EU energy ministers were briefed, on 12 March, on energy relations with Russia and Ukraine. The Commission gave a frank exposition of the difficulties and the possibility of improvements in Kiev’s energy record. The Commission information note admits the «derailing» of efforts to push  for the modernisation of Ukraine’s gas transit system.

The Commission told ministers that new president Viktor Yanukovych will seek to renegotiate gas contracts made with Russia in February 2009. The Commission notes the (continuing) dangers inherent in these agreements. Contracts stipulate that Naftogaz needs to pay for gas imported by the sixth of each month. «If payment is not made, Gazprom is entitled to demand prepayments for deliveries,» explains the Commission.

«Energy relations with Russia are nevertheless likely to improve and so far Naftogaz has been able to meet its gas payment obligations,» reads the Commission’s note to ministers. «The main challenge for the new President will be to seek a solution to the structural and financial difficulties in the gas sector.»

The positive tone is certainly in contrast with the record of relations under the previous Ukrainian administration. Whilst, in autumn 2008, the Tymoshenko government negotiated a USD 16.5 bn standby arrangement with the International Monetary Fund (IMF), this was «de-railed» in late 2009 due to «political infighting» and the «approach of presidential elections». Another failure recognised were international efforts led by the Commission, over the summer of 2009, to provide Ukraine with financial assistance to pay for gas in storage in order to ensure uninterrupted gas supplies to Europe. «Ukraine, however, failed to implement the gas sector reform conditionalities agreed between the Commission, International Financial Institutions and Ukrainian authorities at the end of July,» admits the Commission.

Yanukovych therefore need to take urgent steps to improve cooperation with the IMF to allow for the disbursement of the remaining IMF funds. «This is also the pre-condition for the disbursement of EU budgetary support to Ukraine,» adds the Commission. Also dependent on better performance is Ukraine’s final accession to the Energy Community. In December 2009, the Energy Community ministerial council approved Ukraine’s accession. However, accession will only become effective after the Commission «verifies» the adoption and ratification of a new gas law complying with EU gas legislation (from 2003).

The Commission adds that a range of other industry solutions failed due to a lack of support from stakeholders, whether the EU, EU gas industry, Russia/Gazprom and Ukraine/Naftogaz. «The new President is however now advocating the establishment of a consortium between Ukraine, Russia and the EU for the operation of the Ukrainian gas transportation system.»