Photo courtesy of Greg Westfall /www. flickr.com

On Wednesday, Ukrainian leadership rejected a Russian proposal which intended to reduce the cost of natural gas for Ukraine more than 20%. The rebate discounted Ukraine’s gas bill to $385  per  1,000 cubic meters — after its withdrawal, the price reverted to $485.50 per 1,000 cubic meters; this is the highest price paid by any customer in Europe. The two countries are now at an impasse over the rescinded rebate, which could have significant implications for the gas market moving forward.

It is possible that if negotiations do not continue, Russia may follow through on its threats to cut supplies to Ukraine in the absence of a deal. Ukrainian Prime Minister Arseniy Yatsenyuk remarked today that Ukraine would not agree to any discounts within its deal, and is instead focused on a contract-based gas agreement. At a cabinet briefing broadcast by 5 Kanal TV, Mr. Yatsenyuk declared that Ukraine is “prepared” to pay market price on its gas debt.

Although the European Commission has brokered five rounds of trilateral price talks between Russia and Ukraine, every round has so far been unsuccessful in its attempt to reach an agreement. Despite these past failures, however, many are hopeful that today’s talks — between the two energy ministers, the Commission and the CEOs of Gazprom and Ukraine’s Naftogaz — have a chance for success. This round of discussion follows eight hours of talks on Tuesday; Gazprom has extended until Monday its deadline for Ukraine to switch to prepayment. If Ukraine does not acquiesce, the country will face a supply cut-off.

If current tensions reach the point of such a cut-off, it could have a serious impact on European gas supplies, given that nearly 15% of gas used in Europe comes from Russia through Ukrainian territory. 

Last week, Ukraine paid off $786 million of its debt, but has declared it will not pay more until an overall deal is reached.

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