Crisis deepens as Russia-Ukraine gas deal unravels

The rhetoric between Moscow and Kiev has flared to new heights in recent days, with Russian Prime Minister Vladimir Putin accusing Ukraine’s warring politicians of stealing gas to fund their political campaigns, and Ukrainian President Viktor Yushchenko replying that Russian claims are untrue and designed to “humiliate” Ukraine.

In an interview with German TV this week, Mr. Putin denied that geopolitical considerations mattered, but then slammed Ukraine’s “Orange” revolutionaries, who had pledged closer ties with the West, for leading the country astray. “The former leaders of the Orange Revolution have failed to live up to their hopes,” Mr. Putin said. “Political infighting [in Ukraine] is degenerating into a clash between clans. . . and [a] fight for access to financial flows, of which trade in Russian gas is one.”

Social discontent does appear to be looming as Ukraine’s twin political and economic crises go critical. A mid-December survey conducted by the independent Democratic Initiatives Fund in Kiev found that nearly 84 percent of Ukrainians believe the country is in dire straits. Fewer than 2 percent thought the situation was fine.

Russian experts deny that Moscow is attempting to exploit Ukraine’s weaknesses. After nearly two decades of providing cheap gas to Ukraine, Russian leaders simply want to end the constant wrangling over prices, says Nikolai Petrov, an expert with the Carnegie Center in Moscow.

“Russia has not gained a good image by subsidizing Ukrainian energy consumption, and gets accused of hostile actions against Ukraine when it tries to raise the price,” he says. “So Russian leaders are being pragmatic here, having decided that there’s little to lose by seeing this through. Putin has learned from the past, and it looks like he wants to get a solution that will last.”

But Mr. Petrov adds that Putin’s claim that Ukraine’s leadership is sunk in corruption is a case of “the pot calling the kettle black.”

Experts say that instead of contracting directly with Ukraine’s state gas firm, Naftohaz, Russia’s Gazprom sells its gas through shadowy offshore intermediaries who flip the payments back and forth, beyond any official scrutiny. One such entity, RosUkrEnergo, is 50 percent owned by Gazprom.

“It’s absolutely inexplicable why Gazprom has these joint ventures with obscure little companies, and transfers billions of dollars to them, unless the purpose is to evade taxes and reward particular unseen interests,” says Mikhail Krutikhin, a partner with RusEnergy, a Moscow-based consultancy. “Someone is getting that money. If this isn’t corruption, what is?” he says.

Mr. Vydrin, the Ukrainian parliamentarian, agrees. “Gas spells corruption in both Ukraine and Russia,” he says. “Neither Russian nor Ukrainian gas officials live on their salaries, and it would be very painful for them to give up this model of doing business.”

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