Putin set for talks with Ukraine leader on gas sales, eastern cease-fire

With a temporary cease-fire barely holding in eastern Ukraine and winter approaching, Russian President Vladimir Putin and Ukrainian President Petro Poroshenko have agreed to hold talks in Italy this week.

Mr. Poroshenko said he recognizes that "the whole world has high expectations" for his meeting with Mr. Putin at this week’s Europe-Asia summit on Thursday and Friday in Milan, Reuters reports. The Kremlin said the two leaders spoke by telephone on Tuesday.

Restoring peace in eastern Ukrainian is the top priority, along with a pending energy crunch. Ukraine's easternmost provinces slid into chaos earlier this year after Ukrainians, alarmed by the overthrow of President Viktor Yanukovych, attempted to break away from what they claimed was a fascist junta in Kiev. The conflict eventually erupted into open fighting between Ukrainian government troops and a Russian-backed insurgency. 

With the conflict still simmering amid a temporary cease-fire, Moscow and Kiev have both taken steps to defuse tensions ahead of this week’s meeting. Putin ordered 17,600 Russian troops to pull back from the border with Ukraine over the weekend in a show of goodwill, the Associated Press reported.

For his part, Poroshenko said on Sunday that a full cease-fire in eastern Ukraine could soon be reached under a peace plan that he and Putin have endorsed, The New York Times reported. But the Ukrainian leader is still expecting “difficult negotiations” with Putin in Milan. Putin will also meet with Western European leaders for the first time since his trip to France in June to mark D-Day.

Both Europe and Ukraine hope to resolve a long-running dispute over Russia’s natural gas exports. A third of Europe’s gas comes from Russia, with about half of that flowing through Ukraine. In June, Gazprom, the Russian gas monopoly, cut off exports to Ukraine, citing an unpaid bill of $4.5 billion and disagreements over pricing in its decision.

The gas dispute between Russia and Ukraine could lead to a cut-off for Europe "without either side explicitly intending it" the Monitor’s Fred Weir reported in August.

For one thing, Ukraine might siphon off some gas transiting through its pipelines to meet urgent local demand as it allegedly did during a previous Russia-Ukraine gas war in 2009, leaving downstream customers with critical shortfalls.

If Ukraine hoards all of the gas in its storage tanks to meet its own needs, as it has said it will do, Europe could accidentally be left in the cold, says [Mikhail Krutikhin, a partner at RusEnergy, a leading Moscow consultancy].

"Those storage tanks were designed to have gas on hand to meet peak demand," he says. "Nobody can predict the weather. If there is a serious cold snap this winter, and Gazprom is unable to draw on those stocks to meet increased demand, the impact on Europe could be very serious."

The Washington Post reports that Ukraine's storage tanks are only 54 percent full. 

But even if a deal with Russia is reached this week, experts say reform is still needed in Ukraine’s energy sector. Andriy Kobolyev, chief executive of the country's gas monopoly Naftogaz, explained why to the Post:

Ukrainian households pay about one-eighth the market price for natural gas, Kobolyev said; about a third of Ukraine’s households pay monthly gas bills of just $2, he added. Because of these subsidies, Naftogaz expects to run a deficit of 7.4 percent of GDP this year, Kobolyev said, more than the government’s expenditures on any other budget item.

Mikhail Pogrebinsky, a political analyst in Kiev, said he expected the talks in Milan to generate progress.

"I think that the meeting in Milan will bring a breakthrough in the gas sphere," he told Reuters. "Russia will eventually sell gas to Ukraine, after Ukraine pays a symbolic part of its debt, this will allow Ukraine not to freeze in winter."