Russia/Ukraine politics: Quick View - Ukraine to resume gas imports from Russia

Content Type
Country Data and Maps
Institution
Economist Intelligence Unit
Abstract
No abstract is available.
Topic
International Relations, Politics, News Analysis, Forecast
Political Geography
Russia, Ukraine

Event

In 2017 Ukrainian gas imports from EU countries increased by 27% year on year, to 14.1bn cu metres, as Ukraine continued diversifying its gas supply routes to avoid importing Russian gas. However, in late December the Stockholm Arbitration Court ruled that Ukraine must resume importing small volumes (5bn cu metres annually) of Russian gas in 2018.

Analysis

Ukraine suspended gas imports from Russia in late 2015. In a long-running dispute, Russia's state-owned gas monopoly, Gazprom, claimed that Naftogaz, the Ukrainian gas monopoly, owed it US$56bn for unused gas under a so-called take or pay clause. For its part, Ukraine sought compensation from Gazprom for allegedly inflating import prices and lowering gas transit fees in the years before 2015.

Following Russia's annexation of Crimea and the beginning of the Donbas conflict in 2014, Ukraine has sought to decrease its dependence on Russian gas. Ukraine's gas needs are now covered by imports from eastern European countries through reverse gas flows; even though the gas that Ukraine imports through this system is originally from Russia, the price that Ukraine pays for it is much lower than if the gas was directly imported from Russia. In addition, Naftogaz is seeking to increase domestic production by about a third by 2020-an ambitious target, given ongoing administrative hurdles. Gazprom, in turn, is focused on increasing deliveries to European markets and on building pipelines-Nord Stream 2 and Turkish Stream. As these circumvent Ukraine, the country will gradually lose gas transit fees, estimated at US$2bn per year.

Natural gas imports remain a strain on Ukraine's economy, and the sector is a hotbed of corruption. In line with the requirements of the IMF facility from which it benefits, Ukraine raised domestic gas tariffs several times between 2015 and 2017. However, tariff increases came to a halt in 2017 as Ukraine's financial situation started to improve noticeably. Another area where reform has been delayed is the unbundling of gas production, supply and transmission-a requirement to bring the country's regulations in line with those of the EU. However, vested interests are mobilising to retain control of transmission-the most profitable part of the business. This area could become more and more contentious in 2018, as several unbundling bills will be presented to the Rada (parliament).

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