7. GAZPROM REFUSES TO BACK DOWN ON UKRAINE


By C.J. Chivers, The New York Times
International Herald Tribune (IHT), Europe, Saturday, Dec 31, 2005

MOSCOW Worries of a winter gas shortage in Ukraine intensified Friday as
Gazprom, the Russian energy giant, renewed its threat to cut the supply
Sunday to Ukraine if it did not accept a nearly five-fold price increase.

The impasse showed no sign of solution. Gazprom rejected an appeal from
Viktor Yushchenko, Ukraine’s president, to freeze prices and maintain gas
flow through Jan. 10 to allow for further negotiations.

It also said that it had run technical tests and was capable of stopping
flows for Ukraine, through which much of Europe’s gas passes, while meeting
export obligations to other countries.

The European Union proposed an emergency meeting of energy officials on
Wednesday. The call reflected worries that the stalled negotiations could
tighten supplies in European countries, many of which buy large portions of
their gas from Gazprom but receive it after it passes through Ukrainian
pipelines.

Ukrainian officials and industry analysts played down the immediate risks,
saying that gas reserves in Ukraine would ensure that its supply was
maintained for at least two days and perhaps longer than two weeks. Europe’s
reserves would also prevent any immediate shortages there.

“I hope Gazprom will not turn off the tap,” said Valery Nesterov, an energy
analyst at Troika Dialog, a Moscow investment firm. But if the flow is cut,
he added, “they still have the time to negotiate.”

The test of wills underscored enmities that have tainted relations between
Ukraine and Russia since Yushchenko and his supporters overturned a
fraudulent election last year, defeating a Russian-backed candidate and
pledging to steer Ukraine toward a more Western foreign policy.

It also marked Russia’s willingness to use its state-controlled gas monopoly
as an instrument of foreign policy, even coercion, in dealing with
energy-hungry neighbors.

That policy is not without risk. The Kremlin and its allies at Gazprom have
displayed their strength against Ukraine for the short term. But their
threats against Ukraine, their mocking of Ukrainian proposals and concerns,
and their willingness to foster worries among other gas customers have
raised fresh questions about whether Gazprom, Russia’s largest company, is a
reliable energy partner.

The dispute centers on Gazprom’s politically influenced pricing system in
which Ukraine, through a deal arranged under former President Leonid Kuchma,
has been paying $50 per 1,000 cubic meters of gas. This reflects Russia’s
practice of providing discounted energy to former Soviet republics that
remain within the Kremlin’s orbit.

Gazprom, with President Vladimir Putin’s approval, has proposed charging
$220 to $230 per 1,000 cubic meters, in line with prices in Europe. Putin
has offered a $3.6 billion loan to Ukraine to help cover the costs, a
gesture variously seen as pragmatic or patronizing.

Yushchenko’s government has said Ukraine is prepared to pay more, but not so
much or so fast, and proposed a transition period with a much smaller hike.
Yushchenko has also turned down the loan offer, saying Ukraine should pay
for energy itself, although “at a reasonable price.”

Ukraine’s volatile domestic politics lie just beneath the surface.

Ukrainian parliamentary elections are scheduled for March 26. The elections
will be accompanied by constitutional changes, negotiated last year, that
will weaken the Ukrainian presidency and strengthen the Parliament and prime
minister.

The combination of the new Constitution and the elections means that the
faces and policies of Ukraine’s government could shift remarkably once
again. Russia has made clear of its disaffection with Yushchenko and his
government, and the gas dispute is widely seen as an effort to undermine him
in part to weaken his party’s standing before voters.

A gas shortage during heating season could simultaneously tarnish the
revolution, discredit the president and weaken his party, perhaps leading to
a more pro-Russian government in Kiev.

Ukrainian officials have acknowledged the risks. On Thursday, Anatoli
Kinakh, secretary of Ukraine’s National Security and Defense Council, said
that if talks broke down, the effects on Ukraine’s industry would be severe.

“It is forecast that Ukraine’s GDP will decline 4 to 5 percent in 2006,” he
said, according to translation by the BBC. “Inflation will be at 27 to 30
percent. The social and economic situation in the country may worsen
significantly.” He added: “There is the potential loss of hundreds of
thousands of jobs.”

Gazprom has been unflinching. Aleksei Miller, its chief executive,
reiterated the threat Friday. “If Ukraine does not sign a contract on the
purchase of gas in the remaining hours before the start of the new year,
on Jan. 1 at 10 a.m. Moscow time, gas supplies from the territory of the
Russian Federation to Ukraine will be completely cut off.” -30-

LINK: http://www.iht.com/articles/2005/12/30/news/gas.php

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