Vol. 73/No. 3      January 26, 2009

This is the third time Moscow has reduced gas shipments to Ukraine since the 2005 election of President Viktor Yushchenko, who has established closer ties with the U.S. government and pressed for Ukraine’s entry into the European Union and NATO.

Russian state monopoly Gazprom cut off gas to Ukraine January 1, demanding higher gas prices, while continuing to pump gas through the Ukrainian pipeline to other European customers. Ukraine receives about 70 percent of its gas from Russia.

Last year the Ukrainian government was charged about $180 per 1,000 cubic meters. Gazprom turned off the pumps after Kiev refused the company’s demand for a 40 percent price hike to $250.

As a former Soviet republic, that was lower than the market price of $450 that other European customers pay. Following the shutoff, Moscow revised the price it charges Ukraine to $450 for the first quarter.

The Ukrainian government, meanwhile is demanding that Gazprom pay higher transit fees.

On January 7 Gazprom cut off all gas to the Ukrainian pipeline system, through which 80 percent of Russian gas is supplied to about 20 countries in Europe. Roughly one-quarter of gas used in Europe comes from Russia.

Moscow says it ceased all Ukrainian shipments because Kiev was siphoning off gas bound for other countries, a charge the Ukrainian government denies.

In January 2006 Kiev siphoned off gas in its pipelines after Moscow cut off its supply for a couple days in demand for higher prices. Last March, Gazprom reduced shipments to Ukraine by about half in a dispute over Kiev’s debt, Bloomberg news service reported.

Gazprom said it would resume gas shipments through Ukraine only after Kiev signs an agreement to allow inspectors from Russia and several European countries to monitor the gas flow. The Ukrainian government signed the agreement January 13.

But no gas flowed. Both governments blame the other for creating technical problems that prevent restart of the gas flow across the country to the Romanian border. Moscow has also accused Washington of influencing the Ukrainian government to impede the restoration of the gas supply.

The hardest hit by the shutdown include Bulgaria, Slovakia, Serbia, Bosnia, Herzegovina, and Macedonia, according to Marketwatch.com. Others include Hungary, Greece, Austria, the Czech Republic, Slovenia, Poland, Romania, Croatia, Germany, Italy, and France.

In the dead of winter, gas heat prices have skyrocketed throughout Europe and many countries are restricting its use. The hardest hit face power outages, factory shutdowns, and school closings.

Bulgaria has no other source of natural gas and has discussed restarting a nuclear plant that it shut down as a condition for its recent entry into the European Union. The Slovakian government has said it may also restart an old nuclear reactor it agreed to shut down for its EU status. Hungary ceased emergency gas shipments to Serbia and began using other fuels, resulting in Budapest’s first smog alert.

Ukraine, which is heavily dependent on natural gas from Russia, is experiencing an acute economic crisis. Its currency lost 80 percent of its value to the dollar in the last three months and many industries recently closed, with production down nearly 30 percent in November.

In addition to pressing for a higher price from Ukraine, there are other goals Moscow’s cutoff may further. The move has increased pressure on the unstable Ukrainian government, which the Russian rulers would benefit from bringing back under Moscow’s control. The 2005 election of President Yushchenko—the culmination of what was called the “Orange Revolution”—signaled Kiev’s move away from the influence of Moscow toward alliance with Western Europe and the United States.

Amid the current crisis, the pro-Moscow Regions party has been calling for Yushchenko’s resignation. According to a poll by the National Academy of Sciences, the current president would only receive 3 percent of the vote if elections were held today. The Regions leader, Viktor Yanukovich, would receive 30 percent. Yulia Timoshenko, the current prime minister who is gripped in a factional battle with Yushchenko, would get 17 percent.

The Ukraine remains closely tied in with Russia’s economic infrastructure. Besides being vital to Russia’s gas exports, it is important to its power grid and road and rail transport system. Situated on Russia’s western border, Ukraine has the largest Russian population outside the Russian Federation and is the main base for Russia’s Black Sea Fleet.

Moscow has a record of withholding energy resources to press its political agenda. Gazprom temporarily reduced gas supplies to the Czech Republic following Prague’s signing of an agreement last year to establish antiballistic missile batteries there.

Gas prices are expected to drop sharply over the next six months, as has already happened to oil. The Russian economy is heavily dependent on revenue from oil and gas exports. Gazprom lost some $800 million as of January 11 due to the shutdown, according to government officials.  
 
 
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