Gazprom Ukraine Russia, Gazprom Ukraine natural gas, Western Europe natural gas Russia
Misha Japaridze/AP
Workers weld pipes during a connection ceremony for a new gas pipeline between Ukha and
Bovanenkovo in Ukhta, at Russian Northern Yamal Peninsula, about 1300 kilometers (800 miles)
northeast of Moscow, Wednesday, Dec. 3,
2008. (AP)

Russia's Gazprom Again Stops Selling Gas to the Ukraine; Supply to EU is Threatened

January 02, 2009 05:30 PM
by Josh Katz
The dispute over natural gas shipments between Ukraine and Russia brings back unpleasant memories of the 2006 gas shutdown, and underscores the contentious relationship between the two countries.

So Far, Western Europe Unaffected By Ukraine-Gazprom Row

Russian-owned gas monopoly OAO Gazprom cut off its natural gas shipments to Ukraine on Thursday after a contract dispute failed to be resolved by the end of 2008.

The situation is causing concern for European Union countries as well, because 80 percent of Russia’s exports to the EU travel through the same Ukrainian pipeline. Gazprom halted the gas supply to Ukraine in 2006, and Ukraine intercepted some of the gas meant for the EU in that year, The Wall Street Journal reports. At the time of the 2006 cutoff, the Eurostat statistics agency indicated that about 42 percent of the natural gas imported by the EU came from Russia.

Gazprom has again accused Ukraine of siphoning gas meant for countries in Western Europe after Thursday’s shutdown, but Ukraine has denied such charges. “The Ukrainian side openly admits it is stealing gas and has no shame about it,” Gazprom spokesman Sergei Kupriyanov said, according to The BBC. But on Friday, neither European countries nor Ukraine reported any shortages of gas.

Ukraine has stockpiled gas since the 2006 incident, and it should last them until early April. The EU has also built up its reserves. Russia and Gazprom are eager to keep their Western European customers content because of Russia’s financial straits during the economic crisis.

Yushchenko said on Thursday that the standoff should be resolved by Jan. 7, but analysts suggest that the standoff between Ukraine and Gazprom will not be resolved as quickly as the two sides might hope, and the economic situation is to blame, according to Reuters.

“The very severe financial stringency for both sides, but especially for Ukraine, will make this negotiation even more protracted than in previous gas crises,” said Christopher Granville, managing director of Trusted Sources, an emerging markets research company in London. “It will take longer to reach a deal this time,” he said.

Russia and Ukraine had both experienced years of annual growth averaging 7 percent, but both economies are heading toward recession in 2009.

The 2008 talks fell through because Gazprom and Ukraine couldn’t agree on a number of matters. According to the BBC, “Ukraine says it has paid $1.5bn (£1bn) in outstanding gas bills to Gazprom, via a Swiss company—but not late-payment fines. A Gazprom spokesman said the money should clear by 11 January, but that $614m would still be outstanding.”

Gazprom also wants to charge Ukraine more than the $179.50 per 1,000 cubic meters of gas the country paid in 2008. Ukraine’s state gas company, Naftogaz, has asked for $235 instead of Gazprom’s earlier asking price of $250. But Gazprom now wants $418, withdrawing the previous offer. Gazprom charges its Western Europe customers about $500, according to the Journal.

Finally, Ukraine wants to charge Gazprom more for transporting the Russian gas west, the BBC reports.

Background: Russia halts gas to Ukraine in 2006

On Jan. 1, 2006, Russia cut off gas supplies to Ukraine after Ukraine refused to accept an almost-fivefold increase in gas prices. Some commentators concluded that Russia was punishing Ukraine for the Orange Revolution of 2004, in which the Ukrainian people rejected the Kremlin-backed presidential candidate Viktor Yanukovych. However, Gazprom, the Russian energy giant behind the move, said that it was merely charging a fair market rate after years of subsidies.

Tensions between Russia and Ukraine have been high since 2004, when pro-Western forces led by President Viktor Yushchenko won control of the government over Viktor Yanukovych, a Moscow ally. Russia also opposes Ukraine’s desire to join the North Atlantic Treaty Organization and the EU.

Related Topic: IMF lends money to struggling Ukraine

In October 2008, the Washington-based International Monetary Fund agreed on a $16.5 billion loan over 24 months to Ukraine, contingent on the country making financial sector reforms and balancing its budget.

On top of its flagging currency, translating into more expensive imports at home, global prices have fallen for Ukraine’s key exports, such as steel. Annual inflation rates hit an all-time high of 31.1 percent in May 2008, falling to a still lofty 24.6 percent in September.

Historical Context: Orange Revolution; Yushchenko’s poisoning

In November 2004, Ukraine held its third presidential election since independence from the Soviet Union in 1991. The battle between pro-West and pro-Russian politicians soon boiled down to a contest between their respective presidential candidates: Viktor Yushchenko and Viktor Yanukovych.

In September, Yushchenko fell ill, and accused his opponents of poisoning him. He recovered in time for the election in November, but the formerly telegenic politician returned to campaigning with a face disfigured by toxins. Yanukovych won the November election, but the results were annulled amid accusations of vote-rigging. A rerun was held in December in which Yushchenko and his “Orange” party took power. Yulia Tymoshenko became prime minister.

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