Ukraine crisis: Can Ukraine, Russia avoid another gas shutoff?

Ukraine violence escalated over the weekend and into Monday as pro-Russian militants clashed with Ukraine forces in the east and the Black Sea port city of Odessa. The threat of another natural gas shutoff intensified, too, with Russia and Ukraine failing to agree on terms for paying down Ukraine's gas debt.

Weekend clashes between Ukraine forces and pro-Russian militants extended into Monday as violence spread to the Black Sea port city of Odessa.

The street-level unrest parallels escalating diplomatic tensions between Kiev and Moscow over Ukraine's unpaid natural gas bills. After trilateral talks in Poland late last week failed to reach a compromise and Russia threatened to cut off gas supplies to Ukraine on May 31, European Union officials huddled Monday to figure out how to replace Russian gas with other sources.

With a firm deadline in place, a mounting Ukraine debt, and a staunch disagreement on basic contract terms, the scenario bears an unsettling resemblance to the countries' past gas disputes that ended in a midwinter shutoff of supply. The onset of spring makes any current gas crisis less urgent, and there's still hope Western financial and diplomatic support can avert another gas war between Russia and Ukraine. Still, both sides appear to be uninterested in compromise and are running short on patience.

"If we don't receive prepayment for June by May 31, then it is possible Gazprom will reduce gas supplies to Ukraine or provide it with the capacity it has paid for by May 31," Russia's Energy Minister Alexander Novak said Friday during joint talks in Warsaw between Russia, Ukraine, and the European Commission, as reported by Reuters.

For their part, Ukrainian officials are preparing to file a lawsuit against Russia's state-owned gas giant Gazprom for charging what it says are unfair prices. 

Russia supplies Ukraine with about half of the gas it uses and supplies Europe with about 30 percent of the gas it imports. Slightly less than half of the Russian gas flowing to Europe goes through Ukraine, according to the International Energy Agency. In 2006 and 2009, Russia cut off gas supplies to Ukraine after bitter price disputes, and some flows to the rest of Europe were also disrupted.

Friday's talks were aimed at avoiding a similar scenario but failed to reach a compromise. The dispute centers over a gas price increase Gazprom imposed from April 1 after months of Ukraine being unable to pay for the Russian gas it consumed. Moscow canceled two discounts it had granted previous Ukrainian administrations, almost doubling the price it charges to $485.50 per thousand cubic meters from $268.50 per thousand cubic meters. That makes it the highest price Gazprom charges any European customer.

All told, Gazprom says Ukraine owes $3.5 billion for Russian natural gas, warning Ukraine it must pay in advance for gas beginning with June deliveries.

Western aid agencies have pledged billions in financial support to help Ukraine pay off its energy debts and stabilize its fragile economy, but there's disagreement over exactly how much Ukraine should pay back. Kiev has called Gazprom's price hike unfair and politically motivated, and last week moved to start legal proceedings against Gazprom.

"Ukraine, having received from Russia an unjustified, discriminatory price for gas from April 1, 2014 ... will not be able to pay for gas deliveries at this price," said Ukraine's energy minister Yuri Prodan, according to Reuters.     

Meanwhile, Kiev is busy meeting with Western neighbors to secure alternative sources of gas flows from Slovakia, Poland, and Hungary. Last Monday, Ukrainian officials signed a deal to begin importing 8-9 billion cubic meters (bcm) of gas per year from Slovakia starting this fall. That could offset some of the roughly 30 bcm it imports from Russia last year, but Moscow is already questioning the legality of so-called "reverse gas flows." Many long-term Gazprom contracts have destination clauses that limit where gas supplies ultimately arrive.

"We will look at such contracts very closely," Russian Energy Minister Alexander Novak said as reported by The Wall Street Journal.