EU Calls For Immediate Solution As Supplies Of Russian Gas Are Cut

PARIS, France -- All gas supplies to Europe via Ukraine were shut down Wednesday as the pricing dispute between Russia and Ukraine escalated. The European Union called for an immediate solution to the crisis and said the two countries had agreed in principle to have observers monitor the pipelines amid a war of words.

A technician controlling an E.ON compressor station in Werne, Germany, on Wednesday.

The cutoff showed the first signs of hitting the European economy as the Hungarian unit of the Japanese automaker Suzuki said it was halting production because of restrictions on industrial users of gas. The Hungarian news agency MTI quoted a spokeswoman as saying Suzuki hoped to restart production Monday.

The two countries have accused each other of stopping the flow of gas to Europe. The Ukrainian gas company Naftogaz said Gazprom, the Russian gas monopoly, halted all transshipments at 7:44 a.m. Wednesday.

But in a conference call with journalists, Aleksandr Medvedev, Gazprom's deputy chief executive, told journalists that it was Naftogaz, the Ukrainian company, that had closed a fourth pipeline, ending all transshipments to Europe. Russia continues to pump gas, he said, but it is not being delivered to European customers.

He said that in the current cold winter conditions, demand would normally be as much as 450 million cubic meters a day, but that Gazprom was only able to provide about 170 million cubic meters, and that only by employing pipelines that skirt Ukraine and underground reserves. "I hope it will not be necessary" to declare force majeure, he said, referring to a legal move that release it from its responsibility to meet contracts with European customers.

José Manuel Barroso, the president of the European Commission, said at a press conference in Prague that both Prime Minister Vladimir V. Putin of Russia and the Ukrainian prime minister, Yulia Timoshenko, had agreed to have monitors verify that gas was flowing at key points on the pipelines.

"I've received assurances both from Prime Minister Putin and from Prime Minister Timoshenko that they have accepted international monitors to verify on the ground," Barroso said. "It is critically important that the supply start immediately," he added. "If not, there will be a real problem of credibility of supply of Russian gas through the Ukraine for the EU."

Barroso said he had been told by Putin that Russia was pumping the gas, but that Ukraine was not delivering it. He said Timoshenko told him Ukraine was not interfering with EU gas deliveries.

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem," he said. "So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

"If this is agreed, nothing will stand in the way for transit supplies to be restored," added Mirek Topolanek, the prime minister of the Czech Republic, which holds the rotating presidency of the EU.

EU officials said they would meet Thursday in Brussels with representatives of Gazprom and Naftogaz to sort out the technical aspects.

The shutdown left Slovakia, the Czech Republic, Austria, Hungary and Romania with no Russian gas supplies amid a bitter cold snap across much of the Continent. Bulgaria, almost entirely dependent on Russian gas, was in a particularly dire situation. European Union countries have access to some other sources of gas - including Russian gas from other pipelines, and gas produced in Britain, Norway and the Netherlands - but the loss of the Ukrainian pipeline puts the European Union under pressure to push for a solution.

A number of European countries have warned that gas for industrial customers might have to be restricted if service is not soon restored. The Confederation of European Business, a lobbying group, warned in a letter to Barroso that: "This situation - which is becoming a regular January occurrence - cannot last longer without creating problems for companies and citizens."

The cutoff began Tuesday, causing shortages from France to Turkey. Gazprom said Ukraine was siphoning off for itself supplies destined for Europe, and that Russia would reduce shipments by an equivalent amount. Russia had already halted all supplies to Ukraine for domestic use, saying its western neighbor was not paying enough for the fuel.

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters from $179.50 last year. It also wants to collect what it says are fines for late payments on previous shipments.

Putin personally announced Monday evening on state television that he was ordering a sharp reduction in gas flows, saying Ukraine was siphoning gas from the pipelines without paying. On Wednesday, he publicly endorsed the move in televised remarks, but said it should take place "publicly and in the presence of international observers."

For Putin, the escalation comes at a perilous time, as slumping energy prices threaten the fiscal health and political stability that have underpinned his popularity at home.

Some analysts of Russian politics had expected Putin to become more conciliatory as energy prices fell. Instead, he has taken a hard line in seeking to raise gas prices in Ukraine and perhaps create panic-buying on the international market, where prices of natural gas and oil, Russia's leading exports, have fallen sharply in recent months.

"They're still playing hardball, when they have to realize the rules have changed," Marshall Goldman, a senior scholar in Russian studies at Harvard and the author of the recent book "Petrostate: Putin, Power and the New Russia," said in a telephone interview. "It happened so quickly that I don't think they've had time to realize the implications."

With temperatures plunging, European leaders expressed mounting concern. Some countries announced rationing for industrial customers to reserve enough heating for residential buildings.

A spokesman for the European Commission said that the cut had come "without prior warning and in clear contradiction of the reassurances given by the highest Russian and Ukrainian authorities," adding, "This situation is completely unacceptable."

The cutoff appears to have multiple aims.

Ukraine has angered Russia by seeking membership in the North Atlantic Treaty Organization, as has Georgia, a country Russia fought a brief war against last summer.

Putin is also under heavy pressure domestically. Oil and gas exports provide about 60 percent of the Russian budget; oil prices, meanwhile, have fallen by about two-thirds since their peak last summer.

The effects are rippling through the economy. The ruble is being devalued, Russian companies are facing bankruptcy and the government's huge budget surplus will turn into a deficit next year if prices do not rebound, analysts say.

At the same time, Russia's relations with the West slumped to post-cold-war lows after Russia sent troops into Georgia in August.

Even as Russia will need foreign investment to offset dwindling energy export revenues, options are dwindling for attracting investors to a country that even in the best of times had a poor track record of property rights.

"The Russian elite mind-set right now is a residue of petro-confidence slamming into the financial crisis," said Cliff Kupchan, a director at the Eurasia Group, a global risk-consulting firm based in New York. "So in my view, they're confused about whether to seek help from the international financial system to solve their problems that way or continue a bare-knuckled approach to the world."

Executives of Gazprom blamed Ukraine. In an announcement on Monday, Putin and Gazprom's chief executive, Aleksei B. Miller, said they would cut 65.3 million cubic meters of gas supplies for Europe. In fact, the reduction totaled about 240 million cubic meters, according to Gazprom.

Company officials said that they had intended to ship more fuel on Tuesday, but that Ukraine had blocked export pipelines. Ukrainian energy officials denied this.

"We are shocked that we're not in the position to bring gas to the border of Ukraine because they shut down the pipelines," Medvedev, a deputy chief executive of Gazprom, said at a news conference in London on Tuesday. "There is no reason to blame Russia or Gazprom."

Oleh Dubyna, the director of Ukraine's national energy company, Naftogaz, said he would fly to Moscow on Thursday to resume negotiations.

Gazprom's spokesman, Sergei Kupriyanov, said the company was "ready to begin negotiations at any moment."

A compromise may be harder to find this year, Thane Gustafson, an expert on Russian energy at Cambridge Energy Research Associates of Massachusetts, said in a telephone interview from Washington. "We're talking about two sides that are under extreme constraint," he said.

Among the pipeline routes that were affected the most was the so-called Western Balkan route, affecting supplies to Romania, Bulgaria, Macedonia, Greece and Turkey, said Ferran Tarradellas, a spokesman for the European Union energy commissioner, Andris Piebalgs.

Substantial cuts could also affect Slovakia, Hungary, Slovenia, Italy and Austria, Tarradellas said.

In Turkey, flows of gas through a pipeline that runs from Ukraine stopped completely on Tuesday morning, said the country's energy minister, Hilmi Guler. The pipeline is a major source of gas for Turkey, which imports nearly all its energy.

Several other sources, including the Blue Stream pipeline, which carries gas to Turkey from Russia under the Black Sea, were unaffected, however.

Source: International Herald Tribune