Ukraine eyes arbitration if Russia doesn't cut gas price

KIEV Sat Apr 5, 2014 9:55pm IST

Ukrainian Prime Minister Arseny Yatseniuk gestures during an interview with Reuters in Kiev April 3, 2014. REUTERS/Valentyn Ogirenko

Ukrainian Prime Minister Arseny Yatseniuk gestures during an interview with Reuters in Kiev April 3, 2014.

Credit: Reuters/Valentyn Ogirenko

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KIEV (Reuters) - Ukraine warned on Saturday it would take Russia to an arbitration court if talks with Moscow failed to roll back hikes in the price of natural gas that Kiev called an act of economic aggression.

Russia nearly doubled the price Ukraine pays for its gas this week, forcing Kiev, whose economy is in chaos, to enter into emergency talks with European neighbours to boost cheaper imports from the West.

Ukraine accuses Russia of using the price hikes as a tool of

economic pressure after popular protests in Kiev ousted pro-Russian president Viktor Yanukovich in February, souring relations between the two former Soviet republics.

Russia seized Ukraine's Crimea region and formally annexed it last month widening the dispute into the biggest stand-off between Russia and the West since the end of the Cold War.

"Our Russian neighbours have carried out yet another form of aggression against Ukraine - aggression through its gas supplies. This price is the highest on European territory and it is not an economic but a political price," said Prime Minister Arseny Yatseniuk at a cabinet meeting.

Ukraine is still in talks with Russia to cut the gas price, which Moscow raised to $485 per 1,000 cubic metres from a previously discounted price of $268.50, making it now by far the highest price paid in Europe for Russian gas.

The Russian gas export monopoly Gazprom (GAZP.MM) says that on average it charges its European customers between $370 and $380 per 1,000 cubic metres.

Ukraine imports more than half its gas needs from Russia.

"If we don't come to an agreement (with Russia) then there is a procedure laid out in our contract, going to the arbitration court in Stockholm," Ukrainian Energy Minister Yuri Prodan told journalists before a cabinet meeting.

"We are not trying to break our contract but to set up a fair price like in Europe," he said.

Alexei Miller, Gazprom's (GAZP.MM) chief executive officer, said in a Rossiya 24 television interview recorded on Friday and aired on Saturday that Ukraine had accepted the new price.

"The gas price included in Ukraine's budget is the price that is already at work today, $485, and this confirms one more time that Ukraine recognises it as a market (price), recognises the current agreement and is ready to pay that price for our gas," Miller said.

According to a 2009 contract, the price is calculated on the basis of several fuel product prices and Yatseniuk said there were no economic grounds to increase prices for gas.

In raising the price, Russia scrapped two discounts. One was introduced in 2010 when Ukraine agreed to extend terms for Russia's Black Sea Fleet in Crimea until 2042 and the second was agreed in December after Yanukovich scrapped a trade deal with the EU in favour of closer ties to Russia.

Miller said that the discounts have disappeared "all strictly according to the contract" because Kiev has not paid for deliveries. He said the unpaid bill rose to $2.2 billion as of the end of March from $1.4 billion in December.

"They (Ukraine) fully understand why this discount has disappeared, they fully understand that the cancellation of the discount is Ukraine's fault," Miller said, adding: "We cannot supply gas for free."

EMERGENCY TALKS

Since Yanukovich left power Russia has increasingly pressured Kiev over its failure to pay for past gas debts.

Russia and Ukraine clashed over gas pricing in 2006 and then again in 2009 when Russia turned supplies off to Ukraine during winter months, causing supply shortfalls further on in Europe.

Energy Minister Prodan said Ukraine would not siphon off gas from pipelines that cross its territory to deliver Russian gas to European consumers if Moscow turned off gas to Ukraine.

"Ukraine will fully carry out all obligations on gas transit. Ukraine has not even thought of taking that gas," he said.

Ahead of Saturday's cabinet meeting, Yatseniuk ordered Prodan to carry out talks with energy official in Brussels to discuss "concrete steps" towards importing gas from Europe.

He said on Friday Kiev was carrying out emergency talks with Slovakia, Hungary and Poland on supplies of gas from the West by reversing pipeline flow through infrastructure designed to carry Russian gas to Europe.

Gazprom's Miller said that reverse supplies from Slovakia may not be physically possible, which could mean it would be a "virtual reverse just on paper".

"This issue requires a very careful study and consideration," he said. "In particular, I think that European companies that are willing to reverse supply gas to Ukraine should very carefully, very carefully, look at the legality of such operations."

Currently around 40 percent of Russia's exports to Europe flow through Ukraine, with the rest sent to Germany via the Nord Stream pipeline under the Baltic Sea and via the Yamal Europe pipe through Belarus and Poland.

Yatseniuk said the reverse gas could save Ukraine, which is on the brink of default, between $120 and $150 per 1,000 cubic metres. Ukraine consumed 50 billion cubic metres in 2013.

Prodan said Ukraine wanted to buy gas from neighbouring Slovakia, but Slovakia's gas company had declined to allow Ukrainians to examine its current transit facilities.

Slovakia's Eustream, which operates the gas network, denied it had turned away Ukrainian requests to inspect its facilities.

Slovakia is the EU gateway for Ukrainian supplies, with the potential to reverse flow more than 20 bcm into Ukraine, which could meet over a third of the country's gas demand, but not in a hurry. Ukrainian officials said they see possible imports from Slovakia at 10 bcm annually.

Analysts said it could take another six months for gas to actually start flowing from Slovakia to Ukraine, and that the link was unlikely to flow at maximum reverse capacity.

(Additional reporting by Lidia Kelly in Moscow; Writing by Thomas Grove and Lidia Kelly; Editing by David Holmes and Stephen Powell)

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