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RUSSIA: Price Fuels Gas War

Analysis by Zoltán Dujisin

PRAGUE, Mar 24 2008 (IPS) - A renewed Russian-Ukrainian gas conflict has been provisionally averted, but as Ukrainian politicians struggle for control of the gas sector, the next months are likely to bring more price wars.

The latest disputes are part of a larger conflict which began in late 2005 and had its peak in Gazprom, Russia’s energy state monopoly, cutting gas supplies to Ukraine in January 2006. Ukraine has no long-term agreement on gas deliveries with Gazprom, and price negotiations take place periodically.

Since then EU leaders have put pressure on both sides to ensure the security of gas deliveries to Europe, as 25 percent of gas consumed in the EU is of Russian origin.

Europe is Gazprom’s main client. And, three-quarters of Russian gas exported to the EU is transported across Ukraine.

The latest crisis began in January this year when pro-West Prime Minister Yuliya Timoshenko announced she was getting rid of “shady” intermediaries in the Ukrainian gas market, fulfilling an election promise.

Timoshenko wants Gazprom to deal directly with Ukraine’s national oil and gas company Naftohaz, allegedly to keep profits in the country. But Gazprom claimed that the price of 179.5 dollars per 1,000 cubic metres (tcm) paid by Ukraine could not be kept so low without intermediaries.

Gazprom, which partly owns the intermediaries, twice severely reduced gas supplies to Ukraine in the first days of March, saying Kiev should immediately pay close to 1.5 billion dollars in gas debts. The Ukrainian side responded by threatening to divert gas destined for Europe.

Many believe that the debts were accumulated due to unknown elements in Ukraine illegally diverting Russian gas meant for exports to Europe.

But on Mar. 5 an agreement was reached with Gazprom announcing that Ukraine will pay the debt and the gas price would be maintained. The Ukrainian press hailed the price agreement as a victory for Kiev.

Yushchenko and Russian President Vladimir Putin had agreed Feb. 12 to replace the intermediaries with two joint ventures between Gazprom and Naftohaz, keeping the 179.5 dollar price. But two weeks later, following Timoshenko’s unsuccessful meetings with Russian President Vladimir Putin and Gazprom officials in Moscow, the Prime Minister cancelled the agreement until a new agreement was reached in early March.

Gazprom has seemingly sacrificed profits in 2008 for long-term gains and security of markets. Ukraine has granted it direct and permanent access to 10 percent of domestic clients, the highly profitable industrial ones, finally giving Gazprom freedom of action in the Ukrainian market.

Timoshenko apparently achieved her goals: no intermediaries by the end of the year, and the old price of 179.5 dollars per tcm. But her political victory could come at a high price for Ukrainian consumers.

The deal is valid only for this year, and 2009 could be the scene of a renewed gas spat.

Gazprom has agreed to demands by Central Asian governments for prices closer to world values, partly to elevate Ukraine’s price from 179.5 dollars per tcm to more than 300 dollars in 2009.

“Timoshenko won’t accept higher prices, and if she doesn’t come to terms she just won’t pay for gas, while Russians cannot really cut it off,” András Deák, Russia and energy expert at the Hungarian Institute of International Affairs in Budapest told IPS.

Thus far Ukraine has imported gas through a Swiss-registered intermediary partly owned by Gazprom and delivering mostly cheap Central Asian gas to Ukraine.

Domestic distribution was handled by another Gazprom-connected intermediary which had squeezed the state-owned Naftohaz practically out of the market, and reduced cash flows into Ukraine’s budget.

By waging war with the intermediaries the Prime Minister hopes Naftohaz will again dominate the domestic market and help finance her social policies. But there is more to this.

“Timoshenko thinks Russians have to leave the Ukrainian market,” Deák told IPS. “She wants to import gas at the lowest possible price and re-export some of it to Europe with high profits for the budget, and herself.”

The creation of the intermediaries was part of the 2006 compromise, but Timoshenko says the two companies are a cover-up for shady deals and huge profits to their managers.

President Viktor Yushchenko, also a pro-Western politician, has already cautioned Timoshenko against her policy of “adventures and intrigues”, accusing her of endangering the flow of cheap Central Asian gas into the country by replacing existing schemes with others favourable to her.

Some of Ukrainian media says Timoshenko and Yushchenko are battling to gain control of the Ukrainian fuel and energy sector to fund their 2009 presidential bids, where they might run against each other in spite of their parties’ alliance in government.

Ukraine’s gas prices are presently half of those paid by its Western neighbours, and a rise to European prices would be difficult to digest for consumers and industries as the country’s economy is very energy intensive.

But national-minded liberal commentators have suggested that Ukraine should not capitulate to the much derided Gazprom, and switch to much higher European prices, ensuring the country’s “independence” even at the expense of hardships for average Ukrainians.

Pro-Western Ukrainians have been the most vociferous in claiming that Russia uses Gazprom as a foreign policy tool, worrying about the consequences of its penetration in the Ukrainian market.

Gazprom officials usually respond by saying that Ukraine would avoid all problems by simply paying bills on time and signing long-term contracts on gas deliveries.

Russian commentators have also said that it is Ukrainian politicians who are using gas as a domestic policy tool.

While receiving much condemnation from politicians in the opposition and her own camp, polls show Timoshenko’s aggressive stance has boosted her popularity, and left her for the first time as the leading candidate for the 2009 presidential elections.

But this popularity may not produce solutions. “I don’t expect any great agreement to be fulfilled in the coming years, it will always be shaky, with many short gas wars, as long as Timoshenko is there,” Deák told IPS. “A compromise won’t be reached without a tough conflict in 2009 or even before.”

In an attempt to diversify its risks Gazprom is building sub-sea pipelines bypassing Ukraine through the Baltic and Black seas.

By accepting higher prices for Central Asian gas, Gazprom has sabotaged the economic rationale behind Western and Ukrainian plans to build pipelines bypassing Russia and importing Central Asian gas, which is no longer cheap.

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