Opinion - News Analysis   

Russia, Ukraine headed for gas war

Vladimir Radyuhin

Moscow wants market prices for the gas it supplies. Kiev says no.

RUSSIA'S PRIME Minister Mikhail Fradkov cancelled his visit to Ukraine hours before it was due to start on Wednesday over Ukraine's refusal to discuss new prices for Russian natural gas. Analysts said the cancellation of the visit indicated Russia and Ukraine were on the verge of a gas price war.

The Russian Premier was to negotiate in Kiev a Russian proposal to increase the price of natural gas supplies to Ukraine and to pay cash for the transit of Russian gas to Europe. However, Ukraine has refused to discuss any changes in the current barter arrangement under which Ukraine meets more than one-third of its gas needs as payment for the transit of Russian gas exports to Europe. Russia has been supplying gas to Ukraine at $50 per 1,000 cubic metres, which is less than one-third of the price it gets in Europe.

Earlier this year Moscow said it would stop supplying gas to Ukraine at heavily subsidised prices starting from 2006 and offered to pay cash for its gas transits across Ukraine. Russia's state-controlled gas monopoly Gazprom said it was negotiating a new pricing mechanism under which it will hike the price of gas for Ukraine to $160 and will pay cash for its gas transits to Europe. The move was widely seen as Moscow's reaction to Kiev's declared intention to re-orient its policy from Russia to the West in the wake of the so-called "orange revolution" in Ukraine a year ago.

Ukraine initially agreed to renegotiate its gas deal with Russia, hoping to diversify its gas supplies. However, its talks with Turkmenistan, which has so far been supplying nearly 50 per cent of Ukraine's gas needs, failed because Turkmenistan already has an agreement with Russia to sell practically all its natural gas exports to Russia's Gazprom over the next 20 years.

Following this setback, Kiev backtracked on its promise to discuss a new deal with Gazprom and insisted the current arrangement stand unchanged, threatening otherwise to start siphoning off Russian gas bound for Europe. Analysts say Ukraine's refusal to negotiate gas prices with Russia's Prime Minister put the two countries on a collision cause.

"Ukraine is pushing the situation to a gas war with Russia," said Sergei Markov of the Institute of Political Studies. "It hopes to play the card of Russian dependence on Ukrainian transit pipelines to Europe and counts on the support of its European allies and the United States in its standoff with Russia."

For its part Moscow reaffirmed its plan to increase gas prices for Ukraine.Russia's Energy and Industry Minister Viktor Khristenko told Channel One television that Moscow was firm in its intention to go over to "market pricing mechanisms" in its gas dealings with Ukraine. A Russian government source told the RBC news agency that the only concession Russia was willing to make to Ukraine was to postpone introducing new prices to March or April 2006. Experts said Gazprom could stop gas supplies to Ukraine in January 2006 if the sides fail to sign a new price agreement by the end of the current year.

Russia has also moved to ease its dependence on Ukrainian transit pipelines. "The more Russia's hands and feet are tied by transit countries, the more they have a temptation to be parasites on Russia," President Vladimir Putin said earlier this week in a clear reference to Ukraine.Two months ago Gazprom signed a mega contract with Germany's BASF and E.O.N. energy giants to build a seabed gas pipeline across the Baltic Sea for the export of 55 billion cubic metres of Russian gas to Europe. On a visit to Turkey last week, President Putin also discussed plans to extend the 1,213-km Blue Stream gas pipeline Russia has built across the Black Sea to Turkey to Italy.

The two projects will enable Russia to wield its energy clout against Ukraine with full force.

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