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Russia-Ukraine gas standoff

With 80 percent of Russian gas exports flowing through Ukraine, wintry Europe could be hard hit.

By Correspondent of The Christian Science Monitor / January 3, 2006


Russian natural gas supplies to Europe, used to heat homes and businesses, fell sharply Monday as a pricing dispute between Russia and Ukraine turned nasty.

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Monday, the Russian energy giant Gazprom cut off Ukraine's share of the gas flowing through the Friendship Pipeline. The pipeline carries about 80 percent of Russian gas exports through Ukraine to the West.

Russia says Ukraine is now "stealing" its share from Europe. Ukrainian officials deny it, but Serbia lost half of its gas supplies, forcing rationing and some industries to switch to oil. Hungary, Croatia, and Slovakia also reported a 30 percent drop in supplies Monday. By late Monday, Russia appeared to back down, vowing to restore full gas supplies to Europe by Tuesday night.

The Russian-Ukraine gas-price quarrel is stirring political passions on both sides and threatens to escalate into a much wider confrontation, experts warn. The gas conflict has its roots in Ukraine asserting its independence from Russia a year ago.

Moscow says Kiev should follow the logic of the "Orange Revolution," in which Ukrainians broke free from Russian influence, and accept that the days of Soviet-era energy subsidies must end. Ukraine, while agreeing in principle to higher gas rates, argues that the nearly five-fold price hike demanded by Moscow is unfair, abrupt, and politically motivated.

"Everybody understands that this is not about market pricing, it's pure politics," Oleksander Shushko, an analyst with the independent Institute of Euro-Atlantic Integration in Kiev. He says that the crisis may do great harm to Ukraine's energy-intensive economy in the short-run, but will show Ukrainians the need to wean the country's economy from dependence on Russia. "Unless we resolve this on our terms," he says, "it's clear that Russia will be able to play this card against us anytime it wants to."

The crisis erupted on the same day Russia assumed chairmanship of the Group of Eight (G-8) market-driven democracies, a high-profile position which Moscow has pledged to use to promote global "energy security."

German and US officials criticized the Russian cutoff as undermining its credibility as a European supplier. "Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure," said a statement released by the US State Department.

Gazprom, a state-run monopoly, set the 2006 price of gas for Ukraine at almost $230 per thousand cubic meters, up from $50 under an old contract that Kiev claims is still in force. Moscow says that's in line with the average $240 paid for Russian gas in the European Union. But Ukrainian President Viktor Yushchenko said Sunday that price "is unacceptable, because it is economically unfounded." Mr. Yushchenko has suggested $80 would be an acceptable new price.

Loyal Belarus pays just $47

Russia has long provided its former Soviet neighbors with cheap energy in return for political loyalty and economic preferences. The Baltic states of Latvia and Estonia - now EU and NATO members - pay $110 for the same amount of Russian gas. Russia's loyal ally, Belarus, pays just $47.

In late 2005, Gazprom said it charged its customers in Western Europe an average of $135 per 1,000 cubic meters, but expected that figure to rise to about $255 this year. Poland won't say what it pays, but media reports have said it pays between $200-$250, according to The Associated Press. Bulgaria now pays $180 per 1,000 cubic meters, but is expected to pay between $230-$260 in 2006.

About a third of Ukraine's gas is supplied by Russia, while Ukraine produces about 20 percent of its own needs. The remainder comes from former Soviet Turkmenistan, via Russian pipelines. Monday, Gazprom reportedly cut off Ukraine supplies from Turkmenistan, too.

A political boost for Yushchenko?

Most experts, on both sides, agree there is a strong political component to the Kremlin's tough line. "We have vast resources and they give us political influence," says Vladimir Zharikhin, deputy director of the state-funded Institute of Commonwealth of Independent States Studies in Moscow. "If we give a lower price to somebody, we have the right to demand political concessions. So, we will give economic aid only to the countries that are loyal to us. This may not be a great geopolitical policy, but it's better than nothing."