Gas: Russia and Ukraine

Russia and Ukraine to Resume Talks in Dispute on Gas Prices

New York Times 3 January 2006

MOSCOW (AP) -- Russian and Ukrainian officials agreed Tuesday to resume talks on resolving a dispute over the price of natural gas that has reverberated across the continent and left Ukraine cut off from its supplies.
Sergei Kupriyanov, a spokesman for Russia’s state-owned gas monopoly Gazprom, told The Associated Press that Ukrainian officials were on their way to Moscow. He did not specify who would be taking part but said the talks would be ''at a sufficiently high level.''
Gazprom cut off natural gas supplies to Ukraine on Sunday after the country refused to meet its demand for a fourfold price increase. Other European countries also reported drops in their supplies and Gazprom accused Ukraine of siphoning off gas bound for Europe -- a charge Ukraine denied.
Russia supplies about one-quarter of the gas consumed in Europe and 80 percent of that goes through Ukraine.
Gazprom promised to turn up the volume to compensate for the falloff and the European countries most affected -- Hungary, Austria, Slovakia and Slovenia -- reported supplies were back to normal Tuesday.
Meanwhile, Russian Prime Minister Mikhail Fradkov called on members of the European Union to press Ukraine to ensure that natural gas crossing the country reaches Europe.
''We are asking that influence be used on the Ukrainian side with the aim of returning it to the sphere of law and ensuring that it is in full conformance with its international obligations,'' the RIA-Novosti news agency quoted Fradkov as saying in a message to the European Council chairman, Austrian Chancellor Wolfgang Schuessel.
Despite the planned resumption of Russia-Ukraine talks, there was no immediate sign of a compromise in the works. Fradkov, in his message to Schuessel, said Russia ''firmly intends to return to its relations with Ukraine on the principle of a market economy.'' Russia contends the price spike is justified by high world gas prices.
Ukrainian officials have said they don't oppose market-driven price changes, but any increases should be phased in. A sudden, huge price increase would cripple the country's economy, which depends on energy-intensive heavy industries, Ukraine has said.
The dispute has reawakened European fears over Russia's reliability and potential for belligerence -- criticism that comes as the country assumes the chairmanship of the Group of Eight, a position it wants to use to boost its international prestige.
The dispute also has thrown a new spotlight on Ukraine's dependence on Russia even as it seeks to break out of Moscow's orbit of influence and become a member of the European Union.
Ukraine's tilt toward the West since President Viktor Yushchenko took office a year ago has irritated the Kremlin.
Ukraine denies it is diverting gas intended for others. Deputy Foreign Minister Anton Buteiko said Tuesday his country was sending on the European gas even though there was no contract with Russia and Gazprom was not paying transit fees.
''And when one does not pay dues, that's something that can be described as smuggling,'' Buteiko told TV5.

For Putin and the Kremlin, a Not So Happy New Year

C J Chivers

New York Times 3 January 2006

MOSCOW, Jan. 2 - For President Vladimir Putin and Russia, 2006 was supposed to be a banner year. Instead, it has begun badly, and with problems of the Kremlin's own making.
The Kremlin, which labored in 2005 to distance itself from the ill will that accompanied its destruction of the Yukos oil company and the bungled handling of the rigged Ukrainian presidential election in 2004, has begun the new year with a display of politics and bullying, followed by partial retreat, that is raising fresh questions about its reliability as an international energy partner.
The problems are familiar. Even as Russia assumed the presidency of the Group of 8 industrial nations on Jan. 1, a position it hopes will improve its stature, Mr. Putin returned to two issues that have previously undercut his reputation: control and management of Russia's energy resources and Russia's waning influence in Ukraine.
The source of the trouble is a relatively straightforward question: What will Ukraine pay for imported Russian natural gas? It is a commodity that Ukraine, and much of Europe, desperately needs.
Gazprom, Russia's state-controlled gas monopoly, seeks $220 to $230 per 1,000 cubic meters for Ukraine, abandoning the favored rate of $50 for a more realistic market rate.
Ukraine, while agreeing that it must eventually pay market rates, seeks a much lower price and a transition period to a full rate - an arrangement that Russia has offered to other former Soviet nations.
The Kremlin's solution on Sunday was to reduce gas flows through the pipeline system for Ukraine, a major transshipment point for gas going to Western Europe.
The move, in retrospect, seems both spiteful and unwise, because Russia then tried to send gas through Ukraine to reach European customers on the other side.
One predictable result was a threat to winter fuel supplies in Europe. By Monday, declines in pipe pressure were reported in Austria, France, Italy, Moldova, Poland, Romania, Slovakia and Hungary, which said it would have to cut exports to Bosnia and Serbia and Montenegro.
Even Germany, usually a faithful Russian ally and Russia's largest gas customer, wondered aloud whether Russia could be trusted.
Michael Glos, the German economy minister, said in a radio interview that Germany would like to import even more gas, but could do so only "if we know that supplies from the east are dependable," according to Reuters.
Speaking of Russia, he added, "One should naturally act responsibly."
Supply concerns seemed to ease Monday as Gazprom announced it was restoring most of the gas flow to Ukraine. Mr. Putin, amid a fresh din of international criticism, appeared to blink.
But a set of oddities and problems remained.
First among the oddities was that Mr. Putin, who managed to draw unflattering attention to himself, did so in a case where almost no one disputes that in principle he is right: Gazprom's customers should pay market prices.
Western governments, the European Union and the customers themselves have not argued otherwise. The issue is what market prices are, and how Ukraine should reach them.
To build what seemed a manageable business dispute with a neighbor into a problem for much of Europe, Mr. Putin, a former K.G.B. colonel who last year called the collapse of the Soviet Union "the greatest geopolitical catastrophe of the century," cast himself anew.
For the purposes of this quarrel, he became not only a capitalist but a monopolist, embracing a free-market rationale in its harshest form. His position was clear: If Ukraine does not like the price, let its factories slow down, let its lights dim, let its people freeze. And let Europe worry if it will have heat this winter, too.
Other problems followed, as the dispute attracted more attention. While the Kremlin argued for market rates, it refused to acknowledge why Ukraine's gas prices have been so low. The job of clarifying the record fell to Andrei N. Illarionov, who was Mr. Putin's top economic adviser until he resigned in frustration last week.
Mr. Illarionov said in a radio interview that Ukraine's subsidized rate was essentially a problem of the Kremlin's own creation. Gazprom had agreed to the $50 price in 2004, he said on the Ekho Moskvy radio station, to help a Kremlin-backed candidate in Ukraine's presidential election.
The $50 deal was supposed to last until 2009, he said. But when the Kremlin's candidate lost the presidency to Viktor A. Yushchenko - who wants Ukraine to join the European Union and NATO - the Kremlin changed the rules. Market rates were invoked.
Moreover, Gazprom has been using different pricing criteria for different nations. Georgia pays $110 for the same amount of gas, as does Armenia and Azerbaijan. The Baltic states, which are members of the European Union, pay $120 to $125. Moldova pays $160. Belarus, a firm Kremlin ally, pays $47.
The origins of Ukraine's current rate, and this variable pricing regime, allowed critics to suggest that the Kremlin suffers from amnesia and hypocrisy alike.
The problems only piled on. Experts also charged that Mr. Putin had undermined the credibility of Gazprom, Russia's largest company.
Gazprom has been seeking international respect and trying to shed its image as a Kremlin stooge. But at important moments last week, it was not the company's official leadership making proposals for settlement, but Mr. Putin.
Mr. Putin's appearances put to rest any questions about who is handling this affair, and underscored anew that Gazprom is a company bound to the whims of a head of state.
Investors will get some measure of how the company has fared in the short term when the Russian stock market reopens after the Russian holiday season, on Jan. 10. The news, experts say, has been bad.
"Once again we are seeing that Gazprom is not a leading international company," said Dan Rapaport, managing director of CentreInvest, a Moscow-based investment firm, "but a tool of policy making for the Kremlin."

The new Cold War Russia’s use of energy as a political weapon could prove disastrous.

Times Leader [editorial] 3 January 2006

The Russian cut-off of gas supplies to Ukraine may prove, in the long run, as catastrophic to the Kremlin as the oil boycott in 1973 eventually proved to the Arabs. Whatever the bland public communiqué by the European Union at its emergency meeting tomorrow, urging Moscow and Kiev to settle their quarrel, the lesson for Europe is clear: the Kremlin’s assurances of stable energy supplies are hostage to its political interests. Europe’s energy lifelines must never depend on Russia.
The political conclusion is almost as bleak. President Putin, having backed the wrong horse in Ukraine’s presidential election last year, is determined to avenge himself on the Orange Revolutionaries. The decision to quadruple the price paid for Russian gas is clearly political and intended to hurt. It is taken in response to the Yushchenko Government’s decision, deeply resented in Moscow, to position itself closer to Nato and the European Union. It is, if not economic blackmail, at least an unacceptable use, in the name of market economics, of a dominant market position.
That such a clumsy action should mark Russia’s assumption of the G8 presidency is a poor riposte to Western critics who maintain that President Putin is, in any case, unqualified to host — for the first time — the annual summit because of his poor democratic record. His clampdown on non-governmental organisations is only the latest in a series of restrictions that have caused the resignation of a top Kremlin economic adviser, with the reproach that Russia was no longer politically or economically free. The irony of the action against Kiev is that Mr Putin wants to make energy security the leitmotif of the summer summit. How could he better demonstrate how a contract can be abused or a country undermined by the manipulation of its energy supplies?
Ukraine, however, has scarcely helped to defuse the quarrel. The appointment last year as Prime Minister of Yulia Tymoshenko, a woman viscerally anti-Russian in her policies, was as provocative as it subsequently proved divisive and sabotaged the talks with Moscow on a new gas contract. Her sacking, amid charges of corruption, signalled the end of the Orange Revolution’s honeymoon and with it hopes that President Yushchenko would be able to overcome inherited problems of corruption and opportunism.
Ukraine has, therefore, had little incentive to make concessions. Indeed, the gas row was seen as the best way of demonstrating to Western Europe Russia’s attempts to put pressure on its neighbour, while uniting a fractious country behind a Government determined to stand up to Russian bullying. If, however, Ukraine is proposing to siphon off gas intended for Western Europe in compensation for transit charges or to supplement a sudden shortfall in the depth of winter — or, indeed, if it has already done so, as Russia alleges — this will quickly lose it friends in the West.
President Putin offered a last-minute compromise, proposing a freeze in price for the next quarter. Ukraine turned this down. Parliamentary elections are due in March: little would so galvanise Mr Yushchenko’s supporters than a stand-off with Moscow. But little could be more dangerous to the rest of Europe. Ukraine may get through this winter. But the opening of a new Cold War shows that pipelines are the new weapons of choice for an embattled and angry Kremlin.

Russia: Bully or just applying the rules?

Analysis By Paul Reynolds

BBC 3 January 2006


Russia might not be, as Churchill once described it, "a riddle wrapped in a mystery inside an enigma" but it is still a hard place to understand.
In the West it is regarded these days as something of a rogue bear, not content with stamping its authority on its own territory but roaming around its neighbours' as well.
The row with Ukraine over gas is, according to this interpretation, part of President Putin's authoritarian approach, under which he has sought to re-establish state control over Russian institutions and is now using the power of Russia's energy resources to browbeat a country which turned its back on Russia during the Orange Revolution in late 2004.
The case against Russia
"Putin is not a democrat," says Margot Light of the London School of Economics. "He has a view of strong government and he wants state control over the commanding heights of the economy and of civil society."
"He decided that everyone not part of the Russian sphere will have to pay market prices for gas. Belarus is part of that sphere so is not being charged the full rate. Georgia and Armenia are not and have had to accept increases.
"However, I think he miscalculated and did not expect Ukraine to resist this much. He is also a realist and a pragmatist but has now been made to look foolish, as security of energy supply is one of the themes has been proposing for the Russian G8 chairmanship, which has just started."
Putin energy proposals
Certainly, President Putin has been talking ambitiously about energy supply.
The Russian news agency Interfax reported him as saying that Russia is not only drafting proposals for the G8 but "is also ready to take part in their implementation".
It would emphasise "reliable deliveries of traditional fuel to the world economy on terms acceptable for producers and consumers".
He added that "diversification and security of energy supplies, including their protection from terrorist attacks" were other priorities.
The contrast between the high sounding words Russia has been using about energy supply and its actions towards Ukraine (increasing the price fourfold while offering a three month postponement and a loan to help pay for it) is something that Western governments have noted and are concerned about.
For them, Russia has been a disappointment and this is another manifestation of that.
Mr Putin is to host the next G8 summit in St Petersburg in July.
He will want this row out of the way by then but he has already suffered damage in that Russia's pride in being a good supplier has taken a knock.
The taps were never turned off to Western Europe even during the Cold War
It seems not to have taken into account the possibility that Ukraine would take a proportion of the gas passing through its pipeline.
The way in which supplies have now been increased to ensure that Europe does get enough shows that Russia is worried about this damage.
In addition, Ukraine argues that the Russians have a contract to supply gas at the much lower rate of $50 until 2009 and that any dispute should be go to arbitration (The Stockholm Chamber of Commerce is the agreed venue).
A defence of Russia
However, there is another view about Russia and it has been expressed in an article in the UK's The Independent newspaper by a former Moscow correspondent Mary Dejevsky.
She argues that Russia is simply applying market rules and that the West is operating double standards towards Russia on this and other issues.


As an example she says that Russia is being told to cut its domestic fuel subsidies as a condition of joining the World Trade Organisation.
"So it is quite right, indeed necessary for Russia to freeze its own children and pensioners, but when it comes to income-earners in a poorly-run foreign country such as Ukraine, this is bullying. What are Russians to make of this?" she asks.
Russian views
One sign of what Russians make of it comes from the BBC Russian Service website which is full of hostile comments about Ukraine.
This for example: "For Ukraine the price of $230 is payment for its 'democratic choice'. Why should Russia pay for that choice? You want to join the West? You want to join Nato? Go ahead!!!... If you change course, the price will change. That's normal. That's how all your Western friends behave. So stop crying and howling... At the end of the day the Ukrainian people always has a choice - the West, where no-one is waiting for you, or with us."
Or this with reference to Russian claims that Ukraine has diverted gas meant for Western Europe: "A thief should go to jail. If [Belarusian President Alexander] Lukashenko stole gas from Europe, then the EU would not remain silent about the fact that its gas was being stolen."
Of course, similar views about Russia can be found on Ukrainian sites but the point is that Russian nationalism is a force Mr Putin has to reckon with.
One question is whether he is encouraging it.
Ms Dejevsky does accept that Russia has, at the very least, a presentation problem.
"Sometimes, even those of us inclined to give Vladimir Putin's Russia the benefit of the doubt have to despair about Russia's abject inability to present its case and defend itself against the calumnies hurled in its direction."

Turning off the pipes threatens to leave Putin out in the cold

Analysis by Michael Binyon

RUSSIA’S action has caused an immediate political and economic crisis in both Eastern and Western Europe, dramatically underlining the key role energy supplies now play in power politics.
But the Kremlin’s action may backfire, damaging long-term relations with the West and throwing into question President Putin’s commitment to stable energy supplies. Ukraine’s attempts to win the backing of Western Europe in a showdown with Moscow are also a high-risk gamble that could leave it isolated, cold and industrially paralysed.

The Russian action could not come at a worse time — for both President Yushchenko of Ukraine and for President Putin. Russia took over the presidency of the G8 for the first time this year and Mr Putin wants to make energy security the main theme of the annual summit. Already he is under attack in the West for moves to curb democracy; the action by Gazprom will convince Western critics that Russia is unqualified to chair a meeting of industrial democracies. The Kremlin cannot distance itself from the highly politicised decision by Gazprom, the state-owned giant that is increasingly influential in Russian foreign policy. And it must be worried by the immediate reaction of Germany, its main partner in Europe, which said that cutting off the gas could harm economic relations with the West.
Investors may now be wary of trusting assurances from the Kremlin and will be concerned that Russia might try to use its muscle in other ways. Despite months of negotiations and clear warnings to Kiev in September by President Putin, the quadrupling of gas prices for Ukraine will be seen by businessmen and Western governments as precipitate and tantamount to blackmail. It will make Europe extremely wary of further increasing its dependence on Russian energy supplies.
There could be real doubts in Germany over the proposed new pipeline under the Baltic to bring in Russian gas.
Indeed, for the Kremlin, the move may prove as catastrophic as the Arab oil boycott of 1973, which left the West, and America in particular, determined never to be so dangerously reliant again on Arab oil.
But Ukraine cannot assume automatic backing from the West. Russia’s argument that it should pay market rates for its gas are powerful, especially as the old price of $50 (£29) was absurdly low and the proposed new price of $230 per 1,000 cubic metres is still lower than the rate for Western Europe. Ukraine says, after all, that it is now a market economy.
If Ukraine, as Russia claims, has indeed caused the sudden drop in supplies to the West by diverting them into its own network, this will cause uproar. Kiev denies the charge, though it says it will consider tapping into the export pipelines to pay transit costs.
Ukraine may also be criticised for turning down President Putin’s offer to delay any cut-off for three months, raising the suspicion that Kiev wants a showdown to highlight the constant pressure by a Russia that strongly opposes its moves to position itself closer to Nato and the EU.
It is no secret that the Orange Revolution has run into difficulties, with squabbles and splits in the Yushchenko Government; little would so unite the fractured country as the perception that Russia was trying to freeze it into submission. Ukraine has raised the stakes by threatening to increase the rent for the Russian Navy’s use of Sevastopol, the Black Sea port.
At heart, the row centres on deep emotional antipathy on each side. Many Russians are unreconciled to the loss of Ukraine, a Russian province for more than 300 years, and many Ukrainians are still deeply resentful of former Russian domination.
The Kremlin’s open backing for Mr Yushchenko’s opponent last year, its anger at the overturning of his initial victory and Ukrainian suspicions of Russian involvement in the poisoning of Mr Yushchenko have further soured relations.