Interview by Alexey Miller with TV Rossiya 24

Anchorman: Moscow hosted the 14^th International Energy Forum (IEF) Ministerial meeting in Moscow, a high-status event for any country. That’s the reason why Prime Minister Dmitry Medvedev attended the Forum. Without hesitation he reminded the participants that Ukraine should better pay for gas. But Europeans, at whom this message was addressed in the first place, were represented at the Ministerial meeting not by ministers, but by officials of lower rank, i.e., ambassadors. There were no British representatives at all, and they even officially declared a boycott of the International Forum in Russia because of Ukraine.

Jean-Yves Garnier, Head of the Energy Statistic Division at the International Energy Agency presented a very curious forecast until 2018 at the Forum. The future is with Asia. Considering the investments Europe and the USA have already channeled into alternative energy sources, it is no surprise that the International Energy Agency forecasts an increase in hydrocarbon demand at outstripping rates in Asia.

For Russia, it would be much more convenient to supply gas to Europe bypassing Ukraine if the European Commission gave the green light to using the full capacity of the already constructed Nord Stream under the Baltic Sea and didn’t set forth so many restrictions to South Stream currently under construction via the Black Sea to the Balkans. But for various reasons the European Union wants to get gas, but doesn’t make concessions to Russia. What’s the matter?

What will happen now as Ukraine doesn’t pay Russia for gas, Moscow switches Kiev to prepayments and, as experience shows, Ukrainians may start siphoning off transit gas intended for Europe? Alexey Miller, Head of Gazprom told the News on Saturday about it in his interview.

Mr. Miller, it is possible to see China from the roof of the Gazprom headquarters in Moscow, isn’t it?

Alexey Miller: A meeting with the Chinese Energy Minister has recently taken place, so, figuratively speaking, it is. The meeting was held on the 35^th floor of the Gazprom building, by the way.

Anchorman: Not every foreigner can get the meaning of the Russian saying ‘joking is over, no more coddling’. Though in reality it’s the most terrible thing a Russian person may say. If Ukrainians do not pay, gas won’t be supplied to Ukraine on June 1, will it?

Alexey Miller: A prepayment is a voluntary matter. If you want to get gas, you have to pay for it. If you don’t want it, you may not pay. If Ukraine doesn’t pay for June supply in advance, Gazprom won’t impose any restrictions; it will simply supply Ukraine with as much gas as it has paid for. As for the boundary between Russia and Ukraine, we will supply as much gas there as Europe should receive and Ukraine should transit.

Anchorman: But what if Ukrainians, just like they’ve already done it, start siphoning off gas meant for Europe and delivered through their territory?

Alexey Miller: According to the transit contract with Ukraine, Ukraine’s obligation is to transit our gas to Europe.

Anchorman: But we do remember how it actually was.

Alexey Miller: We do. But it also means that our Ukrainian partners will be held responsible for the so-called illegal offtake. Gazprom on its part, though, will make every effort for European consumers not to have any problems.

Anchorman: Ukrainians are saying already that they are ready to pay, but at the old price. Maybe, at least some ‘real’ money is better than nothing at all?

Alexey Miller: I totally agree that at least some ‘real’ money is better than no money at all. But the payment trend we’ve been observing month by month has been gradually worsening. Early this year Ukraine tried to pay something and we received three million dollar, million dollar, five hundred thousand dollar payments, but in the recent months Ukraine hasn’t been paying for gas at all. No payments for April supply, no payments for March. Already about ten billion cubic meters of gas in physical terms haven’t been paid for. It is the volume of annual consumption in Poland! It’s the same as if we supplied the full volume of gas to Poland for the whole year, and Poland didn’t pay us a single dollar.

Anchorman: Ukrainians say that they are about to appeal to the Stockholm Arbitration Court. Petro Poroshenko, front-runner for presidency declared it. He brings forward the arguments that the former price was with a discount, taking into account the Kharkiv Accords. Russia, on obtaining the Crimea, denounced these Accords. The western community doesn’t admit Russia’s ownership of the Crimea, that’s why, as they say in Kiev, Ukrainians hold all the aces, they will win the case. In your opinion, if the case comes to arbitration, what will the outcome be?

Alexey Miller: The Ukrainian party states that the situation has changed. I suppose it should be pointed out that the issue of the price formula in the contract and the contract itself are out of the question. We’ve been working with our Ukrainian partners under this contract for five years already. No changes have been made to the contract during this time.

Anchorman: Was it signed by the guys who currently hold the office?

Alexey Miller: Yes, it was signed by the people who control the Ukrainian fuel and energy sector today, particularly, Naftogaz of Ukraine. But it should be understood that the Stockholm Arbitration Court will not help or save them, as problems with payments are not the relationship problems between two business entities – Gazprom and Naftogaz of Ukraine, these are the issues of Ukrainian economy. Ukraine is a bankrupt. It is really a very profound systemic matter. Today Ukraine is unable to pay for gas. It doesn’t pay either at this or that price, either with a discount or without it. And it should be understood that the situation is aggravating every month. The reason is low financial solvency of Ukrainian consumers and, what is most distressing, a dramatically degrading payment discipline. Ukrainian state power bodies are almost destroyed now, and under such conditions Ukrainian consumers simply don’t pay for gas. Month after month we observe a drop in payments for the supplied gas collected by Naftogaz of Ukraine: 50 per cent, 20 per cent, and right now even less than twenty. And since Naftogaz of Ukraine can’t collect money from its consumers who do not pay and there is no payment discipline, no Stockholm Court will be able to help.

Anchorman: What’s the solution?

Alexey Miller: There is no doubt that the solution is to provide assistance to Ukraine. We’ve been hearing about the intentions of the European Union, the IMF and the USA to help. Apparently, Ukraine has already received the first tranche. But we haven’t received gas payments or debt settling and we still don’t.

Anchorman: There is a Memorandum of the International Monetary Fund which states that the money it allocates is particularly aimed at paying off debts. Do they not pay anyway?

Alexey Miller: If there really is such a clause in the Memorandum with the IMF, it demonstrates Ukraine’s attitude to agreements with the International Monetary Fund as well, not just with Gazprom. Until today we haven’t received any payments either for June supplies or payments on debt, which has already reached a tremendous figure of USD three and a half billion!

Anchorman: Suppose Europeans have sincerely come to love Ukrainians and want to help them to pay off their debts. One of the ways of helping Ukraine and Europe, which may not receive gas if Ukraine starts offtaking it, would be allowing Gazprom to use the full capacity of Nord Stream, which is not totally loaded.

Alexey Miller: That’s right.

Anchorman: And also to construct South Stream and the Opal gas pipeline.

Alexey Miller: Exactly.

Anchorman: If they did so, gas would bypass Ukraine, but Europe would surely receive it. Why don’t Europeans make such a compromise?

Alexey Miller: I suppose that the European Commission may return to this matter if there are problems with transiting gas via Ukraine. I think then the Opal issue will be resolved. But even the Opal gas pipeline doesn’t solve the problem completely. We will be able to deliver only fifty billion cubic meters a day if we divert the Ukrainian volumes through Nord Stream. But it is not even half of the volume delivered via Ukraine.

Anchorman: That is to say, South Stream is also necessary?

Alexey Miller: With no doubt. Only South Stream will eliminate all risks of transit via Ukraine.

Anchorman: However, Europeans retard the progress of this project for political reasons, don’t they? It seems that the European Commission is opposed to the project, but in a meantime you are making arrangements with certain countries. What would weigh more?

Alexey Miller: Above all, the gas pipeline is being built. And we do not experience any problems with the construction process. I mean the offshore section of the gas pipeline to be laid on the Black Sea bed, it concerns Bulgaria and Serbia. The meeting with Hungarian Prime Minister Viktor Orban was held. We have no doubts that the Hungarian section will be constructed and completed strictly on schedule.

Anchorman: And, in that case, what do you think about the accusations that Gazprom destroys the unity of the European Union?

Alexey Miller: We primarily consider the interest of our partner countries in South Stream and their willingness that we feel and the support they demonstrate. In all these countries, South Stream got a national significance status. And nobody can restrain its construction. Another business is that some regulatory matters are related to the Third Energy Package. We understand that these matters also should be discussed with Europe. But it concerns the operation stage. And regarding the construction phase and gas pipeline commissioning strictly on time, first deliveries to Bulgaria will start next December, the first pipe on the Black Sea bed will ‘come’ from Russia to Bulgaria in next December without any doubts.

Anchorman: They say that you also could have been included to the sanctions list, and that the European political establishment has supported the idea, but your European business partners stood up for you. You continue visiting Europe; in particular, you will go to negotiations in Amsterdam. Was it really the case, and the businessmen, your partners, fought for you?

Alexey Miller: I can hardly imagine any sanctions in the gas industry. As for the last year results, Russian gas supplies to European gas market exceeded 31 per cent. And the most important thing, we keep increasing those supplies. In absolute terms, last year supplies beyond FSU accounted for 162.7 billion cubic meters. It is a record volume of export supplies in the entire history of Gazprom and gas industry of the USSR. We realize that Europe has no substitutions for Russian gas anywhere else; it’s like have no alternatives, really. The first quarter shows that we increased supplies by 2.6 per cent. We keep a keen eye on supplies from other providers. What do we observe? We observe the decreasing volumes from the most important gas suppliers to Europe, like Algeria, Qatar, and Nigeria.

Anchorman: Does it mean that they cannot replace Russia?

Alexey Miller: No. One should understand that we have been gaining Gazprom’s reputation of the reliable supplier meeting its liabilities just-in-time and in full in the European market for over forty years. Currently, the existing problems do not refer to our relationships with European customers, our European partners, these are problems related to risks of gas transit via Ukraine. These problems are not new, we discussed them many years ago. And delivering the project such as Nord Stream and the construction of South Stream are associated with mitigating risks of transit through Ukraine.

Anchorman: One could feel that you also respond to Chinese partners, who may apply the following point: you guys have some problems with Europeans, you have no chance to escape, and therefore, we will sign a contract under our terms only. But it appears that the situation is more complicated and puzzled, isn’t it?

Alexey Miller: In the context of Chinese contract you are absolutely right. We will sign it under conditions being economically acceptable for the Russian party. At negotiations with Chinese Minister of Energy we settled that agreements should be reached on a principle of mutual benefit.

Anchorman: Will the contract be concluded during the Putin’s visit?

Alexey Miller: We are at the final stage of negotiations. The contract is fully ready as a document. This document is very meaningful and extensive. A plenty of complex, difficult commercial, technical, operational and technological issues was settled. Only one issue left – it is a so-called benchmark price in the pricing formula, which has been confirmed with our Chinese partners. So, there is not much left – to put just one figure. And then, a thirty-year contract for the supply of 38 billion cubic meters of gas from Eastern Siberia to China will be executed.

Anchorman: For Europeans this is something to think over.

Alexey Miller: Speaking about volumes, one should keep in mind that 38 billion is just the beginning. Together with Chinese partners we’ve agreed that upon signing the contract on the eastern route, we start talking about the western route. And here we have one principal difference, i.e. the resource base. It is actually the base we use for supplying gas to Europe.

Anchorman: Shall we decide at this point where to direct it?

Alexey Miller: There is plenty of gas; the resource base is huge in fact. For that reason, we can provide a significant volume of gas supplies to China as well, which in a mid-term could become comparable with gas supplies to Europe.

Anchorman: It is really important to understand. Does it mean that Europe should not be opposed to China? Is Gazprom ready to work with both of them?

Alexey Miller: Yes, sure.

Anchorman: In the interview to the Komsomolskaya Pravda newspaper with the economist Inozemtsev it is offered to contribute all Gazprom’s incomes to the treasury. Such socialistic ideas are popular nowadays. And it is hard to argue with Inozemtsev, because in people’s consciousness if you are a national treasure than you should give all your incomes to the treasury. What do you think about such an ‘exotic’ offer?

Alexey Miller: Gazprom is a socially responsible company. And Russian state owns the majority stake. And problems we solve are very complex. First of all, certainly, it is about securing the reliable gas supply to customers across Russia and our partners abroad and passing through the autumn/winter peak consumption. Winters here are cold, we live in the northern country. I would like to remind you that every second each bulb in the country is fed by Gazprom’s gas. In parallel, we address other matters. Among them, to boost our contributions to the state budget and, by all means, the growth of our shareholders’ income from dividends. And no doubt that the Company should meet all these challenges, but to achieve the main objective – the reliable gas supply to all our customers during the winter and summer periods across Russia and abroad.