Ukraine Gas Dispute With Russia Raises Supply Fear

KIEV, Ukraine -- Ukraine and Russia have had many disputes over natural gas, but have never come as close as now to reducing supplies to Europe.

Even through the break-up of the Soviet Union and crises that followed, Russia's gas exports to Europe, 80 per cent of which transit Ukraine, have always been reliable.

But unless Ukraine agrees to pay much more for the gas it takes from the pipeline for its own use – Moscow first asked for roughly a four-fold increase, but now suggests it should be more than five-fold – Russia has said it will cut out Ukraine's portion from the gas going into the pipe.

If Ukraine keeps taking gas, which Moscow says would be stealing, supplies to Europe could be cut by about 20 per cent.

Both sides have huge incentives to make a deal. Russia has no other way to get its gas to Europe, while Ukraine, which currently receives 30 per cent of its gas from Russia in a barter deal in lieu of transit fees, has no alternative source.

Yet both sides claim the other is refusing to negotiate seriously. Viktor Yushchenko, Ukraine's president, this week called Russia's position “irresponsible, unprofessional and naive”.

He accused Moscow of trying to punish Kiev for its turn towards democracy in last year's Orange Revolution and of operating “double standards” by demanding that Ukraine pay roughly twice as much for gas as the south Caucasus and Baltic states pay.

Russia in turn accuses Kiev of dragging its feet and refusing to drop the antiquated barter system. Russian officials ask how Ukraine can aim to join the European Union while refusing to pay market prices for gas.

Russia says its interests are purely economic. But Mr Yushchenko's supporters accuse Moscow of trying to damage his popularity three months before parliamentary elections. Mr Yuschenko's party is facing tough competition from Viktor Yanukovich, the pro-Russian politician who ran in last year's presidential race. The elections also give Mr Yushchenko an extra incentive to face up to Russia; his stand has been popular with voters little inclined to pay more for energy.

Mr Yushchenko says he would accept a gradual change to cash payments and market prices, but no quick increases. He has threatened to retaliate by demanding “European” rents from Russia's naval base in Crimea, which Russia says are fixed by contract until 2017.

Russia, too, could escalate the dispute, for example by cutting deliveries of the central Asian gas that Ukrainian industry relies on.

But a deal at the 11th hour or a delay by Russia of its cut-off threat as negotiations continue remain the more likely scenarios.

As Sergey Lavrov, Russian foreign minister, said this week: “I'm convinced the good tradition by which Gazprom and Russia have never once not met their obligations to European customers will not be broken.”

Source: Financial Times