Russia-Ukraine gas standoff

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

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.

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."

The gas crisis comes just as Ukraine heads into parliamentary elections, slated for March, in which Yushchenko faces tough opposition from his former pro-Moscow rival Viktor Yanukovych and his estranged ex-ally Yulia Tymoshenko. Even many Russian experts believe that standing up to the Kremlin could boost the image of Yushchenko, who has been flagging in opinion polls, amid allegations of corruption and signs of economic drift.

"By this step Russia complicates any possible union of our peoples in the future," says Leonid Ivashov, vice president of the pro-government Academy of Geopolitical Problems in Moscow. "Ukraine will continue drifting towards the West, while Yushchenko will get a chance to blame all his political and economic failures on Moscow."

Energy shortages are likely to hit hardest in heavily industrialized eastern Ukraine, which is, ironically, the main bastion of pro-Russian sentiment. Despite the Orange Revolution a year ago, Yushchenko defeated Mr. Yanukovych in free elections by just eight points, 52 to 44 percent.

Experts say those divisions between Ukraine's Russified east and the more nationalistic west remain very acute. Mr. Shushko says that many people in the east may blame Yushchenko for alienating Moscow and bringing hardships down on them.

"I think this crisis will have a polarizing impact within Ukraine," he says. "While it may strengthen support for Yushchenko among his supporters, those who didn't support him before may feel even more strongly against him."

Will gas ignite other flashpoints?

Most dangerous, the dispute could spread to other potential flashpoints between Russia and Ukraine, especially the emotionally sensitive status of Crimea, a mainly Russian populated territory that was given to Soviet Ukraine as a "gift" by Nikita Khrushchev in 1954. Moscow currently pays Kiev about $98 million annually for the use of the warm water naval port at Sevastopol, where Russia's Black Sea fleet is based.

Last month Ukrainian Defense Minister Anatoliy Hrytsenko suggested that Kiev could start charging Moscow "market prices" of up to $500 million annually, for use of the facilities.

That brought an angry retort from Russian Defense Minister Sergei Ivanov, who said any attempt to renegotiate the deal could re-open the border issue. "The agreement on the Black Sea fleet base is one part of a bilateral treaty, the second part of which contains recognition of mutual borders," Mr. Ivanov said. "Trying to revise the treaty would be fatal."

A tiny border incident over a sandbar in the Kerch Strait between Crimea and Russia two years ago inflamed passions on both sides and had some nationalist politicians talking of military mobilization. "There is real potential for this crisis to spread," says Sergei Markov, a Kremlin adviser. "In Crimea the population is 95 percent Russian-speaking, but they are forced to [conduct official business] in Ukrainian. There is really explosive material here."

Mr. Markov says the stakes are high, and the Kremlin is unlikely to back off its harsh stance toward Ukraine. "Failure will undermine Russia's image, but victory will strengthen it," he says. "To be a guarantor of energy security, it's important to be firm. If Moscow were to agree to continue paying for Ukraine's anti-Russian behavior, who would ever take us seriously?"

Who's feeling the pinch?

Europe gets 80 percent of its Russian natural gas via Ukrainian pipelines. On Monday, Russia cut off gas supplies to Ukraine, but Ukraine was supposed to allow Europe's share to keep flowing. Some European countries are already seeing shortages.

• Hungary says natural gas imports from Russia have fallen by more than 40 percent.

• Austria's oil and gas group OMV says Russian supplies have fallen by about 33 percent.

• Slovakia, Croatia, and Romania say that Russian gas coming via Ukraine dropped by 30 percent on Monday.

• Italy, which gets about 30 percent of its gas from Russia, says that less gas is arriving. It has stocks to last 15 days.

• Poland reports a 14 percent reduction in gas supplies since Russia cut off gas to the Ukraine. It's working to increase flows from Belarus.

• Germany, which gets more than one-third of its gas from Russia, says it has stocks to last 75 days. But larger companies may suffer cutbacks if Russian gas doesn't start flowing again soon.

Source: Reuters

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