Negotiations over a natural gas deal between Ukraine and Russia have faltered since the spring, but the standoff has taken on a new urgency as winter approaches.

Following the overthrow of Ukrainian President Viktor Yanukovich in February, Russia altered the terms by which it sells natural gas to Ukraine. Along with Yanukovich, favorable pricing went away. In April, Russia nearly doubled the sale price of natural gas to Ukraine, from $268.50 per thousand cubic meters to $485.50.

This was a price that the Ukrainian government said it could not meet. Even worse, Russian gas company Gazprom demanded upfront payment for gas supplies, an issue that kept the two countries at odds for months. Gazprom cut off gas supplies to Ukraine in June, saying Ukraine had failed to pay its debt. (Related: Putin Threatens Gas Reduction To Europe)

A long-term solution has eluded Moscow and Kiev since, and talks have dragged on for months. It’s not just Ukraine’s problem, though: around 40 percent of Europe’s gas imports from Russia travel across Ukrainian territory. So to a large extent, the standoff over pricing is a three-way dispute between Russia, Ukraine and the European Union. The supply cut-off in June underscored the threat to the rest of Europe.

It will be difficult to postpone a resolution any further. Russian Energy Minister Alexander Novak has demanded full payment in advance for gas deliveries in November and December. In addition, he says Gazprom must receive further debt payments from the Ukrainian government as a pre-condition to a deal.

Expectations were high that an agreement was imminent after some of the major stumbling blocks had been ironed out. Ukraine and Russia agreed on an interim price of $385 per thousand cubic meters through March 2015. Although the price is substantially lower than the price Russia originally demanded, it is still a victory for Moscow as it is above the average that other Gazprom customers pay -- around $350 per thousand cubic meters.

Nevertheless, no deal was cemented during talks in Brussels on Oct. 21 because Ukraine is still short on funds. “There is a cash gap for November and December and this cash gap requires financial resources,” Novak said, suggesting that the European Union should provide Ukraine with the money.

Ukrainian President Petro Poroshenko has asked Brussels for 2 billion euros, but the EU Commission has thus far balked at the price tag.

But European officials are desperate to bridge the gap to avoid a confrontation over natural gas supplies, with colder weather beginning to set in. Gazprom has gone to great lengths to reassure its EU customers that gas supplies will not be affected by its decision to cut off Ukraine. But Russian President Vladimir Putin has threatened to reduce gas flows if Ukraine diverts supplies for its own use. (Related: Caspian Sea Could Be Key To Russian Control Of Eurasian Energy Markets)

Even still, a Citigroup report published in September found that the EU has stockpiled enough gas supplies to withstand a supply cut off from Russia, as long as the winter season was not abnormally cold.

Storage sites around Europe are nearly 100 percent full due to a proactive campaign to stash away supplies ahead of winter. And EU leaders have agreed to reverse gas flows from west to east to safeguard the more vulnerable countries in the former Soviet bloc from a supply disruption.

Despite the setback in the negotiations, all sides have agreed to meet again at the end of October. With funding the only outstanding issue remaining, the EU or the International Monetary Fund could seal the deal by issuing a loan to Ukraine. For that reason, hopes remain high that a deal will be completed soon.

By Nick Cunningham of Oilprice.com

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