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Financial Times (UK) January 3, 2006 By Neil Buckley MOSCOW-An air of unreality hung over events as Russian national television suspended normal programming on New Year's day to show live pictures of technicians turning down the flow of natural gas to Ukraine at a compressor station near the Russian border. Few believed Russia would carry out its threat, on the day it assumed the rotating presidency of the Group of Eight industrialised nations with a pledge to make "energy security" a key theme. The Russia-Ukraine gas trading relationship is, after all, the second largest in the world after Canada-US. The fact Russia has taken such drastic action suggests how important it believes the issue is - and that the dispute is about much more than the price of gas. At its heart, certainly, is a commercial conflict. Russia is raising prices to all former Soviet neighbours towards market levels, after subsidising them for 14 years. Alexander Medvedev, vice-president for export at Gazprom, Russia's state-controlled gas giant, adds that there are good reasons why some republics are still paying much less than the Dollars 230 per 1,000 cubic metres (tcm) being demanded from Ukraine. The Baltic states, now paying Dollars 120, for example, have already agreed to start buying gas at European market prices in two years. The Caucasus states, paying Dollars 110, buy gas from Central Asia, so transit charges are much less than for Ukraine, whose gas comes from northern Siberia. Belarus, paying little over Dollars 46, has agreed to give Russia joint control over the export pipeline running across its territory to western Europe - similar to the one across Ukraine. Mr Medvedev says the Dollars 50 Ukraine pays now was negotiated in a completely different environment: "Over the past several years, prices in Russia and Europe more than doubled and trebled, but the price for Ukraine remained the same." Yet analysts see a heavy political element to the price dispute. Ukraine's "Orange Revolution" in late 2004 tore it out of Moscow's sphere of influence as President Viktor Yushchenko turned its gaze westwards. It was also a personal setback for Russia's President Vladimir Putin, who had backed the losing presidential candidate, Viktor Yanukovich. Ukraine, moreover, occupies a pivotal position at the heart of Europe. Russia allied with its 48m-strong Slavic neighbour has a much greater chance of re-establishing itself as a significant geo-political power - one of Mr Putin's biggest aims. The move to charge Ukraine "retail" prices for gas may be punishment for moving out of Moscow's influence, and a demonstration that life outside Russia's embrace can be harsh. "Nothing says 'it's over' quite like charging retail," says Stratfor, a private US intelligence firm. Russia may also be trying to influence Ukraine's parliamentary elections three months from now, to return a more Moscow-friendly legislature. Mr Yushchenko's supporters suggest it is no coincidence that Russia is trying to send a message about the perils of crossing Moscow before elections in which he again faces a tough race against the pro-Russian Mr Yanukovich. There may be another reason why Russia is demanding such a high price of Ukraine: so it can force it into a compromise involving agreement to share control over its transit pipeline with Russia - as Belarus does. For a country seeking to increase gas exports to Europe, joint control over the main pipeline would be an important prize. There are other precedents for handing over control of assets in return for lower gas prices. Following an increase in prices for Georgia, Gazprom is offering to fix the cost for 10 years in return for agreement to form a joint venture to operate and develop Georgia's natural gas transportation system. Mr Medvedev says Gazprom would consider an asset swap with Ukraine in return for agreeing on a transition period to higher prices - and makes little secret of its favoured option. "We are ready to consider other assets that may be of interest to us," he says. "But we are particularly interested in the transit pipelines in Ukraine." |
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