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Sep 30, 2014 8:08 AM

Ukrainians gear up for winter without Russian gas

The Associated Press

KIEV, Ukraine (AP) For Alexei Polezhai, who sells water heaters and wood-burning stoves at his two shops in Kiev, sales this fall have been remarkably good considering the dramatic collapse in the rest of the Ukrainian economy this year.

Ukrainians are rushing to insulate their walls, seal up drafty windows and snap up heating equipment as the possibility sets in that they may be about to experience their first winter without Russian gas.

Russia stopped gas deliveries to Ukraine in June after Kiev failed to pay what Moscow said it owed in arrears. As the two sides play brinksmanship over whether to sign a stopgap deal that would provide Kiev with enough gas to get through the winter, many Ukrainians are left wondering whether they may have to fend for themselves in the coldest months. Ukraine has some gas stored, but it will not last through the winter.

"People are afraid they will turn off the gas supply entirely," said Polezhai. Demand for his water heaters is about 15 times higher than normal, and sales for wood-burning stoves are also up dramatically. The warehouses where he buys the water heaters have hiked up prices by up to 50 percent.

"What to some is war, to others is profit," he joked.

Whereas Oct. 1 typically is the date when central heating is turned on for the winter, first in public buildings and by the middle of the month in residential buildings, this year the government has warned it won't supply heat until early November, when temperatures can easily dip below freezing.

For more rural residents, preparing for that means chopping extra wood or buying a wood-burning stove. For city residents, options are more limited: They are stocking up on blankets, buying water heaters and insulating their homes, but otherwise are simply left to cross their fingers.

Russian and Ukrainian negotiators are expected to resume talks this week in Berlin on a gas deal proposed by the European Union. But Kiev is continuing to talk tough, despite the fact that it previously has relied on Russia for about 60 percent of its gas.

The reason is that the stakes are high for Russia, as well. It uses the pipelines that cross Ukraine to deliver about half of the gas it supplies to Europe. And if Ukraine is desperate enough to start siphoning off gas for its own consumption, Russia would be left either to turn a blind eye or cut off supplies to much of Europe its largest market further damaging its reputation and hurting its profits.

"We're playing a game of chicken where the risks are too great," said Andrew Neff, an analyst at IHS Energy. "Nobody wants to go into the winter with this hanging over their heads."

The Ukrainian government already is advising people to be prepared for a rough winter.

"It will not be easy," Prime Minister Arseniy Yatsenyuk said during an interview with a Ukrainian network. "I warn you right away that it won't be warm, but we won't freeze."

Kiev Mayor Vitaly Klitschko last week said households will be approximately 2 degrees Celsius (almost 4 degrees Fahrenheit) colder than in previous years and hot water, which already has been turned off for weeks at a time, will be less readily available.

Many people, like cello teacher Anna Goncharova, are trying other ways to keep the cold out. She has replaced her old windows, insulated the walls of her apartment, and bought a pile of blankets.

"We're hoping we won't freeze," she said. "I truly hope that somehow we'll find an agreement with Russia. ... This can't happen in the civilized world."

Yatsenyuk said in early September that Ukraine had some 16.7 billion cubic meters of gas in storage, but the country will need approximately double that to survive the winter, and without Russian gas it would be left to rely on already minimal supplies from Europe.

Poland, Hungary and some other European countries have been selling gas, originally imported from Russia, back to Ukraine, but Moscow disapproves of the practice. Recently, some of these countries have had to stop supplying Ukraine with gas as they build their own reserves ahead of the winter and amid reports that Russia is tightening controls.

Relying on coal will also be more difficult this year. With much of Ukraine's industrial, coal-mining east ravaged by war with Russian-backed separatists, Kiev has had to resort to imports from countries as far away as South Africa.

The Ukrainian government has said it would cut energy supplies to industry by 30 percent before reducing supplies to the civilian population. That decision would likely send the Ukrainian economy, which could shrink by up to 10 percent this year, spiraling downward even faster.

The proposed stopgap deal on gas supplies between Ukraine and Russia would last only until early spring, supplying Kiev with a much-needed 5 billion cubic meters in exchange for payments of $3.1 billion by the end of the year.

But Ukrainian officials have protested the proposed price of $385 per 1,000 cubic meters, and Prodan has said he would stick by his stance that Ukraine should pay only $268.

Despite the risks to its economy and citizens, Kiev is going to continue playing hardball, says Neff, the analyst. Russian state gas company Gazprom took a major hit in profits and reputation when, in 2009, it retaliated against Ukraine by turning off supplies to much of eastern and central Europe during a bitterly cold winter.

If no deal is found with Moscow, Ukraine is likely to siphon off gas from the supplies meant for the EU.

Ukraine has little to lose, Neff says. Russia has already annexed the Crimean Peninsula, separatists control large parts of east Ukraine, and the economy is in free fall. "Ukraine has already lost."


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