Tue, Jan 03, 2006 - Page 9 News List

Russia, Ukraine argue over gas

The former Soviet allies' dispute could shut off one-third of Europe's supplies


The New Year has arrived, and the East European gas war has begun. Two of the continent's most closely-related countries, the former Soviet republics Russia and Ukraine, have squared off in a nasty dispute over how much Kiev should pay for Moscow's natural gas.

The inter-Slavic conflict carries the alarming potential of a total halt to nearly one-third of all of Europe's natural gas imports.

It is also, already, the worst spat in nearly two decades of almost always friendly relations between the two close neighbors -- Ukraine and Russia's economies and populaces are more closely intertwined than just about any other pair of nations on the modern European continent.

Yet now, with this year's very first trade war suddenly gone hot, two of Europe's newest nations, independent Ukraine and its former colonial master Russia, are employing traditional tactics.

Russian President Vladimir Putin, on the face of it, should be negotiating from a position of strength. The Ukrainians use about 80 billion cubic meters of natural gas every year, and only produce 20 billion domestically.

The remainder is imported, roughly 24 billion cubic meters from Turkmenistan, and 36 billion cubic meters from Russia itself. Ukraine's economy is dependent on low-cost manufacture of industrial energy-intensive commodities like steel and chemicals, and the cheaper the natural gas, the more competitive those industries become.

"It makes no economic sense for Russia to sell Ukraine gas at a subsidized price, so that Ukrainian steel manufacturers can dump their product back in Russia," Putin said last week at a press conference. "We need to place relations between both our countries on a rational basis, and that means an international market price for our [Russian] gas."

The European price for natural gas, as Putin has repeatedly pointed out, is around US$230. If that price doesn't suit the Ukrainians, he reasoned, they should certainly do without.

"The days of subsidized gas are gone," Putin said. "All customers will pay the market rate."

And if you ask the Ukrainians they will agree, only, they will insist Putin's view of a fair market isn't very fair at all.

Yushchenko only hours before the boycott went into effect pointed out to countrymen, and Gazprom customers Europe-wide, that other energy-poor customers in the region, the Baltic states and the Caucasus nations, pay Gazprom around US$100.

"So why is Ukraine singled out for special treatment?" he asked.

More worrying for the Kremlin were last week's comments from Ukrainian Prime Minister Yury Ekhunarov, who declared: "Ukraine guarantees transport of Russian gas to European markets ... but not for free."

Ekhanurov's innocuous statement hides, only barely, a multi-billion dollar veiled threat to Russia's biggest company, Gazprom, whose 2004 revenue was US$36 billion. Half of that cash torrent, Gazprom executives know painfully well, was generated by Gazprom gas sold to Europe via pipelines controlled by Ukraine.

"This gives Ukraine leverage on Gazprom in price negotiations, and Russia doesn't like that," said Ihor Tkach, an energy industry analyst.

The biggest fortunes of post-Soviet Ukraine, by no coincidence, were made by importing Russian gas into Ukraine at a Socialist rate, and then selling to Europe at a capitalist rate.

Ukrainian energy tycoons raised the "redirection" of Russian gas to an art form, using shell companies, faked Ukrainian consumers and inflated transportation contracts. And, according to the authoritative Korrespondent magazine, they also used black market gas reservoirs holding billions of cubic meters of reserves.

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