Russia and Ukraine Battle over Gas Deliveries
Russia and Western-leaning Ukraine remain sharply divided over natural gas supply terms for 2006 in a pricing dispute with far-reaching geopolitical repercussions.
The Russian gas giant Gazprom reduced natural gas supplies to Ukraine on January 1 after Ukrainian authorities refused to sign a contract that called on Kyiv to pay $230 per thousand cubic meters (tcm). The two sides were scheduled to resume talks on January 3.
The cut-off to Ukraine caused some disruption of gas supplies across Europe. When several European states complained, Russia was forced to resume normal supplies. Ukraine's national natural gas company, Naftogaz, had warned in a January 1 statement that the Russian gas cut-off would reduce deliveries to Europe. Also on January 1, Gazprom claimed that Ukraine had started siphoning off Russian gas destined for Western European markets. By January 3, deliveries to European states had steadied. Russia and Ukraine then started to argued over responsibility for the breakdown in negotiations. The Russian Foreign Ministry blamed Ukraine for provoking the cut-off, accusing Kyiv of "blackmailing" European countries by threatening to siphon off Europe-bound gas. Russian officials indicate that they may cut off gas deliveries again if Russian-Ukrainian negotiations fail to make headway.
Ukrainian officials insist that the price set by Russian negotiators was "economically baseless" and politically motivated. Some Russian media outlets concur, suggesting that Russia wants to punish Ukraine over the Orange Revolution of late 2004. [For background see the Eurasia Insight archive]. The Orange Revolution led to the ouster of a pro-Russian government in Kyiv and its replacement by President Viktor Yushchenko's Western-oriented administration.
Some experts say the Russian-Ukrainian dispute is part of a larger struggle for control of the vast energy reserves in Central Asia and the Caucasus. Alexander Medvedev, Gazprom's vice president, indicated that the company is interested in acquiring a 50 percent stake in Ukraine's gas pipeline network. He argued that Ukraine could sell the stake at a market price. However, Ukrainian authorities have declined to consider this option so far. Ukraine's gas transportation system includes 283,000 kilometers of pipelines with a total capacity of 175 billion cubic meters (bcm) per year. It also includes 72 major pumping stations and 13 underground storage facilities with a total capacity of 32 bcm.
Increasing its control over Ukraine's pipeline network would help Russia secure its hold on regional energy supplies. Prior to the Orange Revolution, the Moscow-leaning Ukrainian administration of Leonid Kuchma reportedly explored a deal that would have granted Russia increased authority over the Ukrainian pipeline network. Russian negotiators may now be trying to revive that deal in some form, offering in exchange to lower the price that Ukraine would pay for Russian gas.
Russia's desire to solidify its position in the Central Asian energy game is fueled in part by concern over China, which has made persistent progress in widening its access to regional supplies. In late December, a 1,000-kilometer pipeline linking Kazakhstan and China started pumping oil. Last summer, the state-owned China National Petroleum Corp. won a take-over scrum, paying $4.2 billion for PetroKazakhstan. [For additional information see the Eurasia Insight archive].
Russia and Ukraine have been haggling for weeks over gas supplies. Ukraine had been paying $50/tcm. But in November, Gazprom sought an unprecedented hike, calling for Ukraine to pay about $160/tcm. When Kyiv balked, Russian negotiators upped the price to $220-$230/tcm, or what is considered the "market rate" in Western Europe.
Gazprom chief Alexei Miller repeatedly announced that without a contract covering Russian gas supplies to Ukraine in 2006, the gas conglomerate would be forced to suspend deliveries. Russia's Finance Minister Alexei Kudrin described Gazprom's pressure on Ukraine as a "right measure."
In a series of telephone conversations in December, Russian President Vladimir Putin and Yushchenko agreed not to politicize the gas row. They also agreed to hold talks between the two prime ministers in Moscow, but that meeting failed to produce an agreement.
Russian political analysts believe the bilateral gas dispute could affect Ukraine's domestic politics. Vyacheslav Nikonov, head of the Politika Foundation, a Moscow-based think-tank, said that the gas theme could become a factor in Ukraine's upcoming parliamentary election campaign.
Russia in recent months has calibrated its energy policy to reward its friends and punish states that have strayed from Moscow's foreign policy line. In sharp contrast with the Russian-Ukrainian dispute, for example, Moscow struck a deal with Belarus in mid December, under which Minsk will pay only $46.68/tcm for up to 21 billion cubic meters of gas in 2006.
Gazprom has also indicated plans to raise 2006 gas prices for other former Soviet nations, including Armenia, Azerbaijan, Georgia and Moldova. Prices are also envisioned to rise for the Baltic states of Lithuania, Latvia and Estonia. The price hike for Armenia, which is Russia's strongest ally in the Caucasus, reportedly would not involve actual cash payments. Russia would extend loans to Armenia to cover higher gas bills, and these loans might eventually be repaid by stakes in Armenian state-owned companies.
Meanwhile, Gazprom has secured increased gas supplies from Turkmenistan. Turkmenistani President Saparmurat Niyazov and Gazprom head Alexei Miller clinched a deal on gas prices on December 29. The Russian conglomerate agreed raise the amount it pays for Turkmen gas from $44/tcm to $65/tcm. Russia plans to buy about 30 bcm of Turkmen gas in 2006.
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