Saturday, December 17, 2005

Russia, Ukraine Quarrel Over Gas

MOSCOW, Russia -- Relations between Russia and Ukraine, tense since the election of pro-Western President Viktor Yushchenko last year, are facing a potentially major rupture over the price of natural gas. Russia's state-controlled energy giant Gazprom is moving to raise Ukraine's annual bill by more than $1 billion by ending below-market prices that were part of an effort to maintain the Kremlin's influence with its neighbor.

Threat of big gas price hike seen as a Kremlin lesson for Kiev

The dispute comes as Gazprom is set to raise gas prices for a number of other former Soviet republics, including Georgia and Moldova, which have turned away from Russia in favor of the West, and the three Baltic states, now members of NATO and the European Union.

"The time when we built relations by quasi-subsidizing neighboring economies is gradually passing," Russian Finance Minister Alexei Kudrin was quoted as saying by the RIA Novosti news agency this week. "We must think about our own interests."

During negotiations with Ukraine, Gazprom first proposed that the price of natural gas should jump from $50 to $160 per 1,000 cubic meters, which would add nearly $1 billion to Ukraine's annual bill for heating homes and powering factories.

This week, Gazprom said it was tired of what it called Ukrainian foot-dragging in the talks. It said that if no deal was reached, starting Jan. 1 it would unilaterally charge $200 to $230, the price it obtains in Western Europe. That would push the extra cost to Ukraine well over $1 billion a year.

"Ukraine has wasted time in these talks, and now there can be no talk of $160," Alexander Medvedev, deputy chairman of Gazprom, said on Russian television. "The market situation has changed, and it's continuing to change."

"This is 90 percent political," said Volodimir Polokhalo, head of the Center of Political Thought in Kiev, the Ukrainian capital. The Kremlin is unhappy with the street revolution that brought Yushchenko to power last year, he said, and Russian President Vladimir Putin wants "to show other former Soviet republics that Ukraine is in trouble because it didn't behave."

Gazprom is not proposing to raise prices for Belarus, which it charges $47 per 1,000 cubic meters. Russian officials say this price is kept low because Belarus has allowed Gazprom to own a gas pipeline there and to lease the land it uses long-term. Many political analysts, however, attribute the price to the country's firm political alignment with Moscow.

Putin spoke to Yushchenko by phone Friday and said later that they had agreed that the gas dispute should not be politicized, the Russian news agency Interfax reported. "Business and economics is one thing and politics another," Putin said. "Russia was and will be Ukraine's ally."

Ukraine pays much of its natural gas bill in barter by allowing Gazprom to use Ukrainian-controlled pipelines to transport gas across its territory -- about 80 percent of Gazprom's exports to Western Europe flow that way. This gives Ukraine potential leverage in the negotiations, but Yushchenko has ruled out any curtailing of gas to Europe.

Some Ukrainian politicians and analysts have suggested pressuring Russia by renegotiating a lease for Ukrainian bases used by Russia's Black Sea naval fleet and removing Russian early-warning radar systems from Ukrainian territory. Analysts say either move, which might not be possible legally, would be radical and therefore unlikely.

Yushchenko, who said he remains confident of a deal before Jan. 1, has said he would accept a phased transition to market prices but not the kind of sudden, steep increase Gazprom is proposing.

The proposed price increase would severely strain Ukraine's budget and economy, which has been growing relatively slowly in the last year. The country's chemical and metal industries, which are heavily dependent on natural gas, would be particularly hit. In addition, any popular anger over higher home heating bills could have an impact on parliamentary elections in Ukraine in March.

Source: Washington Post

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