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 800 miles northeast of
Moscow, Wednesday, Dec. 3,
2008. (AP)

Russia–Ukraine Gas Dispute Leaves Europe in the Cold

January 07, 2009 11:31 AM
by Josh Katz
Several Eastern European countries say they may face emergency heating shortages, as Gazprom’s closing of its Ukraine gas pipeline cuts off their supply also.

Russia’s Dispute With Ukraine Takes Toll on Eastern Europe

Russia stopped its natural gas shipments to Europe through Ukraine on Wednesday as the two countries continue to argue over pricing. As a result, Greece, Turkey, Serbia, Croatia, the Czech Republic, Slovakia, Bulgaria and Romania are no longer receiving gas, while France, Austria, Germany, Poland and Hungary are reporting major cuts in their supplies, Sky News reports.

However, Gazprom indicates that it has boosted supplies to the European Union and Turkey to about 200 million cubic meters per day through alternative routes, according to Reuters.

Eastern Europe has been hit the hardest by the dispute. Bulgaria says it is experiencing a “crisis situation,” while Slovakia says it may declare a state of emergency.

The European Union has said that the 27 members could “agree on Friday to share supplies held in storage among themselves if the Moscow talks collapse,” The Guardian writes. Meanwhile, Russia and Gazprom are eager to keep their Western European customers content because of Russia’s financial straits during the economic crisis.

Gazprom cut off its natural gas shipments to Ukraine last Thursday after a contract dispute failed to be resolved by the end of 2008. That action is affecting 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 reported. 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 shut off the pipeline in early 2008 as well, also over a pricing dispute.

Gazprom has again accused Ukraine of siphoning gas meant for countries in Western Europe after Thursday’s shutdown, but Ukraine has denied such charges. Ukraine has stockpiled gas since the 2006 incident, and has enough to last until early April. The EU has also built up its reserves.

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 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.

Talks at the end of 2008 to extend the expiring deal 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 meter of gas the country paid in 2008. Ukraine’s state gas company, Naftogaz, has offered $235 in response to Gazprom’s earlier asking price of $250. But Gazprom has withdrawn that previous offer and now wants $418. 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.

Opinion & Analysis: Who’s to blame?

The Wall Street Journal argues that the current dispute is a power play by Russia to bully Ukraine over its pro-Western policies. “Try to ignore the noise about transit fees, back payments and market prices. Here’s the salient fact about the conflict between Russia and Ukraine over gas supplies: Russia’s strongman is wielding the energy club to undermine the pro-Western government in Kiev and scare the European Union into submission,” according to the Journal. “The strategic stakes are as great as in Georgia last summer.”

But Dan Roberts of The Guardian says Ukraine, not Russia, may deserve more blame. “As energy prices are weakening, it is hard to see why Gazprom would deliberately try to cut off Europe, its biggest customer. It seems far more likely that Ukraine is using the only weapon it has available to avoid having to settle its commercial dispute with Gazprom in a less confrontational way,” according to Roberts. “This doesn’t fit with the agreed Western script which usually portrays Russia as the blackmailing bully and Ukraine as the plucky upstart, but it might just be time to revisit the script.”

Related Topic: IMF lends money to Ukraine; alternative gas routes

IMF Helps 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.
Bypassing Russian Gas Routes
During the late 1990s and early 2000s, the United States was a vocal advocate of the Baku-Tbilisi-Ceyhan (BTC) pipeline, which transports oil from Azerbaijan’s capital through Georgia to Turkey’s Mediterranean coast. The pipeline transports some one million barrels of non-OPEC oil a year without crossing Russian or Iranian territory.

What does get Russian support, however, is the Medstream, a pipeline that would transport Russian and Caspian hydrocarbons via Turkey through Israel and on to East Asian consumers via the Mediterranean. “This sort of project will have a positive effect on the process of strengthening peace in the Middle East,” said Israeli Energy Minister Binyamin Ben-Eliezer.

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.

Most Recent Beyond The Headlines