Putin Tells Merkel "Ukraine On The Verge Of A Civil War" As Germany Agrees To Re-Sell Russian Gas To Ukraine

Submitted by Tyler Durden on 04/15/2014 19:36 -0400

• European Union
 
• Germany
 
• Hungary
 
• Nat Gas
 
• Natural Gas
 
• Poland
 
• Ukraine
 
• Vladimir Putin

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A day after Putin called Obama to warn him that only the US president can prevent bloodshed in Ukraine - something which Obama failed at based on this morning's reports out of east Ukraine - German Chancellor Angela Merkel had a follow up phone call with the Kremlin a few hours ago, in which Putin told her that "The sharp escalation of the conflict puts the country, in essence, on the verge of a civil war".

From Itar-Tass:

President Vladimir Putin has had a telephone conversation with Chancellor Angela Merkel of the Federal Republic of Germany and discussed with her the situation in Ukraine, the Kremlin press service reports.

Russia's Head of State pointed out , "The sharp escalation of the conflict puts the country, in essence, on the verge of a civil war".

The leaders of the two countries accentuated the importance of talks in a quadripartite format (Russia, the European Union, the United States, and Ukraine), planned for April 17. "Hope has been expressed that the sides at the meeting in Geneva will manage to convey a clear message contributing to directing the situation into a peaceful channel," a Kremlin press service official added.

The RF President also recalled the importance of stabilizing the economy of Ukraine and of ensuring deliveries and transit of Russian natural gas to Europe. This had been reiterated in his message, dated April 10, 2014, to the leaders of a number of European countries.

The telephone conversation was held on the initiative of the German side.

Considering the events from this morning which nearly resulted in the S&P plunging below 1800 only to be "redeemed" by the "bad news" that the Japanese economy is about to stumble yet again, leading algos to believe that more BOJ QE is imminent and sending the S&P surging by over 30 points in the span of a few hours, this is hardly surprising.

What is more surprising, is that as we reported earlier, the very same Germany, through its RWE AG utility, announced it would supply Ukraine with nat gas in 2014 since Gazprom is adamant on no longer providing the troubled country with the precious commodity in the absence of payment (which Ukraine can't afford). WSJ reports:

German utility RWE AG said it agreed to supply Ukraine with natural gas this year, as the troubled country seeks to reduce its reliance on gas imported from Russia.

RWE is the first European energy company to agree to supply gas to Ukraine since the political crisis there threatened the former Soviet republic's supplies from Russia. But the deal underscores the extent to which Europe, now scrambling to shore up Ukraine, also depends on Russian gas.

The paradox of course, is that Germany itself is reliant on Russian natgas exports for about a third of its needs, which means that the gas Germany "sells" to Ukraine will in fact originate in the Ukraine! "RWE declined to estimate how much of its gas deliveries to Ukraine's state-owned energy company Naftogaz will likely stem from Russia or to provide details to the agreement, such as volumes, price or the duration of the shipments."

What the deal would do, is to allow Ukraine to purchase nat gas at lower prices than the 81% price surge Gazprom is demanding from Ukraine in the Kremlin's implicit halt of gas supplies to the intransigent ex-USSR republic. As a result, the deal "could at least partially buffer Ukraine from price increases imposed by Russia's OAO Gazprom—which currently supplies the vast majority of the country's gas imports—and the state-owned energy giant's recent threats to turn off the spigot. RWE said it would begin the gas deliveries via Poland immediately, adding only that the gas would be supplied at European market prices, including delivery costs."

There are other complications:

It isn't clear how much gas the RWE deal will enable to flow to Ukraine. Under a 2012 deal between the German utility and Ukraine, the German company could ship up to 10 billion cubic meters of gas to Ukraine each year—the precise amount is agreed upon annually. However, RWE currently can't ship the maximum allowable amount because of capacity constraints, a company spokesman said. RWE shipped around one billion cubic meters of gas to Ukraine last year.

Ukraine consumed around 50 billion cubic meters of gas in 2013, of which 60% came from Russia, according to its government. and most of the rest was produced domestically. Gazprom earlier this month raised gas prices for Ukraine by 81%, saying that Naftogaz owed it around $2.2 billion. Officials in Moscow later warned there could be gas-supply disruptions if Ukraine's unpaid gas bills weren't resolved.

Some analysts caution that European countries won't be able to supply Ukraine with significant quantities of gas until pipelines that carry gas into the country are upgraded.

Central and Eastern Europe's gas-pipeline system was built to ship large quantities of Russian gas westward. After a price dispute in 2009 prompted Gazprom to temporarily halt gas supplies to Ukraine, the European Union looked into upgrading pipelines to allow for reverse flows of gas back into Ukraine. The EU currently receives around 30% of its annual gas demand from Russia, of which around a half is delivered via pipelines that run through Ukraine.

But reverse-flow capacity into Ukraine is still limited. In 2013, around 2 billion cubic meters of gas were shipped to Ukraine via Poland and Hungary, according to the European Commission.

Finally, even this attempt to keep Ukraine plugged in, is likely merely for optical purposes:

Jonathan Stern, senior research fellow at the Oxford Institute for Energy Studies, said Russian gas supplies to Ukraine would likely remain indispensable near-term.

"I expect that raising reverse-flow capacities to around 5 bcm this year should be possible, but that would still leave a large gap to meet all of Ukraine's gas needs," Mr. Stern said.

Of course Putin knows this. He also knows that all this deal really means is that instead of Ukraine paying Gazprom it will now be up to Germany to foot the bill for Ukraine token nat gas supply, which in the grand scheme of things, will hardly be sufficient to move the needle.

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