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Russia cuts off gas deliveries to Ukraine

Russia cuts off gas deliveries to Ukraine

MOSCOW: In the face of mounting economic troubles, Russia cut off deliveries of natural gas to Ukraine on Thursday after Ukraine rejected the Kremlin's demands for a sharp increase in gas prices.

A similar reduction in supplies to Ukraine in 2006 caused a drop in pressure throughout Europe's integrated natural gas pipeline system and led to shortages in countries as far away as Italy and France.

But with a recessionary drop in demand, ample supplies and assurances from both countries that gas would flow westward without interruption, there were few signs of the near hysteria in Europe that accompanied the 2006 cutoff.

The authorities in Poland and Italy issued soothing statements on Thursday, noting the existence of high reserves and the distant likelihood of an immediate effect on gas supplies.

Even Ukraine, which says it has enough gas in reserve to last through the winter, took Russia's action in stride, underscoring how the political potency of the Kremlin's energy card has plunged along with the price of oil and gas. Its normally fractious political leadership rallied together in the face of the supply cutoff, united in their demand that the Kremlin pay more for the right to transship gas through Ukraine.

Gazprom, the Russian natural gas monopoly, likened its actions to a utility cutting off service to a deadbeat customer. "The message is very simple," Ilya Kochevrin, the executive director of Gazprom's export arm, Gazexport, said in a telephone interview. "If you receive a product, you have to pay for it. If you don't pay, you don't receive it."

But energy experts said that the Kremlin's decision to employ the gambit again in a pricing dispute with Ukraine was an indication as well of Russia's deepening economic woes.

Plagued by the sharp fall in oil prices, Russia has been scrambling to make up the revenue shortfall as prices have slipped below $40 a barrel. Gazprom, too, is heavily in debt and sinking along with the energy market.

"They do need the money," Chris Weafer, the chief equity analyst at UralSib bank in Moscow, said in a telephone interview, speaking of Gazprom. "That is the bottom line."

Under Prime Minister Vladimir Putin, who takes a strong interest in energy matters, Moscow has tried a number of tactics in recent months to raise energy prices. It is cooperating more closely with the Organization of the Petroleum Exporting Countries, whose members recently agreed to cut daily production by 4.2 million barrels. It is also trying to organize a parallel group for gas exporting nations.

Talks over price and transit fees unraveled late Wednesday with Gazprom demanding about $50 more per 1,000 cubic meters of gas than Ukraine's president, Viktor Yushchenko, said the country — which itself has severe financial problems — was willing to pay. Later Thursday, Gazprom's chief executive raised the asking price to $418 per 1,000 cubic meters from $250, saying that Ukraine had missed its chance to accept the lower rate. Currently, European nations pay around $500 per 1,000 cubic meters.

At $418 per 1,000 cubic meters, Gazprom would earn about $14 billion more a year than it received from Ukraine last year. While a considerable sum, the revenue would provide only a respite from Russia's broader financial problems.

The Russian authorities have yet to release a detailed plan of how they would fill the hole in the budget presented by tumbling prices. Taxes on oil and gas finance about 60 percent of the government's annual budget. Russia's finance minister, Aleksei Kudrin, has said the country will run a deficit next year if crude oil prices remain below $70; they are now about half that.

Once large foreign currency reserves are increasingly committed to defending the ruble and are running out; the central bank has spent $162 billion since midsummer and still was forced to devalue the ruble three times last week. Russia's gold and currency reserves stand at $438 billion.

The shutoff at the peak of the heating season carried more than financial overtones; it is the most confrontational move by Russia toward a neighboring country since the August war in Georgia.

In comments broadcast Wednesday evening on Russian state television, Putin said any interference with Russia's gas exports to Europe would carry "serious consequences for the transit country itself." He did not elaborate, but Ukrainian officials did not need to be reminded that Russia issued a series of threats and provocations against Georgia, leading in part to the war last summer.

Underlying the gas dispute are long-running tensions between Russia and Ukraine, a former Soviet republic of 46 million. In 2004, after the street protests known as the Orange Revolution led to the installation of a pro-Western government in Ukraine, talks over gas supply and its transit became strained. This time, however, the political coloring is less clear.

Grigoriy Perepelitsa, director of the Foreign Policy Research Institute, an arm of the Ukrainian Foreign Ministry, said in an interview that in addition to raising much-needed revenue, Russia was seeking to undermine President Yushchenko by stalling on the gas deal.

Russia is trying to exploit fissures in Ukraine's mercurial internal politics, offering to negotiate with Ukraine's prime minister, Yulia Tymoshenko, who has recently leaned closer to Moscow. Tymoshenko, for example, was slow to criticize the Russian military intervention in Georgia in August.

Also, the role of an opaque gas trading company that is the exclusive intermediary for gas shipments to Ukraine from Russia and Central Asia carries political ramifications for Ukraine. The Swiss-based trader RosUkrEnergo is jointly owned by Gazprom and by a Ukrainian businessman, Dmitry Firtash, who has close ties to the country's president.

Energy analysts, however, said Gazprom's motives seemed clear.

"The financial crisis puts raising cash as everybody's priority," Simon Blakey, European gas researcher with Cambridge Energy Research Associates, said in telephone interview from London.

"On the Russian side, they are eager to raise cash," he said. "And on the Ukrainian side, they have difficulty finding it."

Russia cuts off gas deliveries to Ukraine - International Herald Tribune
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