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EUROPE: Political Chill May Outlast the Big Freeze

Zoltán Dujisin

BUDAPEST, Jan 9 2009 (IPS) - As Russia suffers from the financial crisis and Ukraine heads towards bankruptcy, nobody can tell who is to blame for a spat that threatens to freeze Central Europe and the Balkans.

What has become a yearly dispute began in 2006 when Gazprom, Russia’s energy state monopoly, cut gas supplies to Ukraine due to late payments. The two sides still lack a long-term agreement on gas deliveries, and negotiations take place periodically.

Moscow says it only cut supplies once it had become physically impossible to transport gas beyond the Ukrainian network, through which 80 percent of Russian gas is exported to the EU. It accused Ukraine of diverting Russian gas for internal consumption.

Ukrainians, who have enough reserves to drag negotiations for long, deny cutting the gas, saying they are physically unable to do so. They say there is a risk its ailing pipeline network could suffer a technical collapse if no gas is pumped through it.

Initially showing more understanding for Russia’s position, the European Union (EU), Gazprom’s main client, is now more critical of Russia’s inability to deal with its Ukrainian neighbour.

Russian Prime Minister Vladimir Putin has promised that Moscow will resume pumping gas to Europe after the EU sends a mission of independent monitors, who have already arrived to Ukraine, to check the gas networks. This was a mission the EU should have sent in December when it received a letter from Gazprom warning it of a possible conflict, András Deák, Russia and energy expert at the Hungarian Institute of International Affairs in Budapest told IPS.

“The EU seemingly didn’t learn anything from previous conflicts and cannot find out any facts,” says Deák.

“We have a case of common responsibility of Russians and Ukrainians but the proportions remain unknown,” Deák notes. “The Ukrainians don’t pay and can’t pay, and both have very tough positions and resist a compromise, but they must find a modus vivendi in the next days, even if it’s not a long term solution.”

After recently receiving 1.5 billion dollars in late payments, Gazprom still expects another 600 million in fines, and says there is no contractual basis to provide Ukraine with gas in 2009.

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

Ukraine has been paying 179 dollars per 1,000 cubic metres, whereas most European countries pay 400 dollars. Russia says it wants to bring rates closer to market prices, and offered Ukraine a 250 dollar rate, which was refused by Kiev.

Kiev demands more for its gas transit rates, and claims the price for gas should be dropping as is the case with oil. Moscow argues that the transit rates can only be revised once Ukraine begins to pay market prices, noting that other European states get less for transit.

Struck by the most serious economic crisis in Europe, and relying on International Monetary Fund (IMF) loans, a rise in the price of gas could have devastating consequences for both consumers and a very energy intensive industry in Ukraine.

The 1.5 billion dollar debt was cleared with funds from Ukraine’s central bank. A recent report on Ukraine’s economic situation by its President Viktor Yushchenko notes Ukraine will soon deplete its gold and currency reserves, leading to the country’s default in 2009.

But the pro-Western president does not want to pay the debt by transferring ownership of the transport network to Russia, as he considers it essential to maintaining Ukrainian independence.

Ukraine’s energy policy remains uncoordinated and is conducted by various centres, an analysis published last November by the Ukrainian weekly Zerkalo Nedeli concluded.

Ukrainian media has also reported in the past that leading politicians in Ukraine battle to gain control of the Ukrainian fuel and energy sector to fund their political campaigns, as early parliamentary elections loom.

“The Russian complaint is partly true, nobody in Ukraine wants to sign a contract with them because the price will definitely be higher and too big of a burden before elections in Ukraine,” says Deák.

But the worldwide financial crisis has not been kind on Russia either. Deák says many factories in Europe have stopped working, and European gas companies are getting rid of their own storage gas while the price for gas remains high. This way gas companies minimise imports while they plan to refill their storage facilities once gas prices plunge, as most economists expect.

But the situation is especially serious in those states, especially in the Balkans, which lack storage facilities and are 100 percent dependency on Russian gas.

Bosnia, the Czech Republic, Slovakia, Hungary, Austria, Bulgaria, Croatia, Macedonia, Serbia and Greece have been differently but seriously affected by the lack of gas supplies.

Power-generating companies in the region are switching to fuel oil as threats of blackouts loom and governments face economic paralysis.

Serbia is already relying on gas loans from Hungary and Germany as citizens in its northern region were left without heating amid below freezing temperatures. The concerned countries may need an additional week to normalise the supply of gas once it is restored, and could demand compensation from Gazprom, which in turn is likely to request them from Ukraine.

Analysts agree that in the long-term the crisis is bad for Ukraine’s role as a transit country, and increases the chances of alternative gas pipelines being built. Other analysts note Russia’s image as a reliable gas supplier has been damaged.

The South Stream, a Russian initiative to transport gas through the Black Sea and the Balkans bypassing Ukraine stands better chances than plans for the Nabucco pipeline backed by the EU and U.S., for which resources are scarce.

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