Putin warns of gas shutoff. What are Ukraine's options?

The East-West standoff over Ukraine has come to a point many hoped to avoid: a Russian threat to end natural gas supply.

Russia will completely or partially cease gas deliveries to Ukraine if its debts continue unpaid, Russian President Vladimir Putin wrote in a letter to European leaders Thursday. A shutoff would devastate Ukraine's already weak economy and could reduce flows of the important heating and electricity fuel to the rest of Europe.

It has long been assumed Russia might use a supply cutoff as a tool in its negotiations with the West over Ukraine – it has twice shut off the gas in winters past after Ukraine amassed large debts to its primary supplier. But Thursday's warning is by far the Kremlin's most direct and explicit in the latest round of tensions over Ukraine's future. It promises to add a new level of urgency to Ukraine and broader Europe's efforts to diversify its energy mix.

"Undoubtedly, this is an extreme measure," Mr. Putin wrote in Thursday's letter, acknowledging that gas piped through Ukraine intended for Europe might also be interrupted. A sudden drawdown of Russian supply would also make the fall and winter heating season difficult for Ukraine, Putin wrote. "However, the fact that our European partners have unilaterally withdrawn from the concerted efforts to resolve the Ukrainian crisis, and even from holding consultations with the Russian side, leaves Russia no alternative." 

Ukraine's state-owned gas company, Naftogaz, has amassed a debt of $2.2 billion in unpaid gas bills to Russia's state-owned Gazprom since late last year. Last week, Gazprom ended two discounts it had previously awarded Naftogaz, effectively raising the price of its gas by 80 percent to the highest level it charges to any European customer. Ukraine's interim prime minister Arseniy Yatsenyuk called last week's price hike politically motivated and warned it may be a prelude to a supply shutoff – a scenario that became more plausible with Thursday's letter.    

Russia supplies roughly half of the gas Ukraine uses and has long offered it at a discount to keep the former Soviet state within its orbit. That has "supported the stability of the Ukrainian economy," Putin writes in Thursday's letter. He blames the European Union for Ukraine's current economic crisis, and for exploiting the country's raw foodstuffs, metal, and mineral resources for economic gain.

The West doesn't see it that way. Russia's gas discounts – together with a heavily subsidized Ukrainian gas industry – have stymied market competition and discouraged the development of Ukraine's own domestic gas resources. It has kept Ukraine's economy in the lurch and encouraged corruption and cronyism among high-ranking Ukrainian officials. Moscow has wielded an "energy weapon" in Europe, using its natural gas leverage for geopolitical ends. Meanwhile, Europe has pledged $15 billion in aid to Ukraine, part of which would go toward paying off its gas debt.

White House spokesman Jay Carney had not seen the letter when he was asked about it at a press briefing Thursday morning, but he reiterated the view that "it’s wholly inappropriate to use energy exports in order to achieve diplomatic or geopolitical objectives."

"[W]e’re in constant conversation with our European partners on matters like this," Mr. Carney added.

That conversation has long been a question of how to wean off Russian natural gas, which makes up roughly 30 percent of European gas imports (slightly half of those go through Ukraine). It is a question that has received renewed attention since the unrest began unfolding in Ukraine last fall. Putin's warning will further motivate European leaders to diversify their energy mix.   

For Ukraine, that includes the reversal of pipeline flows from Slovakia that could allow Ukraine to buy gas for $150 less than the $485 per 1000 cubic meters that Gazprom is now charging. It has already taken steps to reform dysfunctional gas subsidies that could boost its own domestic gas production. Most recently, the country's energy chief has said it will maximize coal output in favor of gas.

But all these alternatives take time to develop, and time is of a premium. If Russia turns off the spigot tomorrow, Ukraine has an estimated three to four months left in gas storage. 

"There can be only one way out of the situation that has developed," Putin wrote Thursday. "We believe 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."