Gazprom Shuts Off Gas Links To Ukraine

MOSCOW, Russia -- For the second time in three years, Russia's natural gas monopoly, Gazprom, on Thursday halted the entire flow of fuel intended for Ukraine's domestic consumption in a shutoff that could eventually reverberate through the Continent's integrated pipeline system and affect consumers in Western Europe.

A gas storage and transit point in Boyarka, just outside Kiev.

Talks over price and transit fees unraveled late Wednesday with Gazprom demanding about $50 more each 1,000 cubic meters of gas than Ukraine's president, Viktor Yushchenko, said the country was willing to pay.

The shutoff at the peak of the heating season, though it has happened before, marked the most confrontational move by Moscow toward a neighboring country since its war with Georgia in August. Gazprom maintains that it is merely cutting service to a nonpaying customer.

"The message is very simple," Ilya Kochevrin, executive director of Gazprom's export arm, Gazexport, said in a telephone interview. "If you receive a product, you have to pay for it. If you don't pay, you don't receive it."

The shutoff caught the country of 46 million people at the peak of the winter heating season, as it did three years ago. Then, the Russian cut drew a din of criticism from the West and pushed up global oil prices.

With energy prices falling, the cutoff seemed intended to boost diminishing revenue at Gazprom, and to remind consumers that natural gas is a volatile commodity. Yet it has caused less panic now, as Russian leverage from oil and gas exports dwindles along with falling energy prices.

This time, European nations and Ukraine are far better prepared to weather a Russian embargo, not because they have significantly diversified supplies but because demand for gas is diminished in the global recession and national gas reserves in most European countries are nearly full.

The authorities in Poland and Italy issued soothing statements - noting high reserves and the distant likelihood of an immediate effect on gas supplies.

Ukraine's national energy company confirmed that the pressure was dropping in its pipeline system, which is used both for domestic supply and exports, but it said the country had reserves sufficient to fully meet demand for three months even if Russia does not restore supplies.

This time, Yushchenko released a statement with a Ukrainian price demand: The country would not pay more than $201 for 1,000 cubic meters he said, even after Russian technicians had stopped the compressor stations that pump gas into Ukraine.

"We have sufficient gas in underground storage," Bohdan Ivanovich, the Ukrainian president's envoy on energy security, said in a telephone interview. "We can survive the winter heating season."

Russia, meanwhile, is reeling from the fall from more than $100 in the price of crude oil since a peak last summer. Gazprom is deeply in debt even as the market is moving against Russia in a serious way.

While still high today, natural gas prices will inevitably fall and further wallop the Russian economy that is reeling from the sharp drop in the country's other pivotal export, crude oil.

Natural gas is pegged to the price of oil, but with a six month delay. Gazprom is still receiving payments linked to last summer's historic spike in oil prices, but they will decline sharply after the second half of 2009.

Elsewhere, the Russian economy is little reformed from the era of weak property rights and uncertainty of the state's role that characterized the early post-Soviet period. The country has used commodity exports as a crutch.

The authorities have yet to release a detailed plan of how they would fill the hole in the budget presented by the tumbling oil prices.

Taxes on oil and gas comprise about 60 percent of the Russian budget. Finance Minister Aleksei Kudrin has said Russia will run a deficit next year if the price of crude oil remains below $70 a barrel. It is now about $40 a barrel.

Russia's foreign reserves are increasingly committed to defending the ruble and are running out. The central bank has spent $162 billion since midsummer and still devalued the ruble three times last week. Russia's gold and foreign currency reserves are now $438 billion.

The country's gas exports themselves are vulnerable. About 80 percent of its gas exports to Europe go through Ukraine, which is now asking for a higher fee for this service. That would further undermine Gazprom's poor financial position.

The transit of Russian natural gas across former Soviet states to customers in Western Europe is a pivotal economic and security interest of the Russian government: Taxes on exports of oil and natural gas account for about 60 percent of its budget.

The conflict could sharply escalate tensions between Ukraine and Russia, the two largest successor states of the former Soviet Union.

In comments broadcast Wednesday evening on Russian state television, Prime Minister Vladimir Putin said that any interference with Russian gas exports to Europe would carry "serious consequences for the transit country itself." He did not elaborate.

Underlying the gas dispute are long-running tensions between the two countries. In 2004, after the street protests known as the Orange Revolution installed a pro-Western government in Ukraine, talks over gas supply and its transit became strained.

Gazprom has characterized the pricing disputes, which arise when contracts expire at year's end, as purely commercial. Yet critics who contend Russia uses oil and natural gas exports as political leverage over former Soviet and East bloc states see clear ties to the region's turbulent politics.

"Russia will use the economic factors to transform the internal politics of Ukraine," Hrigoriy Perepelitsa, director of the Foreign Policy Research Institute, the academy of the Ukrainian Foreign Ministry, said in a telephone interview.

He said Russia was seeking to undermine Yushchenko by stalling on a gas deal, while seeking instead to negotiate with the Ukrainian prime minister, Yulia Tymoshenko, who has leaned closer to Russia politically as alliances shift in Ukraine's mercurial internal politics.

Tymoshenko, for example, was slow to criticize the Russian military intervention in Georgia in August.

The goal, Perepelitsa said, was to steer Kiev close to a model of government more pliant to Russia's self-appointed role as a country with a privileged sphere of influence in the region. "It will create a politics closer to Belarus, or other former Soviet states, that are controlled from Moscow," he said.

In this dispute, the role of an opaque gas trading company that is the exclusive intermediary for shipments to Ukraine is one lever of influence, Perepelitsa added.

The Swiss-based trader, RosUkrEnergo, is half owned by Gazprom and half by a Ukrainian businessman, Dmitry Firtash, who has ties to the country's president.

RosUkrEnergo buys gas from Gazprom and Central Asian suppliers at rates below those charged in Europe, re-sells most to Ukraine, but exports a portion to higher paying European nations such as Poland for a profit.

Half the profit reverts to Gazprom and the rest flows to Firtash and his partners. Critics say the arrangement at best creates a conflict of interest woven into the business and political elite of Ukraine, and is corruption at worst.

The deal is unpopular in Ukraine and controversy deepened when Yushchenko's press aide conceded that the president had met several times with Firtash after the 2006 agreement that made RosUkrEnergo the exclusive supplier.

Raising prices on RosUkrEnergo thus undermines Yushchenko's ally in business, Perepeliltsa said.

Source: International Herald Tribune


Alex said…
Seven ways of stealing from budget

1. "Make an order".
Speed limiters, for instance. Do you know why they appeared recently? And why they are being mounted three or even four in a row? The answer is very simple: capital authorities pay Uah 50000 for mounting the single one, while wholesale cost of it is Uah 300. They earn 100 times including installations maintenance. Sudden replacement of old traffic lights that took place all over Kiev hardly could be explained by sudden care of pedestrians ‘cause no "zebra" markings were refreshed .