Ukraine misses deadline to pay Russia's Gazprom gas debt

A pressure gauge is pictured at an underground gas storage facility in the village north of Kiev Credit: Reuters

If you've ever been in arrears on your gas bill you will know it's in everyone's interests to come to some sort of agreement with your supplier. But Ukraine and Russia seem to be struggling.

Ukraine owes Russia $2.1 billion (£1.2 billion) for gas and counting. More correctly, it owes that rather staggering sum of money to Gazprom, the world's largest gas company which is owned by the Russian state.

The final deadline for Ukraine to settle the outstanding balance, in full, came and went yesterday at 17:00 Moscow time (14:00 BST). My understanding is that no money changed hands. Gazprom executives this morning sound mightily cross but it isn't clear what happens next.

The veiled threat, of course, is that Gazprom will do what it has done in the past and last did in 2009: attempt to cut off Ukraine's gas supply.

In recent days Gazprom has hiked the price it charges Ukraine for gas from a preferential rate to punitive one.

Gazprom said the move was a commercial decision, Ukraine's energy minister saw it as political. He said Ukraine would continue to pay (or not pay) $268 (£160) for 1000 cubic metres of gas, rather than the new rate of $485 (£290) that Gazprom is demanding.

Gazprom says Ukraine has not paid anything for the gas it uses for several months. This cannot come as too much of a surprise. Ukraine's finances are in a mess but an emergency loan of up to $18 billion (£10.8 billion) is on its way from the International Monetary Fund, albeit in it return for Greek-style economic reform. Gazprom want reassurances that some of this money will be used to settle debts. It hasn't got them.

Ex-Ukraine president Yanukovich (R) told Russian leader Putin in 2013 that he hoped for a beneficial gas deal between Russia and Ukraine Credit: Reuters

Ukraine's boldness is, in part, born of desperation but the government in Kiev does have some bargaining power.

In 2013, 30% of the gas the European Union used came from Russia. Yes, 30%. And the pipeline used to deliver that gas runs - you've guessed it - straight through Ukraine.

So Ukraine may well be calculating that Russia wouldn't dare shut off the gas supply. Partly because the world would react with horror but also (and this is the really interesting bit) partly because, in reality, it can't.

Gas conveying system which was symbolically put a into operation by CEO of Russian energy company Gazprom Miller Credit: Zucchi Uwe/DPA/Press Association Images

Russia can reduce the amount of gas it pipes through Ukraine but it can't stop the people of Ukraine using it, which is precisely what happened in 2009. Indeed in 2009 it was countries further down the pipeline, in the Balkans in particular, that ended up experiencing supply disruptions.

What a mess!

This morning I spoke to someone close to the company who said "Kiev may well be banking on inaction but it would be silly to bank on it forever". Talk is cheap, the price Ukraine is now paying for gas isn't. It will be intriguing to see how this is resolved.