A gas pressure gauge at Ukraine's border with E.U. member Slovakia. The political pressure gauge is at the other end of the scale.
By Geoffrey Smith
June 16, 2014

The crisis in Ukraine took a big turn for the worse as Russia cut off supplies to the country and filed suit for $4.5 billion in an international arbitration court over non-payment for past supplies.

The move comes after talks on a compromise settlement broke down over the weekend, and will increase pressure on Ukraine’s tottering economy, which is dependent on supplies of Russian gas, and which is currently being kept afloat by loans from the European Union and the International Monetary Fund.

Gas monopoly OAO Gazprom (OGZPY) said in a statement that it would now ask Ukraine to pay in advance for any further deliveries.

“Ukraine is treating Russian gas in its pipelines like its own, and it has no right to,” Gazprom chief executive Alexei Miller told a press conference. He accused the Ukrainian government of intransigency and said that Ukraine “is engaged in self-destruction.”

Gazprom’s action is bound to worsen the political dispute between Russia on the one side and the Kiev government and its supporters in the E.U. and U.S. on the other. The latter have promised fresh sanctions on Russia if it escalates the crisis, and the shutting off of gas supplies, coupled with Moscow’s increasingly overt support for an armed rebellion in eastern Ukraine, appears to be an open challenge to the West.

Over the weekend, rebels had shot down a Ukrainian military transport plane, killing all 49 people on board. The incident was the biggest single loss of life in four months of spiralling violence. Russia denies actively supporting the rebels but has protested furiously against Kiev’s use of artillery and airstrikes against the rebels, which it says have killed civilians.

The E.U. in particular has shied away from measures that would hit its trade with Russia, which topped $440 billion last year.  Russia is a key source of oil and gas imports and an increasingly important export market for European companies. As such, the Ukraine crisis is one of the biggest threats to what is still a fragile recovery in many parts of the region.

Despite sending a powerful signal, Gazprom’s move is unlikely to cause an immediate crisis, either in the E.U. or in Ukraine. Demand for gas is at a seasonal low, and most of the daily flows in June go to replenishing storage facilities ahead of the next winter.  However, if the dispute isn’t solved by then, pipeline operator Naftogaz Ukrainy may only be able to guarantee heating supplies by siphoning gas destined for countries further west.

EU Energy Commissioner Guenther Oettinger said there was “no reason to be afraid” of any immediate disruption to gas supplies, noting that a mild winter had left bigger reserves in storage than usual, but he added that “we do need to use the coming weeks to fill the storage facilities.”

Gazprom said it expected Naftogaz to honor its commitments to pipe gas to third-party countries. The E.U. imports around a quarter of its annual gas supplies from Russia, and roughly half of that comes through Naftogaz’s pipelines.



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