4. MIGHT, PIPES AND RISKY WAGERS: BEHIND UKRAINE-RUSSIA GAS ROW

“Moscow is trying to bring Yushchenko to his knees,”
said Petro Burkovsky, a political analyst in Kiev.

By Yana Dlugy, Agence France Presse (AFP),
Kiev, Ukraine, Sunday, December 18, 2005

KIEV – Ukraine and Russia will next week try yet again to resolve a
long-running dispute over gas prices, a disagreement which, analysts say,
has become a symbolic battleground for the countries and their leaders.

On Monday, the latest round of talks take place in Moscow with no
compromise in sight on the dispute, which centers on Russia’s stated
intention to hike the price of gas for Ukraine to bring it in line with
world market rates.

Currently Ukraine and Russia settle their gas bill by barter, with Moscow
providing Kiev with gas as payment for the transit of Russian gas exports
through Ukraine to Europe, with a base price of 50 dollars (42 euros) per
1,000 cubic meters (35,316 cubic feet).

Moscow wants to switch to cash payments and more than quadruple the
price, to 220-230 dollars per 1,000 cubic meters. It has threatened to cut
gas supplies altogether if new terms are not agreed by January 1.

Ukraine wants a price increase to be gradually phased in over several years.
Analysts in Kiev give THREE main reasons for what lies behind the scenes
of the tense standoff.

[1] The most popular theory sees Russia as flexing its muscles to regain its
traditional position of influence in Ukraine, which suffered a humiliating
blow during last year’s “orange revolution” presidential election.

Back then, despite the personal backing of Russian President Vladimir
Putin, Moscow’s man lost the bitter campaign to Viktor Yushchenko, who
has vowed to steer Ukraine toward membership in the European Union
and NATO.

Ukraine holds key parliamentary elections in March, and Russia is keen
to help Moscow-friendly groups get into a legislature that will be endowed
with new powers after constitutional changes come into force in the New
Year.

By hiking the price of gas in the middle of winter and just three months
before the election, so this theory goes, Russia is trying to discredit
Yushchenko’s government and boost the pro-Moscow parties.

“Moscow is trying to bring Yushchenko to his knees,” said Petro

Burkovsky, a political analyst in Kiev.

“The opposition will make political hay by saying Yushchenko is incapable
of finding a common language with Putin and will raise the specter of gas
cuts and business shutdowns.”

[2] A second theory views Russia as trying to pressure Kiev into ceding
control of its gas pipeline network — currently, and for some time to come,
the main route for Moscow’s exports to Europe — to a gas consortium, as
agreed by Yushchenko’s Russia-friendly predecessor.

The three-way consortium involving Russia, Ukraine and Germany was to
have operated Ukraine’s gas pipeline network, but Yushchenko ruled out
such an option, saying it impinged on Ukraine’s sovereignty.

Agreement over the consortium was key to resolving the gas price dispute,
the head of Russian energy giant Gazprom, Alexei Miller, said last week.

“Of course a compromise is possible and the Ukrainian side knows what
it is — the question of the gas transport consortium,” Miller told Russian
television.

[3] Finally, some pundits see Yushchenko as consciously giving Russia an
opening to raise the issue of prices in order to drive through unpopular
but much-needed economic reforms.

“What is being done today is a thought-out approach … to force structural
reforms … a forced modernization,” said Andriy Yermolayev, an analyst in
Kiev.

With low gas prices, reforming Ukraine’s Soviet-era, energy-inefficient
industry and raising energy prices for consumers would have been highly
unpopular.

“The risk is high,” Yermolayev said. “Yushchenko is risking the
parliamentary elections … but I think he is acting consciously.” The key
to the gamble will be who voters blame most for the increases when they
go to the polls in March, pundits say. -30-

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