Vladimir Putin's Natural Gas Deal Weakens Russia's Hand in Ukraine

KiEV, Ukraine (TheStreet) -- Falling global energy prices have turned Vladimir Putin's invasion of Ukraine from an imperial Russian triumph into a potentially significant setback for his country's economy. Hard currency reserves are evaporating while western financial sanctions sap the ruble and Ukraine's government continues to turn the country away from Russia and toward Western Europe.

Sure, Putin won Round One, seizing Crimea and a piece of Ukraine's aging industrial base, and shutting off gas supplies to Ukraine until the International Monetary Fund helped Ukraine to pay its $4.6 billion bill. But most of Europe shrugged off Putin's threat of a cold winter without gas.

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The deal announced Oct. 30 with Russia to renew gas supplies to Ukraine will keep some 45 million Ukrainians from freezing this winter. It also assures the European Union that, with more than 15% of Europe's natural gas flowing through Ukraine, there won't be any disruption in gas supplies. That means European leaders are unlikely to put more pressure on Russia to end its war in Ukraine, ease its crackdown on the press and political opponents at home, and cease disrupting global peace efforts from Syria to North Korea.

The regime of President Petro Poroshenko agreed to pay Russian gas monopoly Gazprom OAO $378 per thousand cubic meters (tcm) of gas until the end of the year, and then $365 until March. That's above the current spot price of about $330/tcm and $100 less than Russia was asking earlier, but far higher than the $268.50/tcm that Ukraine paid when the country was led by Viktor Yanukovich, an ally of Russian President Vladimir Putin. It's also a temporary price, and when this deal expires, Russia can again raise prices.

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The pact gives Ukraine breathing space, says Matt Sagers, managing director of Russian and Caspian Energy Research at IHS, a Washington-based economic research firm. "It's a major, major breakthrough. It's a very positive sign the sides can put their disagreements aside."

The accord also cuts out the oligarchs and profiteering middlemen who skimmed off profitable gas customers by cutting side deals to buy gas directly from Russia and leaving state-controlled Naftogaz with the Ukraine's subsidized residential and utility customers. The change in pricing, and promises from the government that it will reduce resource taxes, mean Ukraine's significant natural gas reserves will again be attracting investors.

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