'Tis The Season To Blame Ukraine

MOSCOW, Russia -- Gazprom tries to rally Russian workers' support for its case, saying Ukrainian gas debts could hurt the Russian economy and employment.

Gas flares behind the Gazprom logo and the sign of the Yuzhno-Russkoye gas field in northern Russia, just below the Arctic Circle. Russia has raised the spectre of gas cuts to Europe over the winter, warning that it did not rule out supply disruptions as a result of the dispute with Ukraine over non-payment of debts.

Russia's spat with Ukraine over unpaid gas bills is widening; Moscow is now portraying its own citizens as victims of the disagreement.

Russian state-run energy giant Gazprom said Tuesday that the $2.0 billion debt that Ukraine still owed it was hurting the Russian economy. "Since the majority of the goods imported from Ukraine are also made in Russia, non-payments for gas damage those sectors where Ukrainian goods compete on Russia's domestic markets," Gazprom spokesman Sergei Kupriyanov said. "This cannot but affect the industries and the people who work in them."

Gazprom had warned Monday that its European customers could face a disruption of gas supply due if its dispute with Ukraine led the Kremlin to stop the supply of gas to the former Soviet satellite. Russia provides about a quarter of Europe's gas, and 80.0% of its exports transit through Ukraine.

Now Gazprom is highlighting that Russia's 6.6% unemployment could rise further, and Kupriyanov on Tuesday listed potentially vulnerable industrial cities and factories by name.

Gazprom's tactical line of argument could help deflect Russian workers' collective anger about worsening unemployment and the economic slowdown toward Ukraine and away from the Kremlin.

Shares of Gazprom were up by 2.1%, at $3.88, on Tuesday morning in Moscow, having risen 4.1% on Monday. Gazprom's shares have fallen 73.0% since the start of 2008, when they were trading at $14.38.

Gazprom maintains that Ukraine's state gas company Naftogaz owes it up to $2.4 billion (1.8 billion euros), and it has warned of delivery cuts to the company if its outstanding debt is not cleared.

The companies have until Jan. 1 to sign a new contract, and Russia is pushing for higher prices. Russia has warned that gas prices for Ukraine could rise to $400.00 per 1,000 cubic meters, from the current $179.50.

There is a whiff of familiarity in all this. A similar dispute in January 2006 saw Russia turn off the gas taps to Ukraine, a key transit country for Russian gas exports, and disrupt gas supplies destined for the European Union for several days.

On Dec. 19, President Viktor Yushchenko of Ukraine said his government had paid $1.0 billion to Gazprom for gas pumped in September and October.

Both countries face difficult economic times. The Kremlin spent up to $2.5 billion supporting the ruble on Monday, according to TradeTheNews.com, marking the sixth time it has had to do so in December alone.

Capital flight from Russia has meanwhile compelled the country's billionaire oligarchs to ask for loans from the government in exchange for portions of their assets (often companies).

Ukraine's economic downturn is also being exacerbated by a sliding currency: the hryvnia has halved in the past six months, making imports far more expensive, not to mention the country's debt to Gazprom.

Its central bank had to raise interest rates to 22.0%, from 18.0% last week, in a bid to boost the currency, and a perennially unstable political situation is not helping matters.

Ukraine received a $16.5 billion loan from the International Monetary Fund in October, and Russia expressed "bewilderment" in an official statement that Ukraine had been unable to repay the debts in spite of that assistance.

Source: Forbes

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