Putin Letter Demands Prepayment to Ensure Ukraine Does Not Siphon Europe's Gas
April 11, 2014 • 8:22AM

Russian President Vladimir Putin Thursday released a letter sent to the leaders of European countries which purchase gas from Russia. Putin's letter demands, in accord with the Ukraine-Russia Gazprom 2009-2019 contract, that Ukraine henceforth prepay for all gas, if debts are not paid, and that Ukraine immediately purchase 11.5 billion cubic meters of gas at a cost of $5 billion, to ensure that Ukraine does not siphon off gas being sent to Europe via Ukraine for its own use; and pay an $18.4 billion "take-or-pay" fine because Ukraine failed to buy gas in 2014 according to the contract. The contract stipulates a switch to an advance-payment system if debts are not paid. Putin also announced cancellation of the Gazprom discounts to Ukraine in effect since 2009.

Putin's letter states:

"Russia and the EU member states are Ukraine's major trading partners.... Right from day one of Ukraine's existence as an independent state, Russia has supported the stability of the Ukrainian economy by supplying it with natural gas... and it also provided for its uninterrupted transit through the territory of Ukraine... The total volume of natural gas delivered to Ukraine .... during the period from 2009-2014 (first quarter), stands at 147.2 billion cubic meters... The fact that after signing that contract, Russia granted Ukraine a whole string of privileges and discounts on the price of natural gas, is quite another matter... During the first four years, Russia has been subsidizing Ukraine's economy by offering slashed natural gas prices worth $35.4 billion... No other country provided such support except Russia.

"Russia cannot and should not unilaterally bear the burden of supporting Ukraine's economy by way of providing discounts and forgiving debts, and in fact, using these subsidies to cover Ukraine's deficit in its trade with the EU member states.

"The debt of NAK Naftogaz Ukraine for delivered gas has been growing monthly this year. In November-December this debt stood at $1.451 billion ... In March, there was still a discount price applied... and even at that price, Ukraine did not pay a single dollar.

"In such conditions, in accordance with Articles 5, 15, 5.8 and 5.3 of the contract, Gazprom is compelled to switch over to advance payment for gas delivery, and in the event of further violation of the conditions of payment, will completely or partially cease gas deliveries. In other words, only the volume of natural gas will be delivered to Ukraine as was paid for one month in advance.

"Undoubtedly, this is an extreme measure. We fully realize that this increases the risk of siphoning off natural gas passing through Ukraine's territory and heading to European consumers. We also realize that this may make it difficult for Ukraine to accumulate sufficient gas reserves for use in the autumn and winter period. In order to guarantee uninterrupted transit, it will be necessary, in the nearest future, to supply 11.5 billion cubic meters of gas that will be pumped into Ukraine's underground storage facilities, and this will require a payment of about $5 billion US dollars.

"...We believe that it is vital to hold, without delay, consultations at the level of ministers of economics, finances and energy in order to work out concerted actions to stabilize Ukraine's economy and to ensure delivery and transit of Russian natural gas in accordance with the terms and conditions set down in the contract... It goes without saying that Russia is prepared to participate in the effort to stabilize and restore Ukraine's economy. However, not in a unilateral way, but on equal conditions with our European partners. It is also essential to take into account the actual investments, contributions and expenditures that Russia has shouldered by itself alone for such a long time in supporting Ukraine. As we see it, only such an approach would be fair and balanced, and only such an approach can lead to success."