding compensation for Moscow’s attempts to stop its withdrawal from Russia are seen as unlikely to get their millions back. International arbitration with Russia could turn into a dead end and restore some clout to the far larger economic party, the EU.
Gazprom did not respond to a request for comment on Demchenkov’s proposal. The European Commission said its idea of joint gas purchases was still “in the works” and that when EU Energy Commissioner Kadri Simson met Demchenkov, the focus was not on sanctions but rather on “EU support for Ukraine, including ensuring nuclear safety in Ukraine, securing fuel supplies for the planting season and next steps for synchronizing the power grid.”
Demchenkov’s proposal is an attempt to figure out how to punish Russia without imposing sanctions on energy exports – a move that will require unanimity of all 27 EU members, which currently seems impossible.
On Monday, French President Emmanuel Macron spoke out in favor of sanctions on Russian oil and coal. Italy has called it would not object to sanctions against Russian gas, but Germany and Austria are firmly opposed.
Hungary’s Viktor Orbán, the Kremlin’s closest ally in the EU, also just won a resounding election victory.
“We see very strong support from Poland and the Baltic countries, but we also see that many countries are not even ready to discuss it [sanctions] problem,” said Demchenkov.
EU officials are looking to finalize a package of sanctions against Russia ahead of a meeting of EU ambassadors on Wednesday, but it’s likely the move will target oil, not gas.
Instead of sanctioning Moscow, Kiev’s single buyer program would encourage Brussels to offer between $300 and $350 per thousand cubic meters – three or four times cheaper than current prices on the EU spot markets, but a figure that Gazprom has in the past called a fair price for Europe in normal times.
There are other factors that could bring Gazprom to the negotiating table – it is currently the subject of an EU antitrust probe into gas market manipulation, while its German subsidiary was temporarily seized by national authorities on Monday.
Russian President Vladimir Putin has threatened to halt gas exports to Europe unless companies change their contracts and pay in rubles.
But Demchenkov argues that Putin’s threat is empty and that Russia has little choice but to send its gas west — even under uncomfortable conditions. Without access to European markets, Russia could only send excess gas to its own storage facilities for four to six weeks before it would have to stop production.
“Then Gazprom would have two options: stop its production or send this gas to the EU,” he said.
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