Putin Meets Yanukovych on Gas After Pipe Lease Offer

President Vladimir Putin met his Ukrainian counterpart Viktor Yanukovych today as Russia’s smaller neighbor seeks to trim the price it pays OAO Gazprom for fuel supplies by leasing out its natural gas pipelines.

“Today we should make progress,” Yanukovych said at the start of the talks in Zavidovo, Russia. Dmitry Peskov, a spokesman for Putin, later said that discussions were continuing.

Ukraine plans to lease the network of pipes that ships Russian gas to the European Union to guarantee stable transit and fund maintenance, Yanukovych said March 1. The move is aimed at securing a lower price for gas imports from Russia, which is prepared to pay to upgrade Ukraine’s pipelines, he said.

“We continue to expect a material price cut for Ukraine to be agreed to in the course of this year,” Ron Smith and Alexander Bespalov, analysts at Citigroup Inc. in Moscow, said in a note today. Gazprom “would keep Ukraine as a large and still lucrative client -- on par with Germany even after the cuts -- but remove one of the key uncertainties that have surrounded Gazprom in recent years.”

Ukraine, which is seeking an international bailout as its economy grapples with a recession, depends on Russia for more than 60 percent of its gas needs and is a key transit route for Gazprom. The existing gas contract with Russia, signed in 2009 by jailed former Prime Minister Yulia Tymoshenko, is “a noose” around the country’s neck, according to Yanukovych.

Renegotiate Accord

Ukraine has been seeking to renegotiate its Russian gas accord, which it says imposes the highest prices in Europe, for more than a year as the International Monetary Fund urges lower energy subsidies as a condition for aid.

Ukraine’s government bonds due 2022 rebounded after falling earlier today for the first time since Feb. 22, data compiled by Bloomberg shows. Bonds rose, pushing yields down to 7.091 percent, the lowest level since they started trading on Nov. 23.

“We should have a review of the gas contract this year,” Ukrainian Prime Minister Mykola Azarov said on private TV channel Inter on March 1. “When we review gas prices with Russia, we will start talks with the IMF and recalculate the budget deficit,” he said, adding that terms of the Washington-based lender for aid may change by then.

In a sign of the deadlock, Gazprom sent state-run NAK Naftogaz Ukrainy a $7 billion bill in January for failing to import its contractual amount of gas last year. Naftogaz says it notified the Moscow-based exporter in advance that it would buy less fuel.

Continue Working

“Taking into consideration disagreements over certain issues in gas cooperation such as price formation and volumes imported by Ukraine, the sides will continue working on contracts,” Putin’s press office said in e-mailed statement yesterday.

Ukraine initially wanted to establish a group with Russia and the 27-member EU to manage its pipelines, whose sale is prohibited by Ukrainian law. Putin said in December that Ukraine made “a very big strategic mistake” by not agreeing to lease the network to Russia and European companies.

More recently, Ukraine sought ways of working with a Russian-led customs union. While Russia has said joining would lead to reduced gas prices, full membership would torpedo plans to sign an EU Association Agreement and free-trade pact.

“Today, we’re looking for a model of cooperation between Ukraine and the customs union,” said Yanukovych, who postponed a December visit to Moscow to further explore working with the union. “From an economic point of view, it’s very interesting for us to integrate with the customs union.”

Supply Disruptions

Conflicts between the two countries over gas have resulted in supply disruptions to Europe at least twice since 2006. They’ve since agreed to concessions such as a 2010 deal that gave Ukraine a discount of $100 per thousand cubic meters of fuel in return for an extension of the Russian navy’s lease of a Black Sea port.

Gazprom accused Ukraine of siphoning off gas from transit during disputes in 2006 and 2009, a charge the country denied. The conflicts spurred Gazprom to build links bypassing transit states, such as the undersea Nord Stream and South Stream pipelines, while questioning the viability of Ukraine’s network.

“Gazprom is open for expanding constructive cooperation with Ukraine in the gas sector and will continue discussions of all available opportunities in this sphere,” Sergei Kupriyanov, a spokesman for the company, said March 1.

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