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Russia Pressures Ukraine on Gas as Biden Pledges Support

Russia, the world’s biggest natural gas exporter, increased pressure on Ukraine over its $2.2 billion fuel debt as U.S. Vice President Joe Biden voiced support for the smaller country to gain energy independence.

Russia will make Ukraine prepay for gas unless it starts paying down the debt it has accumulated through March, Prime Minister Dmitry Medvedev said today in the State Duma, the lower house of parliament, in Moscow. “Gas for cash,” he said.

Ukraine is seeking alternative energy sources to cut reliance on Russia amid accusations that President Vladimir Putin uses exports as a political tool. Ukraine gets half of its gas from Russia and is a transit route for about 15 percent of Europe’s annual consumption of the fuel, making energy a key component of international tensions about the nation’s future.

Full coverage of the Crisis in Ukraine:

Ukraine’s “leaders change with kaleidoscopic speed, while their policy stays the same: wait, we’ll pay later, we’ll agree, we’ll bring in Europeans,” Medvedev said. “The Americans have already popped up with so-called new gas. All this is a bluff in purest form.”

Russia, the second-biggest gas producing nation after the U.S., has scoffed at the shale boom and forecasts of American gas exports, saying it’s too expensive to be viable. The U.S, also the world’s biggest consumer of the fuel, plans to start exporting liquefied natural gas later this decade.

Energy Weapon

Biden, in Kiev for a two-day visit, told Ukrainian political leaders that U.S. President Barack Obama’s administration will help Ukraine solve its energy supply issues “so that Russia can no longer use energy as a weapon against Ukraine and Europe.”

“Imagine where you’d be today if you said to the Russians: ‘keep your gas’,” Biden said.

Graphic: Mapping the Ukraine Conflict

The U.S. today unveiled a $50 million aid package to Ukraine, including $11.4 million “to support the integrity” of its planned May 25 presidential election, according to a fact sheet issued by the White House.

The government in Kiev is seeking to diversify energy supplies by buying gas from Slovakia, Poland and Hungary using east-west pipelines in reverse. Fuel supplies from Poland started on April 15, at levels amounting to about 3 percent of Ukraine’s domestic consumption. That is the maximum capacity for gas shipments from Poland for now, NAK Naftogaz Ukrainy and Poland’s Gaz-System SA said last week.

Geneva Accord

Talks on additional gas volumes from other countries are still in progress.

Ukraine is open to U.S. and European investments in energy, including joint operation and upgrades of its gas pipeline system, Prime Minister Arseniy Yatsenyuk said after meeting Biden. “The best answer to Ukraine’s energy dependence on Russia would be the presence here of European and American investors.”

OAO Gazprom, Russia’s state-controlled gas exporter, has sought a venture to operate the pipelines, which it uses to ship half its Europe-bound exports.

Russia “is ready to wait for a month” before moving Ukraine to prepayments, in line with their gas supply contract, Putin said April 17. That was the same day the U.S., EU and Russia reached an agreement in Geneva to ease tensions in Ukraine. The accord is now showing signs of collapse after violence over the weekend that left three dead, with pro-Russian forces holding their ground in occupied administration buildings in several eastern Ukrainian cities.

Putin Deadline

Ukraine has been boosting gas imports from Russia since Putin’s statement on the prepayment deadline, to a level more than double the average for April 2013.

Gas imports from Russia have reached almost 1.5 billion cubic meters from the beginning of the month to April 20, according to the Russian Energy Ministry’s CDU-TEK unit data. That is more than $700 million of fuel at a price of $485 per 1,000 cubic meters.

Gazprom raised the price it charges Ukraine by 81 percent to $485 this month, higher than for any EU nation as Russia’s government canceled discounts after relations soured and Ukraine’s debt mounted.

‘Good’ Russia

Russia has provided about $250 billion of aid to Ukraine since the Soviet Union collapse, including through gas discounts, because “we are good, we are made this way,” Medvedev said today.

Gazprom said today it’s sure that demand for gas in the EU, its “top priority market,” will rise in the long term. The state-controlled company plans to build new gas pipelines and liquefied natural gas projects to supply the growing European market and increase deliveries to “the premium Asia-Pacific market.”

The Moscow-based energy producer gained more than $60 billion of revenue from Europe last year, providing a record 30 percent of the region’s gas consumption.

Gazprom also plans to sign a 30-year deal to supply pipeline gas to China next month after more than a decade of false starts as the crisis in Ukraine forces Russia to look for markets outside Europe.

“We are now interested in diversifying supplies and now more than ever,” Medvedev said.

The U.S. has threatened further penalties against Russia, including measures targeting the energy industries. Widening the EU sanctions “depends as much as anything else on the situation on the ground,” EU spokesman Michael Mann said today.

Russia has shrugged off the threat of such measures.

“Imposing restrictions is a primitive path, it is a road to nowhere,” Medvedev said. “In that case we can manage with our own strength and we will prevail at the end.”

To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Torrey Clark, Alex Devine

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