New Factors Drive Russia-Ukraine Gas Rhetoric

KIEV, Ukraine -- Europe is bracing itself for the possibility of another New Year gas row between Russia and Ukraine, which last year led to supply cuts, leaving hundreds of thousands out in the cold and grinding some industry to a halt.

The problem is a possible repeat of gas pipeline disruptions to EU supplies similar to those of January 2009, which lasted three weeks.

A contract signed after January's three-week standoff should have clarified gas relations between the two countries and ensured there were no more rows about prices and supplies. This year, Ukraine has paid all its bills on time.

But analysts say the potential for a dispute ahead of a Ukrainian presidential election on Jan. 17 exists and, if it happens, it will be sparked purely by political motivation.

WHY SHOULD EUROPE CARE?

Europe receives about 20 percent of its gas from Russia flowing through pipelines running across Ukraine. Some southern and eastern countries are almost entirely dependent on the gas.

Russia cut gas supplies to Ukraine and, later, onwards to Europe as of Jan. 1 over a gas pricing dispute.

As Ukraine ate into its vast reserves and felt little impact from the cuts, European leaders were shocked that a dispute between two non-EU members could impact its own citizens.

In Slovakia, hundreds of companies were forced to shut down or cut production, thousands of people were left without heating in the Balkans and Bulgaria characterised the supply cuts as "catastrophic", likening it to a "terrorist attack".

WHAT WAS THE DISPUTE ABOUT?

Ostensibly, the row was about how much Ukraine should pay for Russian gas after a year of settling bills late. Like many former Soviet republics, Ukraine paid subsidised prices but Moscow wanted its neighbours to start paying market prices.

The two sides also disagreed on how gas should be supplied to Ukraine, including the existence of a trading intermediary called RosUkrEnergo.

The row became protracted after Russia accused Ukraine of stealing gas meant for Europe and as EU monitors were sent to Ukraine to investigate what was happening at pumping stations.

But the conflict developed as President Viktor Yushchenko's relations with Moscow slumped and after Russia fought a brief war with Georgia -- another ex-Soviet state wishing to move from under the shadow of Moscow toward the West.

HOW WAS IT SOLVED?

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, agreed on a 10-year supply contract on Jan. 19, which stipulated Ukraine would pay market price minus 20 percent for 40 billion cubic metres of gas this year.

WHAT IS DIFFERENT THIS YEAR?

Though caught in a deep recession, Ukraine has so far settled all its bills on time and said it would use IMF cash to pay gas supplies of the next few months.

Relations between Yushchenko and the Russian leadership have collapsed. Russian President Dmitry Medvedev has said he cannot do business with the Ukrainian, but ties between Putin and Tymoshenko have been cordial.

Yushchenko is almost certain to lose a presidential election on Jan. 17 -- any gas war could influence the results of the election.

Gazprom, Russia's export monopoly and the world's largest gas producer, has been hit this year by falling demand from European customers gripped by the economic crisis and a switch by some clients to liquefied natural gas (LNG).

Gazprom Export deputy head Sergei Chelpanov has said European customers will buy 8-9 billion cubic metres less gas this year than foreseen by "take or pay" contracts, raising the possibility Gazprom will have to chase customers for payment.

European countries are much better prepared for a potential crisis. Stocks are filled almost to capacity and abundant LNG supplies give them an alternative.

WILL THERE BE A GAS WAR?

The potential for a conflict already exists -- Ukraine has bought far less gas than it promised it would at the start of the year and the two sides have not yet agreed on next year's volumes.

It has struggled to make monthly payments for gas and is likely to go through to the end of the year without a $3.8 billion IMF bailout that had been due for release this month.

Putin has warned that gas supplies to Europe would be cut if Ukraine siphons of transit gas for its own use -- the reason cited by Moscow for January's supply cuts.

But Ukraine has so far made all payments on time and built up large reserves of gas needed to ensure smooth transit to Europe during the winter months, while Moscow has said it would not impose fines for under-consumption.

Analysts say Russia cannot afford to cut gas to Ukraine for a second year in a row as it might play into the hands of Yushchenko, who could portray himself as the victim of Russian aggression.

Gazprom also needs European support for key gas projects. It is unlikely to want to jeopardise hard-won agreements with European countries after securing backing for pipeline projects.

Source: Forbes

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