Why Russia threatened to stop supplying gas to Ukraine on June ?

Russia threatened to stop supplying gas to Ukraine on June 3 unless the country starts paying for the fuel in advance.

Tomorrow, OAO Gazprom (GAZP) will send Ukraine a bill for June, Chief Executive Officer Alexey Miller said today at a meeting with Russian Prime Minister Dmitry Medvedev. If the bill isn’t paid by June 2 the neighboring country won’t receive any Russian gas from 10 a.m. the next morning, Miller said.

“It’s time to stop coddling them, notify them tomorrow and move to pre-payments,” Medvedev said during the meeting. “I think that all possible ways to settle this situation using other measures were undertaken by Gazprom.”

The deadline marks an escalation in the dispute over energy supplies that’s an element in the broader struggle for Russian influence over Ukraine. Stopping shipments to Ukraine may have an impact on the rest of Europe because about 15 percent of the region’s gas travels through the country’s Soviet-era pipeline system.

Ukraine, which depends on Russia for half of its gas consumption, has been seeking to renegotiate a 2009 gas contract since before unrest began in Ukraine’s capital in November.

Russia is moving Ukraine to prepayments because it owes $3.51 billion for fuel delivered in 2013 and through April this year, Miller said today.

Paid Partly

If the bill for June is paid partly, Ukraine will receive what it has paid for, he said.

The neighboring country hasn’t paid for 9.42 billion cubic meters of Russian fuel, which is equivalent to Poland’s annual consumption from Gazprom, Miller said.

Ukraine has the opportunity to pay as it received the first $3.2 billion of the International Monetary Fund aid package last week, Medvedev said today. While the country is able to start paying off the debt to show its desire to settle the problem, Russia doesn’t see any willingness, he said.

Ukraine refuses to prepay for Russian gas and is ready to settle the debt if Gazprom returns an “honest, market price” for gas, Ukrainian Energy Minister Yuri Prodan said last week.

No Compromise

Gazprom raised the price it charges Ukraine for gas by 81 percent in April, to $485 per 1,000 cubic meters, more than any EU member pays.

NAK Naftogaz Ukrainy will seek international arbitration on May 28 if talks with Gazprom fail, according to the Ukrainian company.

Russia will consider a compromise on natural gas prices with Ukraine only after its neighbor pays its debt for previous supplies, Russian Deputy Energy Minister Anatoly Yanovsky told reporters earlier today in Moscow.

Moving Ukraine to prepayments will probably lead to problems supplying Ukraine, Yanovsky said. That in turn may create risks for transit and EU countries may suffer during the winter unless Ukraine has filled its underground storage facilities, he said.

A June gas disruption “could suit Russia, as it would be immediately after the Ukrainian presidential elections,” Energy Aspects Ltd., a research company in London, said today in an e-mailed statement. Though, this could be quickly resolved through the IMF aid to Ukraine, “and as such, the impact on the market is likely to be minimal,” it said.

Gazprom shares closed almost unchanged at 135.71 rubles Moscow after climbing as much as 1.6 percent before Miller’s and Medvedev’s statements on Ukraine.

U.K. next-month natural gas, a European benchmark, erased an earlier decline of as much as 2.4 percent to trade little changed at 46.35 pence a therm ($7.82 a million British thermal units) at 4:10 p.m. on the ICE Futures Europe exchange in London. Bloomberg