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  • Ukraine Natural-Gas Dispute Intensifies

    Wall Street Journal
    Jan 4 2009


    Ukraine Natural-Gas Dispute Intensifies


    By ANDREW OSBORN

    MOSCOW -- Russia's dispute with Ukraine over natural gas prices
    descended into counter claims and legal threats over the weekend, as
    six European countries downstream said they had begun to record slight
    supply disruptions.

    Russia's OAO Gazprom halted deliveries to Ukraine, a key transit
    country, on Jan.1 after talks to negotiate a new supply contract for
    this year broke down amid a price dispute.

    Since then, Poland, Hungary, Romania, Turkey, Bulgaria and the Czech
    Republic have reported slightly reduced supply. Gazprom says it is
    pumping extra gas via Belarus and Turkey to ensure supply, while
    Ukraine says it is using its reserves to maintain transit volumes. The
    EU gets 80% of its Russian gas imports via Ukraine.

    The dispute has forced both countries to defend their reputations as
    reliable energy suppliers and evoked memories of 2006, when a similar
    dispute led to more serious supply disruptions in Europe.

    Russia and Ukraine spent the weekend trading recriminations and
    lobbying to persuade the international community. Each said the other
    was to blame for a shortfall of about 50 million cubic meters that has
    apparently failed to reach European consumers over the weekend. That's
    about a sixth of what Russia pumps to Europe every day.

    Gazprom said it had got President Dmitry Medvedev's approval to bring
    a case at the International Arbitration Court in Stockholm against
    Ukrainian state gas company Naftogaz Ukrainy to ensure unimpeded
    transit. In a statement, it said it would file the case "in the near
    future." Naftogaz said in a statement it would counter file at the
    same court if Gazprom went ahead.

    Bohdan Sokolovsky, an economic aide to Ukrainian President Viktor
    Yushchenko warned the dispute could trigger more serious supply
    shortfalls in Europe in 10 to 15 days if a deal is not struck.

    Lobbying efforts centered on Prague and the Czech government, current
    holder of the European Union's rotating presidency. The EU has so far
    refused to arbitrate, calling on Russia and Ukraine to settle their
    differences bilaterally. An extraordinary meeting of EU envoys is
    scheduled for Monday to exchange information on the situation. Russia
    says it sees no need for EU arbitration. Gazprom has, however, written
    to the European Commission to ask it to monitor the gas supply
    situation.

    For his part, Ukraine's President Yushchenko wrote to eight world
    leaders on Friday, including President George W. Bush, putting forth
    Kiev's side of the story, according to Ukrainian diplomats.

    Ukraine paid $1.5 billion in unpaid bills for 2008 to an intermediary
    company that is 50%-owned by Gazprom, by Dec. 31. But Sergey
    Kupriyanov, a Gazprom spokesman, told a news conference Friday the
    Russian gas monopoly didn't expect to get the funds until Jan. 11. He
    said Ukraine owed a further $614 million in late-payment fines;
    Ukraine says it owes no late fees.

    In 2006, a similar dispute caused shortfalls in Russian supplies of as
    much as 50% across Europe, although a deal was struck quickly under
    heavy pressure from EU governments. Russia on that occasion was widely
    accused of using gas as a political weapon to punish Ukraine's
    pro-Western government, a charge Moscow denied and has made efforts to
    avoid this time.

    Late Sunday, face-to-face talks between the two sides had yet to
    resume. Talks broke down on New Year's Eve after Ukraine rejected a
    Russian proposal that Ukraine should pay $250 per thousand cubic
    meters in 2009, up from $179.50 last year, but around half the price
    paid by EU countries. Ukraine was proposing a smaller increase to
    $201, but has since said it is ready to pay $235.

    After saying on Thursday that it now wanted Ukraine to pay $418 per
    1000 cubic centimeters of gas, Gazprom upped the ante again on
    Sunday. Chief Executive Alexei Miller said the company now wants
    Ukraine to pay $450, equivalent to what its closest EU neighbors pay,
    less transit across Ukraine. He said he hoped that price would bring
    the Ukrainians back to the negotiating table.

    In a statement Saturday, Oleg Dubyna, Nafotgaz Chairman, said
    accepting an earlier Gazprom offer of $418 would spark a "humanitarian
    catastrophe" in Ukraine. The country's inefficient Soviet-era domestic
    heating systems and industries are heavily reliant on Russian gas
    imports.

    Ukraine says, however, that its large gas storage capacity is full,
    allowing it to weather a cutoff longer than in 2006, when the Russian
    cut-off was felt almost instantaneously downstream in parts of the EU.

    In recent years Gazprom has raised gas prices towards world levels for
    all of its ex-Soviet neighbors, who continued to enjoy heavy discounts
    after the break-up of the Soviet Union. Less compliant neighbors, such
    as Georgia, now have to pay full price, while allies such as Armenia
    pay lower rates. The annual negotiations with Ukraine have been
    particularly difficult, however. Moscow has pressed Mr. Yuschenko's
    pro-Western government to pay world prices since it came to power in
    the 2004 Orange revolution, while Ukraine has used its leverage as a
    critical transit country for Gazprom to reach the rich EU market to
    push for more gradual increases.
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