Poroshenko flies to Berlin to talk gas and peacekeeping

Ukrainian president Petro Poroshenko met German chancellor
Angela Merkel in Berlin on Tuesday, April 10. The two discussed the
introduction of United Nations peacekeepers into the Donbas war zone, and the
effect of the Nord Stream 2 project on Ukraine.

Chancellor Merkel, who spoke with Russian Federation
president Vladimir Putin on Monday by phone, reiterated the need for conditions
to stabilize across the line of contact in eastern Ukraine. “We’re still
pushing for exchanges of prisoners and the observance of a ceasefire,” Merkel
stated.

The future of Ukrainian gas transit was also a
featured topic. “A Nord Stream 2 project without clarity about the
Ukrainian transit role is not possible,” Merkel said. She specifically
pointed to the revenue generated by gas transit for the Ukrainian government
and its strategic importance. Deutsche Welle reports that in an interview with
Handelsblatt, President Poroshenko had claimed that Nord Stream 2 would enable
“an energy and economic blockade” of Ukraine.

After Merkel’s comments, Gasprom CEO Alexei Miller released
a statement claiming that the company expects Ukrainian gas transit volumes of
10-15 bcm per year, but that at the same time, Ukraine needs to explain the
commercial basis for the transit fees it charges. Ukraine transited annually 85
bcm of Russian gas in 2009-2016, on average, and 91 bcm in 2017.

James Hydzik: Miller’s
comments indicate that future gas volumes through Ukraine will be at best
one-sixth of their current rate. It will be a huge blow to the Ukrainian
government in terms of budget revenue intake, as well as significant loss of
Ukraine’s foreign currency proceeds from transit services (which totaled about
USD 3 bln p.a. in recent years). However, given the history of
Ukrainian-Russian gas relations, this should be no surprise. Ukraine may have
accept the reality of vastly reduced transit revenue, which will make it more
dependent on IFIs. That development might have the knock-on effect of the
government having less room to maneuver when bargaining with its lenders, which
in turn could make the country more competitive and a better place to do
business in the mid-to-long term.

Though the effort to bring UN peacekeepers to
Donbas remains in gear, we do not expect any change in the status quo in the
near future as there is little will to make significant compromises regarding
their placement along Ukraine’s internationally recognized border.