Gazprom Ukraine Russia, Gazprom Ukraine natural gas, Western Europe natural gas Russia
Misha Japaridze/AP
Russian Prime Minister Vladimir Putin, left, speaks to Ukrainian Prime Minister Yulia
Tymoshenko who is in Moscow for talks aimed at restoring Russian natural gas supplies
to Europe, Saturday, Jan. 17, 2009.

Russia and Ukraine Expected to End Gas Row Today

January 19, 2009 12:00 PM
by Josh Katz
Ukrainian Prime Minister Yulia Tymoshenko travels to Moscow today, where she is expected to sign a deal with Russia to resume gas flow.

Russia and Ukraine to Sign Gas Deal on Monday

Ukrainian Prime Minister Yulia Tymoshenko and Russian PM Vladimir Putin will sign an agreement in Moscow today in an apparent resolution to the gas crisis that has lasted about two weeks. The two sides developed the outline of the new contract over the weekend, Bloomberg reports.

Once Russia restarts the flow, Ukraine’s Naftogaz says the gas won’t reach its western border for a day and a half. Austria’s oil and gas company “expects Russian gas to begin arriving at its Baumgarten hub two to three days after Gazprom turns on the taps,” according to Bloomberg.

The agreement over the weekend stipulated that Ukraine would receive a 20 percent discount from the average price of gas that European countries pay. Since Russia says European prices are $450 per 1,000 cubic meters, it “would make Ukraine pay about $360 per 1,000 cubic meters in the first quarter, doubling the price it paid in 2008,” the Associated Press reports.

But since natural gas prices for Europe are projected to drop later in 2009, Ukraine could only be paying $150 for 1,000 cubic meters by the summer, according to Ronald Smith, a strategist at Moscow's Alfa Bank.

Ukraine will also have to “pay more for its energy supplies” and “Russia also won't have to pay higher transit prices to Ukraine this year to use its pipelines.”

Background: The Russia–Ukraine gas quarrel

Gazprom cut off its natural gas shipments to Ukraine on Jan. 1 after a contract dispute failed to be resolved by the end of 2008. That action has affected European Union countries as well, because 80 percent of Russia’s exports to the EU travel through the same Ukrainian pipeline.

Gazprom also 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 the 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.

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 European customers about $500, according to the Journal.

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

Opinion & Analysis: Who’s to blame?

The Wall Street Journal argued 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 said 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.

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