Gas Fuels Hotter Russian-Ukrainian Spat

KIEV, Ukraine -- What began as a gas dispute between Ukraine and Russia has ballooned into a diplomatic crisis as the neighbours launch a barrage of threats and counter-threats, insults and allegations of blackmail at each other.

Yushchenko (L) and Putin (R) are in a diplomatic war over gas prices

Since the beginning of December, in addition to constant sparring over gas prices, Kyiv and Moscow have bickered over Ukraine's ambitions to join NATO and the Russian navy's use of a Ukrainian port.

The acrimony — magnified by President Viktor Yushchenko's victory last year over a Kremlin-backed candidate — comes as Ukraine celebrates a string of small successes in its hopes to forge closer ties with the West.

This month, Kyiv won European Union recognition as a market economy, played host to U.S. Secretary of State Condoleezza Rice and presided over a pro-democracy forum involving heads of state that was widely perceived as a challenge to Moscow's regional domination.

Ukraine also declared that it would be ready to join NATO in three years — an idea that clearly worries Moscow.

"What we are seeing is Russia playing the spoiler for Ukraine because this administration is not very interested in any form of integration with Russia," said Ivan Lozowy, president of the Kyiv-based Institute of Statehood and Democracy. "It's an emotional, knee-jerk reaction — Russia feels obliged to show its strength and power when it is not getting its way.''

Moscow has warned Kyiv that it will no longer receive some of the cut-rate deals on commodities from gas to enriched uranium that the Kremlin has doled out in the past to friendly neighbours.

"Considering Ukraine's unfriendly attitude, her strivings toward NATO ... delivering gas at those old prices no longer makes sense," said Russian analyst Sergei Markov.

Russian President Vladimir Putin said last week that high economic growth and privatization revenue made Ukraine perfectly capable of paying world market prices.

Kyiv had been paying $50 (figures U.S.) per 1,000 cubic meters and had balked at Russian gas monopoly Gazprom's proposal to triple that price. On Wednesday, Gazprom warned Ukraine that because Kyiv had dragged its feet in negotiations, it now faced a sharply higher price of $220 to $230.

Ukraine has countered that it has a contract through 2013 for the lower price, and would consent to only a gradual increase through 2010.

In apparent effort to sweeten Ukraine's request for more time, Fuel and Energy Minister Ivan Plachkov on Thursday proposed creating an evenly split Ukrainian-Russian enterprise that would oversee the sale of Russian gas on Ukraine's internal market. A spokeswoman for the fuel and energy ministry could not immediately provide further details.

Ukrainian officials have accused Russia of applying pressure in a bid to force Ukraine to hand over management control of its revenue-generating pipelines, a proposal the Ukrainians have rejected. Gazprom threatened on Tuesday to cut off gas supplies to Ukraine if a deal isn't reached by Jan. 1.

The dispute is tricky for this gas-dependent country. Ukraine's energy-inefficient chemical factories will cease being profitable if the price rises above $95 per 1,000 cubic meters, and the country's giant metal works will struggle at prices above $103, Security Council chief Anatoliy Kinakh said. Those industries account for 30 percent of Ukraine's gross domestic product and 45 percent of its export earnings.

The gas dispute comes as Ukraine embarks on a parliamentary election campaign in which Yushchenko is looking very vulnerable. Disappointment at the slow pace of change could bring significant votes to those who opposed last year's Orange Revolution, giving them enough power to alter Ukraine's course.

"The energy factor will be used extensively both to illustrate the performance of the government, which is not satisfactory in that sense, but also to claim that if Ukraine were closer to Russia, there wouldn't be such hardships," said Ukrainian political analyst Inna Pidluska.

Moscow also has demanded that other Western-oriented former Soviet nations of Georgia and Moldova pay higher gas rates. Meanwhile, Belarus, whose autocratic President Alexander Lukashenko is on good terms with Moscow, enjoys subsidized gas rates — $47 per 1,000 cubic meters next year — which are not being renegotiated.

"Russia has interfered, is interfering and will interfere,'' said lawmaker Borys Bespaliy, a Yushchenko ally. "The main problem is that Russia still considers itself an older brother in relation to neighboring countries.''

Moscow has sought to use the gas dispute to blacken Ukraine's name in Europe, warning of possible supply cutoffs. The European Union gets almost half of its gas imports from Russia, mostly piped through Ukraine.

Plachkov promised that Russia's European customers would receive their gas shipments via Ukraine "in full volume," Ukraine's Unian news agency reported. "Ukraine, however, can't transport gas for free," Plachkov was quoted as saying.

"No one is asking them to work free of charge, we are ready to pay the transit charges at the European level," Gazprom spokesman Sergei Kuprianov was quoted by the Interfax agency as saying. Gazprom's $220 to $230 proposed fee factors in those transit charges.

Plachkov said that the next round of Ukrainian-Russian talks were expected to be held next week.

Yushchenko's government is giving as good as it gets. A senior administration official suggested that if Moscow demands "world prices" for oil, it might consider jacking up the $93 million per year that Russia pays to keep its Black Sea Fleet based in the Ukrainian port of Sevastopol.

Russian media, meanwhile, have reported that Ukraine is threatening to open up Soviet-era military installations to the United States and scuttle military cooperation with the Kremlin. Ukrainian officials said they were not aware of the reports.

Even the outbreak of bird flu in Ukraine became a point of disagreement when a Russian veterinary official broke the news that Ukraine had the deadly Asian strain; Ukraine refused to confirm it, countering that Kyiv is putting its trust in a British laboratory.

"Our government is just being provocative," said opposition lawmaker Taras Chornovil. "They intentionally drove our relations into a dead end.''

Source: AP