No pressure

The markets are remarkably calm about another “gas war” between Russia and Ukraine

June 17, 2014
Obsession
Energy Shocks
June 17, 2014

Today, the day after Russia cut off gas shipments to Ukraine, a mysterious explosion rocked one of Ukraine’s main pipelines, a key transit route for Russian gas headed for Western Europe.

This, it seems, is the opening salvo in the third “gas war” between Russia and Ukraine in eight years.

EU-brokered talks have failed to reach a compromise between the countries, which remain far apart on a “fair” price for gas. Ukraine’s state-run gas operator filed a suit in an international arbitration court, claiming $6 billion in overpayment for gas since 2010. Its Russian counterpart filed a suit of its own, alleging unpaid debts worth $4.5 billion on gas delivered since 2009.

Until these cases are resolved, Ukraine will receive only gas it pays for upfront, and must not impede the flow of gas destined for the EU—which gets around 15% of its gas via pipelines that pass through Ukraine. Previous disputes with Russia, in 2006 and 2009, led to gas shortages in Europe, amid allegations that Ukraine was siphoning off energy for its own use. Natural gas prices across Europe spiked as a result:

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Looking at the markets today, you wouldn’t know there was a “war” on. Although traders reflexively bid up the price of gas on the news that Russia was turning off the taps to Ukraine, they quickly reconsidered their positions, leaving key European gas benchmarks little changed.

Why so sanguine? There are several reasons. Despite the pipeline explosion, a parallel line was able to carry gas to Europe without too much disruption, Ukraine’s gas company said (link in Ukrainian). The current dispute is also taking place in the warmer months, whereas previous cutoffs came during the dead of winter. The 2011 opening of the Nord Stream pipeline, which pumps gas from Russia to Germany, has reduced the EU’s reliance on gas piped via Ukraine. And, across Europe, gas reserves are unusually high following recent mild weather, and unlike in 2006 and 2009, the pipelines that normally ship gas from Ukraine to the west are now able to reverse their flows, if need be. For these and other reasons, the markets see the dispute as more of a skirmish than a full-blown war.

But the longer the gas cutoff goes on, the more the temptation for Ukraine to divert flows from Russia, or draw on reserves from the rest of Europe. With relations between Moscow and Kyiv at an all-time low, the odds are against a swift resolution to the dispute. That might make the markets reassess their view.

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