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Ukraine's Naftogaz has sent $378.22 million to Russia as advance payment for natural gas supplies, which should lead to the resumption of shipments that were suspended nearly six months ago in a dispute over the prices Moscow had set for the fuel and debts Kiev owed for previous shipments.
Russia's Gazprom said Dec. 7 that it had received the payment, which had been made the day before. Under an agreement signed between the two government-owned gas companies, the flow of gas was to resume within 48 hours after payment.
The payments and the flow of gas come just in time, as wintry weather settles on Ukraine. It also is good news for Russia's gas customers in the European Union, Alexander Paraschiy, an energy analyst at Concorde Capital in Kiev, told Bloomberg News. "Russian gas paid for [now] cuts the risk of shortages in Ukraine and in Europe-bound transit at least until the middle of February," he said.
Vladimir Demchishin, Ukraine's minister of energy and coal industry, said Dec. 5 that the payment would buy about 1 billion cubic meters of gas. His predecessor, Yuri Prodan, said earlier in December that the amount would depend on weather and demand. Under the Gazprom-Naftogaz contract, Ukraine can decide at any time on the amount of gas it needs for a given period, as long as it pays in advance.
But that's just the first installment. Paraschiy said that, for now, the country can't rely much on coal because of the pro-Russian violence in Ukraine's eastern coal region, and estimated that Ukraine may need as much as 4 billion more cubic meters of Russian gas, costing up to $1.5 billion, starting in January to keep warm through the winter.
Having gone six months without Russian gas, Ukraine has been strictly limiting its consumption of gas from its reserves and increasing its imports from EU countries. Still, Russia could suspend deliveries again if Ukraine's doesn't maintain payments on its $5 billion debt for past gas deliveries by Jan. 1, according to Russian Energy Minister Alexander Novak.
In October, under EU mediation, Kiev accepted an offer by Moscow to supply gas to Ukraine until March 2015. Ukraine also must pay Russia $3.1 billion of its outstanding debt of more than $4 billion by the end of 2014. The first installment of that debt repayment was made in November.
If Ukraine continues to stay current on its payments, Europe can rest easy, at least for the coming winter. EU customers get about one-third of their gas supplies from Russia, and half of that flows through pipelines in Ukraine. That's a key reason that the EU mediated the payment deal.
Russia cut gas deliveries to Ukraine on June 16 against the backdrop of the popular overthrow of pro-Russian Ukrainian President Viktor Yanukovich in February, Russia's annexation of Ukraine's Crimean peninsula in March, and the growing fighting between Ukrainian forces and pro-Russian separatists in eastern Ukraine.
Disputes between the two countries had previously led Russia to suspended gas deliveries in 2006 and 2009. In both of those cases, Russian gas deliveries to the EU were affected.
By Andy Tully of Oilprice.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.